Martin Hawes: Slow steady property rally best

Photo / Chris Skelton

Residential property looks to be recovering. It is difficult to know whether this is a suckers' rally - a tick up that pulls the last few suckers in before the market crashes - or whether it is permanent.

Those who believe the rally will be sustained point to a listings shortage - and we could face a housing shortage if we are not building enough to keep pace with population growth. Housing bulls also say interest rates are low, banks have relaxed a little on lending and there is still high demand from investors.

Housing bears argue interest rates will rise, unemployment is growing, affordability is poor and economic malaise is likely to continue for months.

Importantly, the relationship between property prices and rents is imbalanced, which means a low yield for investors or costly rent substitution for owner-occupiers.

I believe the market may kick upwards on a speculative rally, but poor investment yield will hold it back while prices remain high. Nevertheless, first-home buyers should buy now if they can. If the rally turns out to be sustained, they could be permanently shut out of home ownership.

On the other hand, investors should sit on their hands for a while. In the absence of a price boom, returns will largely come from rental yields. These are not enough at present and capital can be better employed elsewhere.

I hope we do not return to the bubble of a couple of years ago. If we do, the crash, when it comes, will be gruesome. I hope values remain steady for a few years so rents catch up. Steady values will also keep the Reserve Bank from raising interest rates and mean we avoid a worse crash in future.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com