Where are property prices heading?

Our property markets are flat and some investors are worried that the value of their properties are falling. Many are asking, “What will my property be worth next year?”

Each Monday they look at the auction clearance results and every month they check on median property values. While it’s not as bad as watching your shares fluctuate in value on a minute-by-minute basis, this short-term focus is unhealthy for investors who are generally in it for the long-term.

I think a better question to ask would be “what will my property be worth in 10 years time?”

The scary thing for some is that there are commentators out there suggesting property values won’t rise for another decade. Just look at the financial mess the world has got itself into, they say.

Then there’s the overseas gurus who come and visit us, predicting the world is about to go through an economic tsunami that will finally swamp Australian property, taking prices all the way back to where they were a decade ago.

But there’s nothing new about these property pessimists – they’ve always been around and they’ve always been wrong. Just look what happened to property values in the first decade of this millennium.

I still clearly remember the turn of the century…

While many were celebrating a new millennium, others had concerns. Some were worried that the millennium bug would melt down our computers and others were uneasy about our property markets. We were moving out of a difficult decade, which commenced with the “recession we had to have”, and there were concerns that property values could not increase any further.

At the time we were paying less than $300,000 for an average house in Sydney; $245,000 in Melbourne; $144,000 in Brisbane; $149,000 in Perth; $188,000 in Darwin; $128,000 in Adelaide and $113,000 in Hobart.

Fast forward 10 years or so and look at what we paying for the average house today!

In many cities property prices have increased over 140%, despite a recession in 2001, the introduction of the GST, the dotcom stock market crash, going to war in Iraq, a change in government, periods of high interest rates and the world’s worst economic downturn since the Great Depression.

I’m sure more Australians would have bought properties 10 years ago if they knew what would happen to values over the next decade.

Of course I don’t know what’s ahead in the next 10 years, but I do know that there will be just as many hurdles to jump over.

Remember… obstacles are the scary things you see when you take your eyes off your goals.

And while parts of the world are in economic turmoil, Australia’s main trading partners are experiencing boom times, and the good news is that the fundamentals suggest the next 10 years are going to be just as good, if not better, for property than the last 10 years were.

We are moving into a new economic cycle driven by the mother of all resources booms. At the same time our population is still growing strongly and we need more dwellings for the same number of people because we are forming smaller households than before. However, we have a shortage of housing (in some areas), vacancy rates are low, rents are rising and the cost of new construction is escalating.

Putting all of this together means that property values are once again likely to rise significantly over the next decade. But if history repeats itself, and it will, during that time we will have another property boom, a further property slump and most likely another recession.

To safely steer through the next decade to the point where their property values will have once again double, successful investors will need to disregard the “market noise” and not be intimidated by the small stuff, like interest rate increases, tax issues and the negative news in the media.

Instead, they will need to focus on the big picture.

Look at it this way… imagine you were a visitor from overseas and came to any of our capital cities 10 years ago and returned again today – you would scarcely recognise the new landscape.

Now consider what our cities are going to look like in 10-15 years time.

The key drivers of how our property markets are going to change will be population growth and the change in our lifestyle and housing preferences, so it’s really by analysing demographics, the study of populations, that we will understand what the future of the property markets hold for us.

These issues are going to be far more important to the “big picture” than the changes in the interest rates or the cyclical economic fluctuations that we will endure, because these relatively secondary influences won’t change the momentum of the population that is growing with its very definite housing requirements.

Economist Christopher Joye recently explained that Australia will likely have to absorb 2.3 million additional households over the next 15 years alone. BIS Shrapnel estimates that this translates into a new home building requirement of about three million properties once you account for demolitions and the historical share of unoccupied homes (eg. holiday houses, etc).

There is no doubt that this substantial increase in population will bring with it many social, political, infrastructure and environmental concerns. But it will also ensure that well located properties will double in value just as they have over the last decade and the decade before that. And in fact, the one before that also.

At the same time there will be billions of dollars worth of activity in home extensions and alterations. We will also require more shopping centers, nursing homes and hospital beds, as well as schools and petrol stations.

With this in mind, over the next 10 years conditions in our capital cities are likely to be even better than we experienced over the last 10 years and overall properties will increase in value by billions of dollars a year.

It becomes even more fascinating when you consider that Melbourne and Sydney will each require around 40,000 new apartments over the next 10 years. This is equivalent to 200 high-rise buildings, each accommodating 200 apartments. Things will get interesting because while our community requests less urban sprawl, they also want less high-rise living, so the idealistic preferences will have to give way to reality.

It is likely that we will have more decentralised development in the future with the emergence of medium to high rise residential buildings in the suburbs rather than just in the inner suburban areas. These will occur around public transport terminals, railway stations and possibly conjunction with large shopping centers. We will also see the continuation of the trend of integrating housing medium residential development with existing strip shopping centers.

It will be interesting to look back in 10 years time and see how things pan out.

In the meantime, successful investors will take a big picture view, buy more located properties and see the value of their portfolio steadily increase.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia’s leading experts in wealth creation through property. He also writes the Property Investment Update blog.