Intouch : Intouch April 2011
6 intouch • April 2011 Australian house prices have reached an all time high thanks mainly to the low unemployment rate and above trend population growth. However, house prices could be facing stagnant growth over the foreseeable future. In this article we look at both sides of the age-old ‘shares vs property ’ argument to try and find some answers. As an investment opportunity, the first thing to look at is the financial benefit. Over the past 10 years, the benefits of investing in the share market have mostly outweighed the benefits of investing in the residential property market and, based on forward looking estimates, we believe that the Australian share market should continue to present greater benefits. As this discussion is around investment opportunities, and which offers the best financial return, we have based our analysis primarily on the ‘investment property owner ’ segment of the market rather than the ‘owner occupier ’ segment; an owner occupier ’s decision to invest in the residential property market is premised on much broader considerations, some of which may not be centred on achieving the best financial return. Returns comparison — An historical context So, let’s look at how the financial returns from both these sectors compare over the past 20 years. For the purpose of this illustration we’ve used Sydney as a proxy for the national residential market, but the trend is evident across Australia. The graph top right shows that although residential property was the stronger performer in the mid 1980s and 90s, since then the performance of the Australian sharemarket has taken off. As you would expect, downturns have tended to cramp the market’s performance — in the early 2000s share market returns fell below property market returns. However, between 2003 and 2009 you can see that when the Australian share market recovers it tends to outperform the residential property market. In fact, despite the GFC, the share market hasn’t really lost ground when compared to the property market; both are sitting neck to neck. Over the next cycle, we believe that the Australian share market may again chart a better recovery than the residential market. It’s important to note that while the share market is more volatile, this is a reflection of the greater number of available buyers and sellers compared to the housing market, which can go through episodes of illiquidity. Residential property valuation It has been well documented in the financial media that some commentators consider the Australian residential property market to be significantly over valued and “severely unaffordable”. Researchers often use the median house price: household disposable income ratio (commonly referred to as the ‘median multiple’) to measure the levels of affordability in the residential market. For the Australian market, this median multiple is currently 6.1x. To put it another way, it would take 6.1 years for an average Australian family to save their disposable income to pay for the family home. By the same measure, for the average household in Sydney, it would take 9.6 years. The median multiple, however, does not tell the full story of housing affordability. In looking at the 20 year history, the median multiple has increased from below 3x (considered ‘affordable’) in the 1980s to currently 6.1x and is now considered to be ‘severely unaffordable’. Today, Australian households are paying more than twice what they paid for housing 20 years ago. All of the major Australian cities have median house price multiples well above 5.1x which is considered severely unaffordable by various international observers such as the United Nations and the World Bank. Why have Australian house prices become less affordable? Over the past 20 years, house prices have skyrocketed principally because there are more restrictive land use regulations imposed by state and local governments which have virtually prohibited new house construction on or beyond the urban fringe. This is particularly evident where there are “urban containment” measures, such as urban growth boundaries. As the name implies, these boundaries aim to limit the urban sprawl by determining the areas that can be used for high density urban development (inside the boundary) compared to those that can only be used to accommodate lower density development (outside the boundary). Investing - Shares or Property? Surprisingly, London and New York are not the most expensive cities in the world in which to live in recent years. Hong Kong and Sydney have climbed to the top of the list for ‘most unaffordable cities in the English speaking world’ . Severly Unaffordable World Housing Markets (Sydney rank 2nd) Sydney Residential Property vs Australian Shares Source: Demographia 2011 Source: ABS Note: We’ve used Sydney as a proxy for the national residential market, but the trend is evident across Australia.
Intouch July 2011