A slice of housing paradise is worth every penny

I am not sure what is meant by bubble, but I think it means property is overvalued and that an ­interest rate rise will trigger a ­collapse.

No one goes much further than simply stating the word bubble. No one says when this will occur, in which markets, how far valuations will collapse, or how long things may take to recover.

I think the term bubble is a modern-day bogey man designed to scare the scaree and to empower the scarer. Here’s what I think about bubble theory.

Can anyone cite a residential property valuation from a decade ago that is considered a foolish overvaluation today? No? If there is now or has been in the past over valuation then, happily, the effects are not eternal. At least not in ­Australia’s capital cities. And the reason is population growth.

Australia is adding three million people and 1.5 million dwellings every decade. Most population growth is channelling through Sydney and Melbourne. If there is a bubble in these markets then it is fair to say that at current growth rates any slack in demand will be taken up within a few years.

This is not to say that some parts of Sydney and Melbourne aren’t oversupplied with apartments. The areas often cited as being in danger of oversupply are Melbourne’s Docklands and the South Sydney precinct.

I haven’t done the numbers.

It may well be true. These areas may be oversupplied. But with Melbourne and Sydney growing at close to record rates of 96,000 and 84,000 net new residents every year, or more than double the ­annual growth rate from a decade ago, then any bubble-induced slack will be absorbed in due course.

Here’s the thing with the housing market and with apartments. If you are investing for the short term, as many do in the stock ­market for example, then you may well be caught with values dropping in an area of oversupply. And especially in a scenario where ­interest rates rise and everyone offloads their apartment product because they didn’t build a rate rise into their forward planning.

But because all major cities are expanding -- then providing the property is basically in the right area and has all the right bits and pieces that support a standard lifestyle -- values will right themselves, eventually.

I suppose the worst-case scenario is that this righting process might take up to a decade in the hottest of markets. I think the Gold Coast is coming out of a seven-year stint in the property valuation sin bin.

However, I think the question is more fundamental than whether a city or a suburb is over­supplied, or has too many investors and not enough owners, or if “the Chinese are moving in” or the Indians for that matter. Or ­indeed if some people are buying but are not living in apartments. I don’t see these as crucial issues.

I think the question is whether you have faith in the medium-term prospects of the Australian economy and lifestyle. Because if you do, as I do, then you will also believe that in due course others will see what you see and similarly value the lifestyle that we value.

If you want to make a quick profit, then try the sharemarket or the casino or perhaps the horse races.

However, if you want steady wealth accumulation over time then invest wisely and selectively in the Australian residential market.

This nation now contains 24 million residents; by all accounts we will have 40 million residents by mid-century.

That’s 16 million more residents with the bulk being added to the capitals within a single family-formation life cycle of 35 years.

This fundamental equation ­augers well for the value of long-term residential property holdings in Australia. This underlying growth equation does not apply in places like Japan, Germany and France; it applies to Australia and a few other first-world nations.

We are an extraordinarily fortunate people.

Of course, over the coming 35 years interest rates will rise and fall and probably rise and fall again.

There will be boom and bust. There will be wailing and gnashing of teeth.

There will be commentators, soothsayers, scaremongers and out-and-out charlatans proclaiming the end of life as we know it.

But amid the noise and the haste and calamitous screaming look to the horizon. Is Australia a safe and secure place? Is there strong and sustained population growth? Are our capital cities producing national and global businesses that generate wealth and prosperity? Do people still need to and want to live in functional ­accommodation in close proximity to urban amenity?

Because if the answer is yes and if you aren’t necessarily looking for assured year-on-year gains, and especially if you are a young couple moving into the family ­formation stage in the life cycle, then an investment in the Australian housing market would seem to be a sensible thing to do.

I know these are worrying times but have faith in Australia and for young people especially, have faith in your ability to grow and to prosper in an expanding Australian economy.

Bernard Salt is a KPMG Partner and an adjunct professor at Curtin University Business School; bsalt@kpmg.com.au

This article was first published in The Australian. Reproduced with permission.