Capital Growth Until 2012 – Are They Right?

Double digit capital growth up to 2012 is the latest claim being made in the property market. So what of it? Is it true? Is there growth to be had? Are we living under a delusional bubble?

Well according to the experts we need to don the flanny and fire up the Holden Ute – Adelaide is set to lead the Capital Growth Charge over the next three years according to property experts.

In an article published in the Sydney Morning Herald online, Chris Zappone suggests all major capital cities will experience double digit capital growth between now and 2012. We have used this article and added in our own comments, however you can review the entire article online here.

The article “House Prices Set To Jump” suggests house prices may surge about 20 per cent or more in some of Australia’s larger cities over the next three years, driven higher by on-going shortages.

Adelaide, the surprise packet, previously considered among the more affordable cities, may lead the advances, with prices likely to be 23 per cent higher by June 2012 from a base of June 2009, according to the QBE LMI Housing Outlook.

The increases are likely even with the expected rebound in interest rates as the economy recovers. Although interest rates are rising – we would expect them to stay relatively low. Remember our current rates are at 49 year lows.

Why The Price Rises

Well basically Australia looks to continue to experience strong population growth thanks to migration (over 250,000 people in the last 12 months) and subsequently a chronic housing shortage the article suggests is currently estimated to be 56,000 homes.

Are We Creating a Bubble?

Well maybe – although to date Australia has failed to follow the lead of other developed nations experience only an easing in price rises against double digit drops in nations like the US and UK.

If properties rise too fast there is a greater risk of a price bubble being created. Glen Stevens, Governor of the Reserve Bank suggested ”pose elevated risks of problems of over-leverage and asset price deflation down the track,” in July. As we know they have already commenced raising interest rates to help stave off a potential bubble.

What’s In Store?

We still believe there are more turbulent times ahead and caution should be paid to the market.

In the long run there are a number of factors that influence property prices include interest rates, supply and demand, government policy, employment levels, and other economic factors. The world is still in a fragile space financially and any further major hiccup in the global economy could spark reactions worse than what we saw coming out of 2008. Only this time there is no more room for spending to leverage a stimulus.

In the article Bis Schrapnel senior project manager Angie Zigomanis said that even if a housing price bubble popped, a correction would not necessarily mean huge price falls. The median Sydney home price in 2009 is $544,000, lower than the 2004’s median house price of $552,000.

”Corrections are not like share market corrections, where people sell off all their shares,” he said.

”People just sit in the property and wait for things to improve. You don’t have this turnover, aside from people who are forced to sell.” But then clarified this with the statement “anything that had an impact on Australia’s overall economy could affect home prices.”

So is it a good time to invest in property?

Well it depends on your outlook.

If you want capital growth then we would suggest maybe not – particularly if the current activity is a bubble forming that is about to pop. However if we are wrong and this is our destiny then jump right in.

If you can afford to hang on through higher interest rates and perhaps the loss of a job then go for it – the market is hot and your property investment journey awaits. As they say with greater risk comes greater potential reward.

But there is help at hand. You can play your best hand in this market. Contact the team at Portfolios to review your potential, your outlook and get a strategy to… Make it Happen.

Source: Sydney Morning Herald “House prices set to jump: report” By CHRIS ZAPPONE