Property markets are being viewed as a relative safe haven as uncertainty and volatility increase in financial markets.
Return of market volatility
The residential property market is significantly less volatile, as household income and job security are key drivers in the relative stability of the property market. While there was a good deal of uncertainty regarding employment in mid-2020, (before vaccines became available), confidence has returned and in total, 13.25 million Aussies are now gainfully employed, which is the highest ever figure.
Record job vacancies suggest that the employment figures are only going to increase from here, especially as the international borders reopen. And all of those people will have to live somewhere, and obviously, with strong employment readings, there are very few forced or distressed sales.
The unemployment rate fell to 4.17 per cent in December. Yes, that was pre-Omicron, and the January numbers might not be so good. But overall, with job vacancies at extremely elevated levels, we’re confident of seeing full employment and an unemployment rate with a 3-handle sometime later in 2022.
When you look at the risks for residential property, they tend to come from very high unemployment, very high-interest rates leading to widespread defaults and selling, or a big oversupply of properties.
At the moment we have the lowest unemployment rate and interest rates in a generation, while rental vacancies have dropped to the lowest level in a dozen years, and they are still tightening even now. While it’s inevitable that interest rates will have to rise, with a cash rate still at the lower bound for some time yet, it’s no surprise to see the enduring popularity of residential property as an investment in these increasingly volatile market conditions.
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Asset class returns
The consistency of returns from real estate over the decades has been a key drawcard for investors.
US stock markets are off their highs as markets worry about monetary tightening, especially for the tech-driven NASDAQ, which fell by 7.6 per cent last week for its worst week since 2020, taking the market into correction territory.
Australian stock markets have been less volatile, with markets only down a few per cent from six months ago.
But, overall, from the absolute previous peak of 6,828.7 points, set in November 2007, the ASX 200 delivered only modest capital growth of about 5 per cent over nearly a decade-and-a-half. Dividend returns from Australian stocks tend to be considerably higher than the global average, so the total return over that time from Australian stocks have been solid, but unspectacular.
Cryptocurrency markets have continued to be extremely volatile, with the price of Bitcoin down almost 50 per cent from its recent high.
The housing market, on the other hand, has delivered a substantially higher total return over the past 15 years – comprising rental return plus capital growth – especially for buyers using sensible leverage.
While it’s extremely hard for average investors to pick and choose outperforming shares consistently, it’s considerably easier to choose the ‘right’ investment properties that deliver strong long-term return and also enjoys substantial taxation benefits.
From a risk perspective, the risk associated with residential property is typically substantially lower. Here are five benefits associated with long-term investments in low-risk residential properties:
- consistent capital growth over the long-term, delivering strong and stable returns;
- the ability to use leverage to magnify returns;
- tax benefits, such as depreciation and building allowances, negative gearing, and the capital gains tax discount for assets owned for longer than 12 months;
- the ability to add value to residential property assets through renovation or development; and
- there being no need to sell to realise some of the capital gains. Instead, investors can refinance out some of the equity and retain the asset for the very long term.
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2022 set for a calmer year
We expect 2022 to be a steadier year in residential property, after the very tight markets and boomtime conditions of 2021. Enquiry levels are still very strong so far in 2022, especially for Brisbane and Adelaide, but overall there should be a less frenzied market this year.
Stock levels are still reasonably tight across much of the country. We expect to see most residential property markets delivering capital growth in the 3 to 8 per cent range this year, which is more sustainable. However, the key objective is the residential property space is to build wealth, and therefore the average holding period exceeds 10 years.
This is a long-term game of buy-and-hold, which has proven to be an excellent investment strategy: lower risk, solid returns, and generous taxation benefits.
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