You might’ve heard that real-estate investment is one of the most lucrative investments out there, but is it true? How does real-estate investment compare to other forms of investments?
Real-estate investment is typically a medium to long-term investment spanning across 5-30 years, where investors seek the increase in equity of the property as a source of capital gain and rental income as periodic return. Examining asset class by 10-year annual return:
Australian listed property is indeed one of the best asset sectors in generating high returns over a 10 year period. Based on the reported annual return, an initial investment of $100 would turn into $286.5 at the end of the 10-year period.
Additionally, Australian listed property has demonstrated superior 10-year return than global listed property, indicating that Australia is an attractive destination for foreign real estate investors as well.
For a even longer look-back period, if you invest $100 in 1926:
Source: REIA, Global Financial Data, AMP Capital
Furthermore, real estate investment is often known for its defensive characteristics of relatively stable growth. According to ABS Australian household wealth & wealth distribution research (2017-2018), the overall Australian real estate annualized volatility (standard deviation) is 8.9% between 2003-2018 compared to 18% for the Australian shares market portfolio in the same period as reported by RBA.
This means that over the reported 10-year period, Australian real estate investment generates comparable/better returns and is safer than a typical index in the Australian share market.
So what is to be expected?
With the housing market boom of early 2021, where the clearance rate has exceeded 90% in capital cities such as Sydney (~70% is historical average), what does the future hold for the real estate market?
In terms of expected growth:
With a slowed increase in population growth, forecasts suggest that the momentum of property demand will be lower than the past few decades. Despite this, the demand fueled by population growth cannot be undermined. According to the Committee for Economic Development of Australia, 1.7 million extra homes will be needed in the next 10 years.
Moreover, changes in household structure (less number of people in a single household) and increased life expectancy (90+ by 2055) is expected to be a source of demand that offsets slowing population growth.
In terms of areas with greatest potential:
After experiencing the structural impact of the pandemic such as change of lifestyle, working at home, and localisation, housing market growth is expected to slow down in centralised areas such as the CBD, but higher growth can be expected for suburban areas with properties more suitable for families. Traditionally attractive locations such as waterfront properties will remain in high demand. For Sydney, urban planning suggests that suburbs near the CBD are reaching maturity, meaning that newer suburban expansions in the northern, western and southern regions will have the highest expected growth in the coming years.
In terms of investment outlook:
The housing market has been historically consistent and this can be safely assumed for the future as well. So for home owners and investors who seek buying opportunities in 2021, it is about buying at the right time of the housing growth cycle in a value-holding location.
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