Chan & Naylor: Property Squeeze is Economics 101
Sydney, 16 December 2013 - Recent commentary surrounding Australia’s economic well-being has suggested a bleak future outlook for the economy, first time home buyers and those looking forward to an early retirement. However, with the general malaise currently focused primarily on the residential property market, National Property, Business Tax-Accounting and Wealth Advisory Group Chan & Naylor Chan & Naylor believes that Australians are not looking opportunistically at the full picture.
“With inflation down and interest rates arbitrarily low, many Australians have more of everything compared to three decades before including cheaper cars, relatively cheaper food, cheaper electronic goods, more affordable education and travel,” said Ken Raiss, a Director at Chan & Naylor. “Compared with 30 years ago we have more disposable income which in part has led Australian’s to spend more on their home.”
To illustrate this point further Mr. Raiss says that a $350,000 property with a 10% mortgage would have cost $35,000 per year in interest repayments in 1982. Today that property may be valued at $700,000, but with today’s low interest rates of around 5%, the comparative interest costs will still be around $35,000 per year whilst in the meantime wages have doubled. With the actual cost of living coming down many Australians now have a greater amount of disposable income to spend on desirable assets such as property.
“As any market that has experienced a cycle upswing, increased demand necessarily leads to reduced supply, and this may feel like a market squeeze but it is certainly no bubble. People have the money but are chasing an ever diminishing resource, this is classic economics 101,” Mr. Raiss continued, who added that this is exactly what happens in the share market however investors don’t put the same weighting on stocks and shares as they do bricks and mortars.
The current property scarcity, which industry commentators are blaming on cashed up investors, is actually a decades old legacy of poor State and Federal planning which combined with diminished credit has put property development on hold. Limited supply has resulted in increased demand. However Mr. Raiss believes that the property investment market has now turned.
“As we surpass the top of the previous cycle or are above the previous trough, we are now seeing the ill-informed chasing and overbidding on property market values because of fear of missing out,” said Mr. Raiss. “The alarmists are buying at any price, whereas the savvy investor has already made their purchase some time ago and is now looking to either spend appropriately on residential property which they can add value to or maybe the stock market for their next investment growth opportunities.”
Whilst many institutions have argued that residential investment properties are being acquired up by Self-Managed Super Fund (SMSF) holders, Mr. Raiss says this is not the case given this type of investor is more attracted to commercial property, with over 75% of acquisitions taking place in commercial over residential as a recent RBA and ATO study found. However he does agree that property is a great asset in super as it creates long term, social benefits by providing additional housing, employment creation as well as, generation of local and state taxes. Also as property is a long term asset it has a place in super which should also be a long term investment vehicle.
“Shares don’t create this social flood and therefore the Government is right to consider how best Australia’s $1.3 trillion of super can best be directed towards growing the property market,” said Mr. Raiss.
More property will inevitably become available, but for first time buyers and property investors who fear they are missing out, Mr. Raiss advice is to set their sights lower and take the emotion out of buying property, much as they would with buying shares.
“Buying a McMansion as a first home should not be the first time property buyer’s number one priority, and if they can’t sustain a home loan then maybe renting and buying an investment property first would be the best option. Baby boomer parents can also help and through well planned and managed trust mechanisms help their children by co-investing in property,” said Mr. Raiss.
A superior property, Mr. Raiss explains, is one that grows on average 10% annually and doubles a property’s value up to seven years earlier than an average property growing at 5% annually. Adding value through renovations also greatly enhanced value and rental yield. Property investing must be managed as a business and not an emotional reaction.
“For property investors looking for less financial risk and greater surety of equitable return, treating property investment as an exercise in financial diligence rather than of the heart is an important development in this market,” said Mr. Raiss.
Ultimately Australia needs capital growth, but for now Mr. Raiss says that Australians should seek the opportunity by better educating themselves on the property market and maintaining a ‘glass-half full’ perspective.
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Anna Denby, The Narrative - [email protected] / 02 9078 8265
Simon Murphy, The Narrative - [email protected] / 02 9078 8219
About Chan & Naylor
Chan & Naylor is Australia's fastest- growing property, business, tax-accounting & wealth advisory group 2013 (incl. 2007, 2008) www.chan-naylor.com.au
Chan & Naylor is proudly listed as 39th in BRW's Top 100 Accounting Firms 2013 (Published 30 October 2013) among the multiple thousands across Australia.
The group has 24 offices in 15 locations in NSW, VIC, QLD, SA and WA.