About two years ago, I made a rare diversion from the blogs usual focus on listed investments to give some brief views on the Australian housing market.
Of the ‘8 capital cities’ data that you regularly hear reported in the media, I took the view that the best Australian capital city to buy a home in was Canberra and the least attractive option was Darwin.
The ‘pair trade’ that was long Canberra/short Darwin has worked out relatively well in the first 2 years, with Canberra prices up 7.1% and rental yields rising, while Darwin prices are down 4.0% with rental yields falling. Remember, my original timeframe for the thesis was 5-10 years; any investment should really be viewed over 5 years as a minimum, any shorter period and you’re really delving more into speculation than investment. I would estimate the 11.1% gap in capital value growth between these two markets will widen further over coming years.
The latest ABS dataset on the 8 capital cities also shows that Sydney housing prices also finally started to fall in the December 2015 quarter, and almost certainly that will be backed up by another flat or declining quarter in March 2016 as some sense returns to that market, a combination of cooling sentiment and improved supply.
I pointed out in that blog a couple of years back that Australian housing had been characterised by rising prices augmented substantially by undersupply, and that the removal of that factor could be solved by only one thing, building more homes than the net increase in population requires.
As also mentioned, that was starting to happen, with unit construction up 36% and total housing construction up 25% at the time, construction levels have only risen since. The question then that needs to be answered is how many homes needed to be built to eliminate the previous undersupply and help the Australian housing market find its equilibrium?
On average for the last 10 years, the Australian population has grown by nearly 361,500 per annum. There are 9,615,800 homes in Australia and about 24 million residents (so about 2.5 persons per home), so we needed to build about 144,600 homes annually over the last 10 years to satisfy natural population growth without adding excess supply to the market (disregarding houses that are demolished/rebuilt). Our average number of dwelling unit completions over that 10 year stretch when removing demolition replacements was about 127,019. So over the last 10 years, we’ve underbuilt demand by about 175,000 homes, or a little over a year’s demand.
Fortunately, our building completions run-rate is approaching 160,000 and rising (again removing demolition rebuilds) with the recent glut of unit construction. Given the current rate of housing starts, I would imagine the problem of ‘undersupply’ will be eliminated in 2 to 3 years. The question then is if the oversupply conditions persist for a while after that, it could finally create a supply/demand situation that for the first time since the beginning of the century actually favour buyers.
Housing prices in Australia will be lower in real terms in the 2020’s than they are today is my view. As I pointed out in the Update No. 164 link above though, like any investment market, there are always pockets where valuation makes more sense, if you happen not to live in one, be patient, your opportunity will come. Most importantly, don’t use it as an excuse. Face the conditions that are in front of you and make the best decisions based on what you see. As I always say, don’t invest based on how thing should be, but on how you think they will be – Tony Hansen 08/04/2016
|
|
Apr 1st 2011 |
Jul 1st 2015 |
Current Price |
Since July 1st 2015 |
Since Inception |
|
EGP Fund No. 1 |
1.00000 |
1.57872 |
1.68701*1 |
6.86% |
98.42%*2 |
|
37333.23 |
50922.68 |
48613.83 |
(4.53%) |
30.22% |
EGP Fund No. 1 Pty Ltd. Up by 6.86%, leading the benchmark by 11.39% since July 1st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 98.42%, leading the benchmark by 68.20% all-time (April 1st 2011).
*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit
*2 calculated based on dividends reinvested
