Deloitte Access tips property to be the 'worst investment'

Australian Financial Review Oct 17 2016 12:01 AM

Jacob Greber

Property looks set to become the "worst investment" over coming decades because of a looming bust in apartment prices and the reality that official interest rates won't stay low forever, says a leading economist.

Describing the nation's economy as trapped in a "Faustian bargain" with low borrowing costs and resurgent commodity prices, Deloitte Access Economics economist Chris Richardson warns that future risks of a shakeout are mounting.

Mr Richardson said buyers had for decades been repeatedly betting "double or nothing" on property, which until now has been a successful strategy. However, it has entrenched an unwavering belief in investing in housing over shares or other assets.

"There comes a point where past performance starts to become a guarantee of an unwinding of future performance," Mr Richardson told The Australian Financial Review on Sunday.

"There's an increasing risk that it becomes the worst investment in the next few decades. That might happen fast or slow. But every policy maker should pray that it happens slow."

The comments follow the Reserve Bank of Australia's decision to issue a storm warning on Friday to inner-city apartment owners and their lenders over a looming oversupply of units that many analysts believe will lead to falling prices.

Banks are already cracking down on lending to the sector and analysts are increasingly concerned the long pipeline in apartment approvals over the past two years means supply of new units will continue to grow through the rest of 2016 and 2017. Any reductions in new starts will only become apparent in lower supply from 2018 onwards.

Mr Richardson said everyone in Australia knows that too many apartments are being built and that "there will be a shakeout".

Perverse incentives

He said this was creating perverse incentives for developers.

"If you are building apartments now you want to sprint, absolutely get across that finish line and flog yours as fast as you can, leaving problems for those coming down the track," he said.

Mr Richardson, who will release Deloittes' latest quarterly business update on the Australian economy on Monday, says too many of the things Australia depends on are now "priced for perfection".

"The higher go the prices for iron ore and coal and homes in Sydney and Melbourne, the greater the risk that something goes wrong down the track."

Rejecting arguments that current housing price gains are being driven by increased demand or weak supply, Mr Richardson insisted that the single most important factor remains low borrowing costs.

"As the cost of money has gone increasingly close to zero, the cost of housing has increasingly gone atmospheric," he said.

"At some stage, interest rates will be a chunk higher than they are today. That does mean housing prices in Australia have to live through a very long period of headwinds.

"The costs and benefits of this increasingly Faustian bargain are starting to worry us."

Mr Richardson urged people against assuming the current levels of price gains and low interest rates will continue. "People should not think that current conditions are normal in financial markets," he said.

"And every time you price that into the house you buy or business plans you make, there's more risk in that than is widely recognised."