Property's renewed appeal

Anyone expecting quick profits may be disappointed, but bricks and mortar have a growing appeal for long-term investors, writes ANDREW KING.

For the last half of the 1990s many people were predicting the fall of the residential property market - although most of them had a vested interest in its demise.

But with other types of investments becoming more volatile, many people are re-evaluating investment property. This can be seen in the increasing number of residential sales this year.

Investment in residential rental property is seen as being more stable than some other investments.

There are many reasons for this:

* The cost of selling a property is relatively high, so if the would-be sellers cannot obtain their desired price, they will often withdraw the property from the market. This has the effect of matching supply with demand and reducing price volatility.

* People need to live somewhere so there is always a large market for tenants.

* The price of rental property is closely (if not identically) aligned to the home ownership property market, and population trends are usually slow moving and predictable.

* The market for residential property is large, with many buyers and sellers and good access to information, which tends to make it a very efficient and less volatile market.

There are many factors pointing to a pickup in the housing market.

Over the last few years property prices have remained stable while incomes have been rising.

Interest rates have been falling, the economy is improving and along with this has been an improvement in employment and hence job security.

The number of new houses being built has fallen, reducing supply. The number of people coming into the country has overtaken the number leaving, increasing demand.

The availability of rental properties is starting to fall as demand increases because of population growth and because the number of people per household is falling.

These factors have led many people to believe that property is starting to look more and more attractive, and that higher sales volumes will eventually lead to higher prices.

However, this does not mean that we are in for a period of strong price rises.

The extended length of time that property has spent going down in value, or plateauing, has left many first-home buyers and investors with a bargain mentality.

The supply side of the equation is also likely to slow growth in the property market. This is because, when prices started to decline, many sellers took their properties off the market. This reduced the supply of properties for sale and meant that prices did not fall as far as many commentators expected.

Now that demand is increasing, it is likely that these properties will eventually come back onto the market and increase the supply.

The dampening effect of reduced supply on a falling market also dampens the rebound when the market begins to improve. This phenomenon is a key reason for low volatility in the property market.

The Government may also play a part in house prices. It has announced plans to increase the number of state houses to match the increase in demand caused by the income-related rents policy.

If the Government chooses to build new state houses, this will further increase supply in certain area, upsetting market forces and dampening house prices. This would not be the case if the Government bought existing houses or leased property from private property investors.

Taking all these factors into consideration, the majority of house values are unlikely to increase rapidly in the short term.

Regardless of how fast prices rise, however, the medium and long-term outlook for property is positive and many people are likely to want to invest in a second property for superannuation reasons.

The thing to remember is that high capital gains are not guaranteed and it is imperative that these investors approach this decision carefully, armed with as much good, independent information as they can find.

* Andrew King is the editor of Residential Property Investor magazine.