The truth about the Australian property market
In light of dire predictions from foreign commentators about the Australian property market, Katarina Taurian speaks to Nyko Property's Bill Nikolouzakis about how the market is actually tracking and the role SMSFs are playing in it.
What do you see as the biggest mistakes advisers are making when they’re working with their clients on property investment?
I think the mistake, if you can call it that, is that they’re not giving advice on direct property and I don’t think it’s really a mistake on their end, because it’s very difficult with [the regulation] at the moment. But I think there’s a big gap in the market in Australia for advice being given on any direct property investment, whether it’s in SMSF or outside of it.
One in seven Australians invest in property, but only 24 per cent of those people buy again. So there’s obviously a mismatch there and they’re not getting the right advice. That’s where we think advisers need to properly come in and do more to assist their client.
Do you have any general comments on the state of the property market at the moment, given there’s a lot of mixed messages about whether it’s in boom or bust territory?
Property is like any other investment: it’s cyclical. We went through a bit of a boom recently after coming off a drop, which happens in every cycle of course, and I think that boom’s got maybe a few more months maybe this year to continue, and then we’ll probably see a plateau for the next three to four years.
Obviously prices move first, and then rent and wages normally have to catch up at some point. So although [now] affordability is probably a bit lower than it was, a year and a half ago, it was the best it’s ever been in the last 10 years.
So it’s cyclical, and I think that’s the best way to describe it. I don’t think it’s boom or bust territory at the moment, I think it’s just a pretty straightforward cycle.
There are quite a few commentators who have dire predictions for the Australian property market. Do you?
I’ve got a lot of interest in this and I’ve got to say that most of the commentators that have got a dire impression of the Australian market are actually not Australian, they’re actually overseas commentators and they don’t understand the dynamics of the Australian property market.
We’re very much underpinned by a tax system here and a belief in property being the major asset class, [plus] the Australian dream being owning properties. Our tax system thankfully helps us from massive drops in property prices, because [for example] when property prices drop, maybe because owner occupiers stop buying or upgrading, that’s when generally we see the investors come into the market when it’s a bit quieter, and they take up the slack, and the tax system is really the big driver of that I think. That’s probably why we’ve had more stable prices than [other] countries.
Particularly around the time of the Budget, there was a lot of speculation about changes to negative gearing, including potential abolition. Do you have any comments on this issue, and in particular, do you think the government would ever abolish negative gearing?
I don’t think they can change it. [There’s] too much skin in the game at the moment. Even if they do, I think it’d be grandfathered. There’s no way they could retrospectively implement that; there’d be a lot of people being very adversely affected.
Even if it does happen, and look, I can’t see it happening because like I said before, I think we’re just going through a normal cycle… I think the only thing they could do is potentially take it away from existing property and have it only for new property. Because right now, investors buy a large portion of new projects, and with the construction employment market being [approximately] nine per cent of our total employment in Australia, taking away negative gearing would reduce the investors substantially, and that would have a big effect on the construction industry I would say.
There were fears around Budget time that if negative gearing was abolished, there would be a crash in property prices. What are your thoughts on this?
We did it once before in the late '80s; we took away negative gearing, and they brought it back within two years. So… will property prices crash? I think they definitely wouldn’t go up and we would see a reduction. A crash? I’m not sure. Especially if it’s grandfathered, I don’t think we’ll see a crash, although we definitely won’t [see] the increases that we do now, because investors are 30-odd per cent of the market. If it’s 30 per cent of the market now, I think negative gearing being abolished would mean that a large portion of that 30 per cent of people wouldn’t be able to afford an investment property.
In saying all of that then, what do you see as the key drivers of growth in the property market?
At Nyko Property a bit part of what we do is research and we’ve researched this in great lengths as to what is driving the property market in Australia. The biggest thing at the moment that is driving our market, especially in Melbourne, but across Australia, is a big influx of population ... There was 95,000 new people into Melbourne last year alone, leading the country, and I know Sydney wasn’t too far behind.
There’s something that a lot of people probably don’t put a lot of emphasis on being a big part of it as well: the demographics of Australia is changing quite significantly. [We] not only need more property for the new entrants into Australia, but we also need more property for the same amount of people, because there’s a lot less people living in each household.
I think that’s probably the main driver at the moment of the Australian market and what’s keeping it moving forward. But we’ve got to remember as well that we’ve got a very strong economy relative to the rest of the world and it’s [not] had any major increases in unemployment which is probably the biggest driver of property prices and consumer confidence.
With all of those points in mind then, would you suggest SMSFs are not fuelling any kind of excessive growth in the Australian property market?
Certainly not and I’ve spoken about this a fair bit. With SMSFs, less than three per cent of all SMSF assets are in residential property. Considering how big the Australian property market is… a [small amount] of the Australian property market is purchased within an SMSF. We’re talking about very, very low numbers.
[SMSFs are] really not a big driver in terms of property prices. And I certainly don’t see it fuelling a bubble, like some people would have you believe.