Property is not always a great investment

Over the past few weeks, I have read three interesting articles about the Australian property market.

First article - from the Weekend Australian Financial Review (24-25 September 2011)

This article relates to Chris Cuffe, former Chief Executive Officer of Colonial First State, who sold a 3 bedroom waterfront apartment located in the Sydney North shore suburb of Cremorne Point for $7 million at an auction recently.

The property was originally purchased for $6.05 million in 2003.

Estimating stamp duty fees of $364,000 on the purchase and real estate agent fees of $100,000 on the sale, the total costs would be $464,000.

The estimated profit would be $7 million less $6.05 million less $464,000 costs or $486,000.

This equates to an estimated total return of 6.94% over the 8 year period or 0.84% per annum.

After inflation, this would result in a negative return.

Second article - from the Weekend Australian Financial Review (1-2 October 2011)

This article relates to a chart of Australian real house prices and comments from AMP chief economist Shane Oliver.

Research by AMP shows property prices in the past century have increased by 3.2% per year above inflation.

Australian real house prices as shown below have moved in cycles of 10 or 20 years, moving through long periods above the long-term trend and then falling into long term slumps such as during the 1990's.

Shane Oliver comments as follows: "The problem now in 2011, 20 years later, is were at the top of that cycle still on an Australian-wide basis. To buy now would be to buy at a point where housing is still really expensive. In the absence of a massive increase in population or a high reduction in interest rates, it's hard to see spectacular gains in Australian housing."

Third article - from a MLC publication called Infocus (Edition 2, 2011)

This article relates to comments from Michael Karagianis, Investment Strategist at MLC.

Michael Karagianis comments as follows:

"There’s a widely held belief that the Australian housing market always appreciates in the long term."

"Because we haven’t seen significant price deflation or even stagnation across the entire housing market since the early to mid 1990’s, our memories of more difficult housing markets have faded with time. There are also a large number of home owners who have either not lived through, or are too young to recall, anything other than rising housing prices. However, looking back over the past 60 years, periods of price deflation and stagnation have been as much a part of the longer term Australian housing story as has been price inflation. Given the over-valuation evident in the housing market today and the existing poor levels of affordability, Australian house prices are unlikely to experience continued strong appreciation over the next few years. It’s quite possible we’ll see a period of anaemic house price performance lasting five years or more." 

My comments: The above articles highlight that property is not always a great investment.

Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.