PORTFOLIO POINT: Property price growth remains below the median trend level, but the fundamentals are still there and rising inner-city population levels will push up long-term returns.
While some may say you can never have too much information, there is always the danger that intense scrutiny of short-term movements in the residential property sector may cause investors to place too much weight on temporary factors at the expense of deeper, more informative long-term trends.
Ultimately it is long-term factors that should drive property investment decision-making. The recent release of the 2011 Census of Population and Housing is therefore a timely and necessary opportunity for us to plug our ears against short-term statistical noise and to look at the bigger picture.
The Census confirms that population growth remains strong. In the five years since the 2006 Census, Australia’s population has swelled 8.3% to 21.5 million. If this trend continues, it is almost inevitable that there will be a persistent challenge of housing supply and composition struggling to keep pace with demand for it.
The problem will remain most acute in our capital cities. The Census reveals that our major cities are increasing their share of the population relative to the rest of the country.
The combined population of Sydney, Melbourne, Brisbane and Perth grew by 9.9% between 2006 and 2011, to reach 12.2 million. In comparison, the rest of Australia grew a more modest 6.3%. The gravitational force of our big cities is drawing an ever-greater proportion of Australians into their orbits. This is, of course, a trend that has been under way for over a century. But it is a stark reminder to those who think investing in the sea-change or tree-change lifestyle is a winner. Our capital cities continue to be where the action is.
Another fascinating insight for property investors from the Census was the magnitude and nature of growth in our mining towns. It showed that some of our mining towns grew in population by anywhere between 40% and 80% in five years. But it appears much of that growth is transitory. We know this because the Census form asks whether someone is a visitor or not. For most suburbs, less than 5% of those present on Census night were visitors. But in some areas containing fly-in fly-out workers, over 30% of those present on Census night were visitors. This adds further weight to my longstanding view that investing in mining towns is highly speculative.
The Census confirms that the cost of housing – be it buying or renting – has increased relative to incomes. Whilst the median family income has grown 20% in five years, mortgages have risen 39% and rents have grown 49%.
Predominantly, Australia remains a nation of home owners, with 72% of residential property either owned outright or owned with a mortgage. But the deterioration in affordability over recent years has driven the number of people who own outright down from 34% in 2006 to 32% in 2011, and the number of renters has grown from 28% to 30%.
The Census also puts into proper perspective the narrative from some quarters that we’re forsaking houses for apartment living. In fact, Australia-wide, only 14.6% of dwellings are apartments, which is down 0.1% since the last Census. In fact, it is only Sydney where apartment living could be considered to represent a major form of accommodation. In Sydney 27.6% of dwellings are apartments, compared to 16.6% in Melbourne and 12.8% in Brisbane, the two cities with the next highest levels of apartment living.
There is a great deal of hand wringing about the outlook for residential property, and the doomsayers are certainly out in force. But the 2011 Census is the perfect antidote to this negativity and a validation of the capital growth-orientated nature of property investment.
It clearly shows that the long-term dynamics of demand are favourable for our cities. If you’re sticking to the rules of property investment – focusing on scarcity value and classic architecture in the inner suburbs of our major capitals – you should be re-assured and even emboldened that over a million people were added to the combined population of Sydney, Melbourne, Brisbane and Perth between 2006 and 2011. Conversely, the Census alerts us to the fact that not all population growth is necessarily permanent. We need to be wary of investment in mining towns and other small or remote locations where the population is transitory or too small to drive the requisite long-term growth.
It is likely that our cities will grow at a comparable pace for the foreseeable future. The Census demonstrates that Australians remain traditional in their choice of abode. So, as our cities continue to grow, it is almost inevitable that the relative demand and therefore prices of inner and middle suburb properties will increase due to constrained supply and the attractions of traditional architecture and short commutes.
Sure, the trajectory of property prices will never be smooth. We can see that in the experience of the present market and the recent past. Periods when growth exceeds the trend for several years – e.g. 2009-10 – have to be offset by other periods of below trend growth – e.g. 2011-2012 and possibly the next year or two.
Furthermore, for those managing a portfolio of diverse asset types, the Census findings deliver a powerful case for including property as a hedge against potential volatility and underperformance elsewhere in your portfolio.
