Politicians call them barbeque stoppers – a topic of conversation that immediately captures a lot of people’s attention.

The property market has long been an all-time favourite bbq topic – generally in a good way as prices went up and then went up some more. Unless you were a member of the younger generation looking to enter the property market and seeing price rises push the great Australian home ownership dream out of reach.

Lately the reports of property prices falling – and some pundits predicting further to go – has definitely been making property values a hot topic for a different reason and for a generation of home owners this may well be a new and uncomfortable experience.

Residential property investments, coupled with the Australian dream of home ownership, have long been the mainstay of most investor’s wealth and combined with superannuation savings generally represent the lion’s share of retirement nest eggs. So it is no surprise investors share a common interest in property price movements in Australia.

Vanguard’s economists recently took a look and compared Australia’s property market to three other property markets – in the UK, US and Canada – to compare fundamentals and examine valuations and the economic implications that might occur in each of these markets should we experience a housing market crash.

The research showed that significant drivers of the growth in house prices in Australia included the balance of housing demand versus supply, interest rates and foreign investment, but Australia’s housing market rally exceeded expectations beyond even what these measures can explain.

While affordability has been a huge concern, particularly in large cities, Vanguard economists consider that the risk of a sharp correction – defined as a correction in the space of a year which severely impacts the economy or causes a recession – is low for markets studied, including Australia.

Researchers felt that a big unknown is how households deal with their high debt given the slow income growth in Australia and this will be a large factor in what transpires in Australia’s housing market.

They commented that the large pipeline of housing – mostly apartments – coming into the market in Australia could effect a more gradual moderation in house prices, rather than a sharp correction.

Other scenarios that were considered more likely were that house prices would correct over three years, with limited economic impact, or that house prices would correct over five years with marginal impact, if any.

However this research was caveated because, as we have always cautioned, forecasting peaks or troughs in the property market is as challenging as predicting recessions themselves, and it’s clear investors should be prepared for a range of possible scenarios, and expect highs and lows.

As with other asset classes, property valuations will fluctuate over time, which is why as ever, patience and discipline are so important when it comes to investing.

What is being felt now is a healthy reminder that growth assets will rise and fall based on market economics. Property may move more slowly than the rapid day trading of the sharemarket because of the illiquidity of the property market as well as the idiosyncratic value of different locations and styles of houses but ultimately the same laws of supply and demand will apply.

For those with an established property portfolio it may be timely to understand the percentage that property represents as part of your total investment portfolio – including superannuation or share holdings.

For those investors who have benefited from the strong rise in values over the past decade there may be an opportunity to diversify across other asset classes as a way of managing risk.

Please contact us on |PHONE| if you seek more information on this topic.

For those in fear of being locked out of the property market then the bad news on property prices feels more like the silver lining.

Source : Vanguard  

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

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