29 May 2006

Investing in changing times

Contemporary market thinking

With property markets currently soft and so many negative issues canvassed daily in the press, we could be forgiven for thinking that the market’s equilibrium has in some way been affected – that property markets in future will perform differently, that things are less predictable and that past price growth patterns cannot be repeated.

From the Treasurer and the Governor of the Reserve Bank to the media’s popular economic commentators and local journalists, everyone has had their say. Understandable this has caused real confusion.

Yes, there are major changes occurring – economic, social, political and international. In combination, it begs the question as to whether there will be a major shift in the fortunes of property.

An alternate perspective

This is where we need to put things into context and determine whether we are proponents of the half full or the half empty glass.

If we are the half empty supporters, we have plenty of ammunition for our argument. We would use interest rates, low yields and affordability perhaps excess stock in some markets, global instability, changing tax regimes and so on. It would be easy for us to be persuaded that times have changed and that a raft of influences will change the long established pattern of property price growth.

Buy if we are the half full glass supporters we would adopt a far broader view. Rather than focusing on the immediate environment, we would be looking to history for a better understanding.

Let’s look at a hypothetical 20 year property portfolio evolution and outcome from 1996 to 2006:

An indicative 20 year portfolio performance*

Inv No

Inv Year


Av mkt Price

2006 Av price

Equity growth

1 1986 Sydney $88,000 $520,000 $432,000
2 1988 Melbourne $90,000 $385,000 $295,000
3 1990 Brisbane $110,000 $330,000 $220,000
4 1992 Perth $100,000 $400,000 $300,000
5 1994 Sydney $210,000 $520,000 $310,000
6 1997 Melbourne $160,000 $385,000 $225,000
7 2000 Brisbane $150,000 $330,000 $180,000
8 2002 Cairns $155,000 $275,000 $85,000





* Based on published market average prices (ABS and REIA) which ignore investment cash flows over time.

So an average investor developing a portfolio of eight properties over the past 20 years could have achieved an equity growth of some $2,047,000.

How could this occur?

  • Sydney property values rose from $90,000 in 1988 to $500,000 in 2006 – a 500% + increase representing a 10% pa compounded growth over 18 years.
  • Coincidentally, Melbourne, Brisbane, Pert and a number of other established markets performed similarly.
  • In fact over the past 25 – 30 years, Sydney, Melbourne, Perth and Brisbane all achieved around 9% pa compounded growth.
  • This is Australia’s historic property market performance.
  • Reflecting in 1973 on the national property market’s history, FW Johnson commented in his book titled “New Ways to Real Estate Wealth” that the resilience and performance of property is proven over generations.

“Even in the great depression of 1930, the real estate market suffered least of all. Various paper investments were wiped out and real estate values dropped but by 1936 they had recovered to 1930 levels and by 1938 they were well ahead.”

Just contemplate on the national and global influences exerted on the market over the past 30 to 40 years – let alone the Great Depression of the 1930s:

  • The Gulf War and the 80’s oil crisis.
  • Keating’s “Banana Republic” and the 90’s recession “we had to have”
  • 17% + housing mortgage interest rates
  • Kosovo and constant Middle East disruption
  • SARS and the Asian economic meltdown
  • China’s reclamation of Hong Kong
  • GST and the First Home Grant
  • September 11 and subsequent global turmoil
  • The tech boom and bust
  • The economic explosions in China and India
  • The resultant resource boom

Property had the unique capacity to transcend all these influences

So why is property so resilient and reliable?

What many current commentators and observers fail to understand is what fundamentally drives housing prices and why the market’s cyclic behaviour is unstoppable.

Let’s look at some simple facts:

  • Even with a 3% vacancy factor 97% of all property is required for necessary accommodation every day.
  • Population growth guarantees ongoing demand growth.
  • As communities consolidate, demand for location exceeds supply and market forces exert upward price pressure.
  • Inflation, even at a modest 2.5% pa, exerts a 40% + replacement cost pressure over 15 years.
  • Land shortage and premium higher density location shortage allow market forces to exert ongoing upward price pressure.

While ever we have a capitalist system, market forces will guarantee that where demand exceeds supply, prices will grow.


We all recognise that different cities experience their growth spurts at different times. Perth has just seen exponential growth (some 150% + over thee to four years), while south east Queensland peaked some two years ago. Sydney and Melbourne peaked some four years ago in 2002.

Population transfer is the catalyst. Whether for employment, affordability, financial opportunism or lifestyle, as people migrate from the major population centres of Sydney and Melbourne, an imbalance is created in other markets where demand exceeds supply. Price growth then occurs through normal market forces generally affecting Queensland, Western Australia and occasionally Tasmania.

In a similar way, baby boomers and those with flexible work arrangements are migrating to local seaside, mountain and boutique townships. This is significantly impacting on their traditional supply and demand balance and has resulted din price growth in these areas.

The key is in identifying the markets that are demonstrating the correct fundamentals for the highest probability of short to medium term growth.

These fundamentals are demand exceeding supply, consistent population growth, a strong economic foundation and affordability.

Generic tips for location selection

Traditionally, as investors, we have understood and utilized the differing cyclic timeframes of major recognised markets and the impact of cyclic population migration patterns between States.

Increasingly today, we are learning another alternative, supplementary model – that of seachange and treechange for affordability, lifestyle and quality of family life – inevitably impacting on future prices.

There are significant numbers of emerging coastal villages and boutique and spa towns running from Perth all the way around the southern coast and as far north as Port Douglas. Each has its own market, supply and demand and affordability variables.

There are also the resource centric locations. Many of these are entirely dependent on mining and offer exceptional short to medium term yields and capital growth prospects.

Collectively, the national market offers many alternative investment opportunities relevant to a range of investment objectives.

In this market the emphasis is on selecting properties and locations with the highest probability of short to medium term price growth and lowest probability of downside risk.

Today’s investment reality

  • We are increasingly aware that responsibility for our future financial wellbeing stops with us.
  • To defer investment because of contemporary market attitudes is an excuse.
  • Opportunities exist and will continue toe evolve for responsible property investment.
  • There are sensible selection criteria and safety precautions that we can take to avoid or mitigate acceptable risks.
  • The property market has been proven to have extraordinary resilience and reliability over time notwithstanding a constant barrage of negative local and international impacts.
  • While market sentiment is modest and much of the media commentary negative, the fundamentals do not change.
  • Property will continue to provide excellent long term investment opportunities to the determined investor.
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