Residential property prices to rise 5% in 2013 but shares a better bet than property: Shane Oliver

AMP Capital chief economist Shane Oliver predicts property prices will rise by between 4% and 5% in 2013 spurred on by lower mortgage rates, but expects only modest returns for property investors compared with other asset classes.

Oliver says property investors can expect returns of around 6% from their investment properties over 2013, compared with returns of 2% in 2012 and a loss of 4% in 2011, but well below expected returns for both listed property (12%) and unlisted property trusts (9%).

Oliver expects the cash rate to fall what would be a record low of 2.5% next year as a result of initially subdued economic growth as “mining slows and mining slows and non-mining is slow to pick up”, with unemployment set to rise to 6%.

“Against this backdrop the RBA is likely to cut rates further to 2.5% in order to push bank lending rates down closer to past cyclical lows. However, as the impact of rate cuts starts to feed through with normal lags, growth should start to improve by year end.

“Overall we see growth around 2.5%, but this is masking a second half upswing; inflation remaining benign; and the cash rate falling to around 2.5% in the first half."

He says the main risk to the Australian economy is that the non-mining sectors – housing, retailing, tourism, etc – take longer than expected to pick up pace, leading to a sharper slowdown in growth beyond the 2.5% we are expecting.

“This could occur, for example, if rising unemployment triggers a desire on the part of households to more rapidly reduce their debt levels. This could see the RBA cut the cash rate to 2% or below,” he says.

But Oliver says he remains cautiously optimistic about 2013, with historical recession patterns suggesting a continuation of the global recovery for the next three years.

His outlook on the property market also appears more bullish when compared with comments he made in July, when he said Australian property prices were still overvalued by around 10% to 15%, though down from earlier AMP estimates of a 30% overvaluation.

For investors, the strongest growth is expected to come from the share market, with gains of 15% from global, Asian and emerging market shares.

“Shares are likely to provide another solid year of returns. Shares are very cheap against bonds as bond yields have fallen further and should benefit from ultra-easy monetary conditions globally and the anticipation of stronger profit growth in 2013-14," says Oliver.

“What’s more, while sentiment towards shares is not as bearish as it was in late 2011 it is still very cautious at a time when share weightings have collapsed. This suggests there is plenty of money to come into shares once confidence starts to pick up."

Investors looking for strong returns from the property sector with a lower cash outlay should consider invested in listed property trusts – REITs, either in Australia or globally, with Oliver forecasting returns of 12% for this sector.

“Property securities are likely to continue to benefit from investors seeking yield, however returns are likely to slow after the 20 to 30% returns of 2012."

Unlisted commercial property and infrastructure are likely to benefit from relatively attractive returns and strong investor demand given their relatively attractive yields, e.g. around 7% for commercial property, he says.

Oliver advocates investors having a balanced portfolio that includes both shares and property investments and says that historically returns have been similar for both asset classes.

At the bottom end of the risk-spectrum, Oliver says cash and hence term deposits are likely to become even less attractive as cash rates slide to 2.5%, further pulling down term deposit rates well below 4%.

 Bonds are also likely to offer little upside either for investors.

“Historically low starting point bond yields suggest low returns from sovereign bonds, unless global growth takes a renewed leg down. Australian bonds are a bit more attractive than global bonds given higher yields.

“Corporate debt is a better bet for those after income,” he says.

To learn more about where property should sit within your wealth-creation portfolio, watch our free webinar.