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Long term property investment proves its worth

The current share market correction, combined with poorly performing superannuation funds, has refocused the attention of many investors on the benefits of long term property investment. The world economic crisis was always going to have an impact on Australia regardless of whether we had a recession or not.

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Australian share market investors have been susceptible to the global demise in share prices and have seen the value of their portfolio fall drastically. Australian property investors, however, are far better off. In this edition of Which Property? Insight, we will explain why the Australian property market, and even more so the Queensland property market, will remain strong in the long term.

Long term investors can expect price rises in australian property

Australian property prices are still well supported as is evidence by the latest median prices for property and will not see the dramatic falls experienced elsewhere in the world. The more conservative money lending policies practised by Australian banks, plus a genuine shortfall in property availability across the country, has placed us in a far better position than, in say, the UK and USA - which are both experiencing the exact opposite market conditions to those in Australia.

The overhang of unsold houses in the U.S. has created downward pressure on house prices as builders and developers have been forced to sell. This is absent in the Australian property market. Rather, the shortage of housing here means that there are buyers waiting for better circumstances - e.g. lower interest rates, rising incomes or simply some confidence - to facilitate their entry to the market. This latent, underlying demand for housing is a factor that will support the market moving forward!

The population figures tell the story

An almost unprecedented population rise has been occurring in Australia and in particular South East Queensland, which continues to be Australia's fastest growing region. By 2031 the South East Queensland population will have grown to over 4 million, not far short of the total population of the whole of Queensland today, and will have generated demand for an additional 735,500 new dwellings. All of this has strong bearing on future capital growth, particularly for long term residential property investors.

Queensland's overall population grew by an impressive 105,128 in the year ending September 2008. That figure represents 27% of the country's total population growth whilst Queensland currently only accounts for about 20% of the Australian population. Year after year Queensland's pro-rata share of population growth has been more than its weighting in terms of its existing population numbers. While some of these new residents will be born to Queensland parents, most of the increase will be from interstate and overseas migration, clearly indicating where people want to live in Australia.

Will this growth trend start to flatten out? Not according to the ABS which forecasts strong growth beyond the middle of this century. In fact ABS forecasts that by 2056 Queensland's total population will have expanded to almost 8 million people, basically double the current level of population.

With the state currently experiencing a population growth rate of approximately twice that of the rate of growth a decade ago, unless we build much more property, the property shortage is set to continue.

Historic property undersupply

Is there a light at the end of the housing shortage tunnel? Not really. Instead of improving, the undersupply is actually worsening, especially in South East Queensland.

February 2009 building approvals in Queensland were down by an incredible 53.3%, further compounding the state's undersupply. Property undersupply in Australia will inevitably lead to price rises and rent increases, a situation confirmed by the ANZ Bank which has stated that Australia will face a critical and potentially intractable shortage of property likely to last for a decade.

Australia-wide, the natural population increase plus net immigration means we need to build 180,000 dwellings per year to satisfy demand (some say the real demand is for 200,000 properties per year). The reality is that the country will build just 130,000 to 140,000 properties this year and, with the recession, the total number of new properties likely to be built next year will fall even further. This is despite the fact that population growth continues unabated at record levels.

With its surging population, Brisbane is a prime example of the effect on housing demand. Setting aside the outer suburbs, Brisbane's inner suburbs alone are receiving 7,000 new residents each year. Based on an average of 2.6 persons per home (a figure which itself is reducing as a result of changing demographics and creating even more demand) approximately 50 brand new homes need to be built in the inner suburbs each week to satisfy demand. Now, with nervous builders and developers, plus bank finance drying up, the gap between Brisbane's supply and demand widened further again.

Investors should note that in the September quarter of 2008, Inner Brisbane maintained the lowest rental vacancy rate in Queensland of 1.4%. A report by BIS Shrapnel estimated that since 1999 the Brisbane CBD apartment market has had a shortfall of rental stock of 1,000 dwellings, as at June 2007. As a result, Brisbane CBD apartment rents have risen by a staggering 64% since 2001. The low number of new building approvals, combined with a historical low number of rental vacancies, will lead to further price rises and rent increases. The main beneficiaries, of course, being you, long-term property investors.

Visionary infrastructure keeps people coming

South East Queensland is the third-largest urban region in the nation and for many years has been approving dispersed, low density dwellings that have crept well into the landscape. This pattern is now thought to be unsustainable as the effects, such as traffic congestion and eco-impact, are affecting people's lifestyles.

The state government has addressed these and other population issues with a regional plan that supports ongoing population growth. The plan has a focus on higher density and mixed use development in and around regional centres, with enormous improvements to road corridors and public transport. The plan -SEQ Regional Plan 2009 to 2031 - concentrates urban development in the Urban Footprint and redirects a proportion of new growth to existing communities.

Already the government has committed more than $100 billion to road networks, extended rail links, public transport, energy networks, industry development and many other areas. Accompanying this is a visionary plan for managing growth, housing availability, transport congestion and climate change. As the plan is progressively implemented, South East Queensland will become an even more desirable destination.

A fair conclusion

Bill Morris in his latest Midwood Report is suggesting that the next uplift in the property cycle should commence around 2010 to 2011, when price rises are expected to be around 20% to 30%. We believe that property price growth may actually commence before that and perhaps begin sometime during the second half of 2009. Population pressure will force an increase in the costs of land, houses and apartments. This will occur despite the current economic downturn, since exceptionally low interest rates, a shortage of property and the best housing affordability in many years will contribute to making this a great time to purchase property.

It's interesting to note that the Reserve Bank of Australia's own projections support the hypothesis that demand for housing will continue to support the market. As Deputy Governor, Rick Battellino recently stated: "In the past five years real disposable household income grew by an average of 6.1% per year, resulting in a cumulative increase over the five years of more than 30%. You would have to go back more than 30 years to find a bigger increase. This growth has exceeded that of any other developed economy. Beyond the next couple of years the future is harder to predict, but there is no reason at this stage to doubt that past patterns will be repeated and that growth will pick up again. Australia remains, after all, a very dynamic economy!

They say that the only thing you can be sure of in life is death and taxes. In a market that will continue to be acutely short of property which can only be supplied by building, I think it's a fair bet that we can add property price rises to that list.

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent of Which Property? and the Author.

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