With people’s enduring need for accommodation, and the perennial preference for traditional architecture, we know strong population growth will ultimately support and drive values up. No other asset class can demonstrate such a strong correlation between population growth and performance.
Smart investors know to take the rough periods with the smooth when it comes to property. With the knowledge provided by the 2011 Census, we know that the trend is indeed our friend!
· Are serviced apartments a good investment?
· Selling up the holiday home.
· Where in Melbourne is a good place to buy?
· When to get a property depreciation schedule.
Buying a serviced apartment
My financial advisor is suggesting I buy a serviced apartment within an SMSF. I don't have any investment properties and would appreciate if you could shed some light on such an investment.
I am not a fan of serviced apartments as an investment for a variety of reasons. Typically, these apartments are situated in unremarkable buildings on busy main streets, for which there is little or no scarcity value. Developers often opt to market these types of properties as a serviced apartment because they recognise that the assets have limited attraction to home buyers or to long-term renters. Generally the apartments are sold at a premium to their genuine market value by the developer and investors end up paying too much. Consequently, long-term capital growth prospects are always poor and this ultimately undermines the rental value unless large after-tax capital injections are made to support rental.
Another key disadvantage of serviced apartments is the lack of control for investors. By buying a serviced apartment, the owner has signed away some of the key benefits of direct property ownership such as the ability to add value, the option to occupy the property themselves or to let it in the open market. When it comes time to sell, the investor is restricted to selling the property to other investors, thereby limiting the pool of potential buyers by up to 70%.
Furthermore, investors are usually locked into contracts by the operator that allow the operator to approve works without the owners’ consent and because of the heavy wear and tear associated with short-stay properties, maintenance costs are high. Serviced apartments are a high risk, low return investment. They should not be bought inside or outside of an SMSF.
Should we keep our holiday house?
In 2001 we purchased a holiday rental investment townhouse property through our SMSF paying $290,000. The rental returns over the first six years were about 6%, but in the last three years the returns have been negative and we have taken the property off the holiday rental market and are considering whether to permanently let it for at least a 4% return. The current value is around $330,000 and although close to the beach, there are plenty of strata and non strata properties for sale around for a little more, so the prospect of a sale is not good. Should we bail or hang on to the property?
Unfortunately this situation highlights the perils of trying to combine lifestyle with investment and is made even more difficult when you add the inflexibility of the SMSF structure. A prime asset bought for $290,000 in 2001 should have performed far better for you. Selling is the best option. The longer you hold an underperforming asset, the worse the financial fallout becomes. In light of the number of competing properties in the area, your property has no scarcity value and the long-term capital growth prospects are low. Before proceeding with the sale, I recommend you engage an independent property advisor to verify this prognosis for the property and to give you some solid strategic advice on future property investment options. I also recommend you talk to your accountant to ensure you abide by SMSF rules.
If you do decide to sell, I suggest you first rent the property on the open market and look to sell it at a time when there are holiday makers who might make an emotional decision to buy the property – early in the New Year and during summer through to early autumn are often good times.
Where to buy in Melbourne?
I’m interested in buying an investment property in Melbourne and have $400,000 to spend. Just wondered if you could give me your opinion of the best area and property type to look at.
The good news about the weakness in the Melbourne property market of the last 18 months is the much improved affordability, choice and transparency. Consequently, $400,000 is a healthy budget to buy an entry level investment. Go for a high land value location in an inner suburb. For instance, you might like to consider Elwood and St Kilda in the south or North Melbourne north of the Yarra. Search for well-positioned one bedroom apartments in a small, established block on residential streets with an attractive and consistent streetscape. Ensure that the apartment has designated car parking. Tick all these boxes and you can be confident – over the long-term – of 7-10% annual compounding capital growth and a rental yield of around 3.5-4.0%.
Property depreciation schedules
In reference to your recent article (A Window of Opportunity, 30 May 2012) why might an investor commission a new depreciation schedule other than when they buy a property?
You’re right that the most common time to commission a quantity surveyor to undertake a depreciation schedule is at the point of purchase, and all investors should ensure they do this. But note that any additional work undertaken after the purchase date can also be depreciated. If the value of the work is relatively small – e.g. new carpets or curtains – then it is sufficient for your accountant to manage any claims. But it is advisable to prepare a new schedule if a major renovation has been completed.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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