First year in nearly four decades residential property and shares have delivered negative returns

EXPERT OBSERVER

Earlier this year analysis by RiskWise Property Research projected returns for shares, government bond yields and residential property would reach their lowest in 25 years.

Unfortunately the research has been proven correct and the latest figures showed 2018 to be by far the worse and poorest year for returns for investors across the three major asset classes.

Based on available data from CoreLogic since 1981 (the earliest point when valid data is available), 2018 is the first year in 37 years that two major asset classes (residential property and shares) delivered annual negative returns at the same time. In addition, government bonds only delivered less than 2 per cent return.

This means in 2018 major asset classes delivered either negative or poor returns, well below the return of at least 5 per cent, as expected by investors under typical circumstances. 

The extremely unusual 2018 situation was due to a perfect storm of volatility and uncertainty in the financial markets, ultra-low interest rates and, besides a number of exceptions, negative growth in dwellings due to lending restrictions, the Banking Royal Commission’s findings and restrictions on foreign investments. 

Furthermore, with the looming Federal election and investor fears of the Labor Party’s proposed changes to negative gearing and capital gains tax, he said 2019 was projected to be a year of political uncertainty and economic volatility. 

Falling property prices in Sydney and Melbourne have caused poor consumer sentiment in relation to housing.

Combined with ongoing weak wage growth, this is likely to have a flow-on effect during 2019 on the overall consumer sentiment and a negative impact on household spending and consequently on GDP growth.

 What you expect in an ultra-low interest rate environment is continued growth in dwelling prices, however, the lending restrictions and fear over Labor’s policies have cooled the market and created an unusual situation of low house prices.” 

Until the GFC there had been a good correlation between high interest rate environments (high-growth environments) to strong returns from shares, however, due to very strong volatility in the financial markets and ASX200 there was no clear correlation between interest rates to changes in the ASX.

The outlook would not improve in the immediate future with investors facing another tough two years, with the majority of properties likely to be depreciating assets in the short term.

Shares also show volatility and uncertainty and this is now even more of a territory for professional investors and fund managers.

The good news is that there are markets that carry a lower level of risk and are projected to deliver good overall return (i.e. capital growth and rental return) both in the short and long term, at a variety of price ranges.

These include houses in areas that enjoy high demand mainly in southeast QLD and regional areas in Victoria such as Geelong that still enjoys very good demand that translated into 15.1 per cent capital growth for houses in the past 12 months.

High population growth and a rise in infrastructure projects, leading to an improved economy and more jobs, have greatly increased the popularity of the area. It is also only one hours’ drive from Melbourne and housing is significantly more affordable.

Another example where houses enjoy strong demand is Queensland’s Sunshine Coast that delivered 6.5 per cent capital growth in the past 12 months and 35.2 per cent in the past five years. The lifestyle and strong demand from families, downsizers and investors make this place an attractive destination that holds well even in the current market conditions. 

As more volatility was expected in the financial markets for 2019-2020, uncertainty around international major global events such as the US trade war with China, low interest rates and low growth, it was likely the trend of low returns would continue for the immediate future.

DORON PELEG is CEO of RiskWise Property Research.