Let's get some perspective, look beyond the property 'boom': Mark Armstrong

There’s every sign that the property market is on the way up. The interest rate cycle is at its low point, auction clearance rates are up, and median house prices are reaching new highs.  

But I’d like to put something into perspective. Recently, media headlines have been proclaiming the start of this growth phase as a ‘boom’, and this bothers me.  

I’ve never been a big fan of the term ‘boom’. A ‘boom’ implies the existence of its opposite, which is a bust – and ‘boom and bust’ does not accurately describe the nature of the property market.  

Residential property is a real asset, not a paper asset, and it’s the only one that serves a dual purpose by providing a lifestyle and financial investment. Everyone needs somewhere to live, but not everyone needs or wants to invest in shares – so residential property has a widespread and ongoing level of demand that stabilises the market.  

This makes it a relatively stable asset compared with paper-based assets like shares. In Melbourne, as in the vast majority of capital cities and large regional centres, the notion of booms and busts simply doesn’t ring true.  

The only places it might apply are smaller towns based on single industries like mining or tourism, which have a more volatile economy. Bust can also arise in contained over supplied developments such as the Docklands that are dominated by investors.  

The current growth spurt in the residential property market is not a ‘boom’, but rather a natural and logical phase in the overall cycle.  

For the last two years the market has been stagnant or in decline and it was only a matter of time before it moved again. The demand for property is always evolving, as family units get bigger or smaller and there is a need to change living requirements. While many people put these moves on hold the pent up demand has been growing and is now flexing its muscle. While there is no doubt low interest rates are helping, the market is going through a normal part of its cycle.  

I’d like to inject a note of caution here. Another reason I dislike the boom and bust concept is that it’s often used in a blanket fashion, implying that all property grows (or falls) in value at the same rate, at the same time. This is not the case.  

After the current growth phase reaches its peak around the second half of 2014, there will be a noticeable split in growth rates. Some properties will continue to grow strongly in value, albeit at a slightly more moderate rate; whilst others will tail off substantially.  

Properties that will continue to grow strongly will be those in demand from homebuyers and investors alike. These properties will be in areas with high employment rates and reasonably low debt levels. They will be in short supply relative to demand, and will have a high land-to-asset ratio – that is, the bulk of the asset will appreciate, not depreciate.  

As an investor, it’s vital to take a long-term view. So look beyond the exhilarating headlines and choose property that will continue to perform strongly after the current growth spurt.  

Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.