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  1. bbm

    2,263 Posts.

    Outlook: The going gets tougher
    20 November 2002

    From Money Magazine, November 2002

    Real estate remains the dinner party topic of choice around Australia. Max Walsh points out there's been an important shift of late.

    No longer is the focus entirely on what has until recently been the seemingly unstoppable climb in house prices. Increasingly the conversation veers to the collapse in returns from residential investments. Tales abound of savage rent cuts in order to simply obtain some cash flow on the negatively geared apartment or house.

    The Reserve Bank has been warning about growing indigestion in the residential rental market for some little time now. Despite this nearly 50 cents in every loan dollar approved for housing purposes is still going to investors. Between $4 billion and $5 billion is being loaned to investors each month. That is unprecedented.

    Inevitably this boom will end in tears. Valuations are way out of line with prospective returns.

    As some investors will discover to their pain, bricks and mortar is not the fail-safe investment of popular mythology. Not only do prices go down, this can be a highly illiquid market with high transaction costs. We have had housing booms before but never with the current degree of emphasis on pure investment. That carries some worrying implications. For the average reader looking for somewhere to invest savings, the most important is the one identified by Reserve Bank Deputy Governor Glenn Stevens in a recent speech.

    He warned that “a more balanced and realistic assessment of the various potential avenues for investment probably involves an acceptance of more modest investment returns across the board than people may have been used to in the past decade or more”.

    That observation takes on considerable significance when placed in a demographic context. Australian baby boomers are at that stage in their life cycle where they are focusing on funding their retirement.

    If Stevens is correct, and there is plenty of evidence to support his case, then those baby boomers will require a greater volume of personal savings to provide a given income yield than they might have reasonably come to expect.

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