The Next Great Property Boom?

Over the past six years, on the eastern seaboard, property price growth has been relatively modest; is this period of low price growth about to end? Are we about to experience the next great property boom? 

Expert opinion on property prices is currently divided.

On the one hand we have the doomsday brigade, fearlessly lead by none other than Today Tonight’s favourite property expert, Professor Steve Keen who has been arguing that property prices are due to fall by 40%. Despite losing a well publicised bet and now having to walk to Mt Kosciusko with a sign saying ‘I was wrong … ask me how?’, is still standing by his prediction that Australian property is overvalued and is due to experience a substantial fall.

On the other hand we have the optimistic boom time brigade, typically led by real estate agents and property spruikers, suggesting that a significant shortage in properties, rising rental yields and low interest rates will result in the next property boom.

Where to from here for property prices?

Property Cycles – Taking a look at property prices in Sydney, Melbourne and Brisbane it can be demonstrated that the property market has moved in three distinct phases over the past 20 years.

However, it is important to recognise that something else has been happening over the past 30 years, interest rates have been falling. Analysing the above chart further demonstrates that the difference between rental yields and interest rates has been a primary driver behind property growth.

Source: “Residential Property Prospects 2009-2012”, BisShrapnel 

The Difference between Rental Yields and Interest Rates

People need somewhere to live and they typically have a choice between renting and buying. If they rent, they must pay the landlord rent, and if they buy, they typically must pay a bank interest on the funds borrowed. Hence, it makes logical sense that the demand for property is intrinsically linked to the difference between the two. The closer they are the more attractive it is to buy, and the further away they are the less attractive it is to buy.

At the beginning of the early 90’s the difference between interest rates and rental yields was approximately >>

5%, a property lull then followed.

At the beginning of the late 90’s the difference between interest rates and rental yields was approximately >>

2%, a property boom then followed.  

At beginning of the current property cycle, the difference was close to >>

4% and a relative property lull has followed.

The difference is currently sitting at 2%, although that is likely to widen as interest rates rise. If interest rates rise faster than any increase to rents, the difference between the two will widen, possibly out to by 3-4% over the next couple of years.

This would suggest that a property boom is possible although it may be delayed by rising interest rates.

Shortage – Due to insufficient new property development and strong population growth there is a significant shortage of properties. This problem is expected to worsen over the coming years as demonstrated in the below chart.

Housing Affordability – As discussed in Phil’s recent Housing Affordability Crisis Debate, it is quite possible that this is more of a media beat up than a real issue. Furthermore, it is arguable that the difference between rental yields and interest rates makes more of a difference to the relative affordability of property.

Other factors – The first home owners boost concludes at the end of December and the impact of the Governments stimulus package is beginning to fade. These factors may temporarily result in a more subdued market.

Confidence – Like shares, property price growth is often impacted by confidence in the property market. In a rising market people feel a need to get in quickly (before prices rise) and vendors are often less willing to negotiate. In a falling or stagnant market people are not rushed into buying and feel that they can negotiate more. At present it is arguable that it is still more of a buyers market, although that depends on where you are looking and in what price bracket.

The outlook for residential property remains positive and attractive returns are likely within the next few years however we are unlikely to experience the same substantial growth that was achieved in the late 90’s.

Residential real estate should remain a core component of the average investors portfolio and it is likely to offer attractive returns. Investors need to be selective about where they invest, the price they pay and they must be realistic about the growth prospects they expect to obtain.

If you would like to discuss property investment and what action you should be taking, arrange a time to discuss your situation with your Hudson adviser.

We often refer to the ‘yield’ of shares and property within our Hudson reports however, what exactly is ‘yield’ and why is it important to understand?

Yield refers to the income return of an investment, and does not typically include any movement in price (capital gains or losses). The yield of our three main asset classes specifically refers to:

Yield is obviously important as it represents a large part of your overall return, not to mention the fact that it provides investors with all important cash flow. Understanding how yield is calculated, also allows investors to compare different investment options.

There are two yield figures that are often quoted:

Gross yield refers to the income that is received before any direct expenses are taken out.

Net Yield refers to the income that is received after any direct expenses have been taken out such as management expenses, insurance and lease fees.

Whilst both are important the net yield is considered more important as it actually lets you know how much you end up with in your pocket.

For example, let's compare a short stay holiday accommodation property with a long term commercial property lease. Both properties have a gross yield of 8% per annum however, due to the high expenses associated with the short term holiday accommodation such as cleaning fees, high management fees, high body corporate fees, etc, the net yield on the short stay only ends up at 4% compared, to 7% with the commercial.

A few other points:

• Franking credits should be added onto the gross yield figure for shares. For more information on calculating franking credits click here.
• Borrowing costs and taxation are typically not taken out of the net yield figure although they remain an important consideration.
• You could go one step further and calculate the net after tax yield, or even the net cost (after accounting for interest) however, these will be the subject for another day.

from the floor...

Share market update for the week ending Wednesday 09/12/2009

The markets were broadly negative this week. As the Copenhagen Summit on climate change continues, along with Tiger Woods’ tally of indiscretions, the main headlines affecting markets were: 

• US Federal Reserve Chairman Ben Barnanke commented that whilst the US economy was improving, it still faces considerable headwinds.

• Concerns over Dubai’s debt position last week, and this week fresh concerns over debt levels, continued to make their way around the world. Both Spain, Greece and Portugal this week have had their credit ratings downgraded by rating agencies.

• Additional concerns remain over other European nation’s debt levels as a proportion of GDP.

Source: www.comsec.com.au , The Australian Financial Review, www.smh.com.au, Aegis Daily Research

SOURCE | Graph data: Finance.yahoo.com.au

Healthscope Limited (HSP.ax)

The Health Care sector is undoubtedly a growing industry and one that should continue to benefit from the aging population in Australia and abroad. Healthscope Limited (HSP) is Australia’s second largest private hospital and third largest pathology operator with small operations in New Zealand and South East Asia.

HSP has a sound business strategy of improving the efficiency and occupancy of its existing assets whilst at the same time expanding via acquisitions and organic growth. HSP has a very good track record of successfully following this strategy even in the tougher recent economic times.

HSP continues to research the possibility of greater expansion via possible offshore opportunities and by adding further capacity to their existing hospital portfolio. HSP continues to explore further vertical integration by adding additional healthcare services (such as radiology) to their existing centres.

Sales have increased consistently for more than a decade and net profit continues to increase and is forecasted to strongly increase by 38% over the next year. Following a recent capital raising the companies balance sheet remains sound.

An attractive price earnings ratio suggests the stock is reasonably cheap, particularly for a company with good growth prospects. Whilst the 4.5% fully franked dividend yield provides investors with an effective gross yield of 6.4% at the 30% market transfer rate

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