Why Residential Property?

Australia’s Top Performing Asset Class

In risk-adjusted terms, residential property has delivered vastly superior returns to all other broad asset classes (ANZ Economists, 2008).

High Average Returns

In raw terms, since 1984, residential property has delivered compound annual total returns of 13.4%, only slightly below that of equities (13.8%) and far above both commercial property (10.3%) and bonds (9.4%).

Low Volatility - ‘Safe as Houses’

Due to its low volatility (relative to shares, etc), residential property has earned a reputation over the decades of being a ’safe’ place to park money.

This is because, over the past 23 years at the national level, house prices have virtually never fallen with the greatest annual falls being just:

• -0.3% in the depths of the early 1990s recession
• -0.9% in 1996
• -1.0% in 2008 (Jan-Sep 2008)

By contrast, Australian equities fell by:

• -43% in Sep-Dec 1987
• -15% in 1992
• -17% in 1995
• -18% in 2003
• -30% in 2008

Diversification Benefits

Residential property exhibits a low correlation to other asset classes, which provides critical portfolio diversification.

In fact, it has the lowest correlation of any asset class with equities, which means that it has been the defensive asset of choice in a sharemarket downturn - and 2008 appears to be no exception.

With high average returns and low volatility, increasing residential holdings within an investment portfolio has been shown to greatly reduce the prospect of a negative annual return.

A Historical Opportunity

“Be fearful when others are greedy. Be greedy when others are fearful.”
-Warren Buffett on the wisdom of countercyclical investing…

With equity markets in a virtual freefall, has there ever been a better time to own the security of well located, quality bricks & mortar?

‘Safe as houses’ has rung true yet again during the current credit and financial crisis of 2008, as the residential property markets lost only -1.0% in the nine months to Sep 08, while the share market lost -30% over the same period.

Newspapers have boosted circulation with headlines such as “Property to fall 30%”, but this amounts to fear mongering.  The media have also tried to draw parallels between the US and UK property market falls, but the Australian market is in a fundamentally different (and stronger) position.

[see News & Media for articles from Reserve Bank and others on why Australia is a different case.] 

In fact, the fundamentals underpinning the residential property market have never looked stronger, and the current market weakness represents an extraordinary buying opportunity that is unlikely to be repeated.

People will look back at this period of opportunity and say “if, only”.

Strong Market Fundamentals

Supply-constrained and worsening by the day

• Structural undersupply (as evidenced by historical low vacancy rates and rising rents)
• Historically low building starts (no new supply coming online)

Demand-side growing

•  Record population growth - due to overseas migration and birth rate increases
• First homeowners grants stimulus package increasing demand
• Self-managed Super laws relaxed to enable borrowing for residential property
• Improved affordability due to plummeting interest rates
• Pent-up demand from property buyers who have been waiting for strong signals to return