4th February 2010

Dear Investor,

The future of Australian property

As you may recall, in previous editions of Investment News we have discussed the strong performance of property through 2009. Since all investments at La Trobe are secured by mortgages over property, this is great news for investors. However, our investors are also interested in whether this performance is sustainable into the future. Key to this issue is the question as to whether the Australian housing market is overvalued.

In this edition of Investment News, we consider what the experts are saying about the Australian housing market.

Is Australian housing properly valued?

Both the International Monetary Fund (IMF) and the Reserve Bank of Australia (RBA) are consistently assessing the Australian property market. A summary of their recent findings follows.

International Monetary Fund Analysis

At the end of October 2009, the IMF released its "World Economic Outlook" in which it noted that:

"... in the case of Australia, if the impact of long-term migration on housing demand is taken into account, the results do not produce evidence of a significant overvaluation of house prices." (page 22)

Christopher Joye summarised the detail of IMF analysis in a presentation to the Melbourne Institute as follows:

Whether assessed since 1980, 1990 or 1997, Australia's house prices have risen in line with its peer group (broadly Western Europe, the UK, US and NZ). Specifically:

  • When considered since 1997, the rate of house price increases in Australia is ranked sixth (6th) of eleven (11);
  • When considered since 1990, the rate of house price increases in Australia is ranked sixth (6th) of eleven (11); and
  • When considered since 1980, the rate of house price increases in Australia is ranked fifth (5th) of eleven (11).

Further, Australia's house price-to-income ratio growth between 1997 and 2008 would rank it seventh (7th) of twelve (12).

Housing correction

Interestingly, the IMF also considered whether there was a global 'correction' occurring in the housing market, but concluded that:

"... the corrections in Australia and the United States are close to complete." (page 21)

Reserve Bank of Australia Analysis

The IMF report followed a presentation by Tony Richards, Head of the Economic Analysis Department of the RBA, on 29 September 2009. Richards commenced by noting that, since the Australian property market hit its peak in 2003, housing prices have risen less rapidly than incomes.

However, Richards then pointed to a number of factors that increase the prospect of housing price rises in the future, including:

  • strong population growth (both natural and immigration-led);
  • a long-term trend towards decreasing average household sizes (although there is some evidence that this trend might have paused in recent years. The pause itself might only reflect pent-up demand for housing that has temporarily been delayed);
  • a long-term increase in average hours worked per week, per household;
  • the high price of vacant land on city fringes; and
  • zoning and development approval issues constricting new development.

Further, on 25 November 2009, the Deputy Governor of the RBA, Ric Battellino gave an assessment of the Australian economy's future prospects. In doing so, he reviewed the much-discussed ratio of house prices to household income.

Battellino noted that the ratio was higher than 20 years ago, but that the increase was largely explained by the fall in inflation over the period, which had kept interest rates cycling at a lower average level than had previously been the case.

Further, although the Australian home price relative to incomes was higher than that in the United States, this reflected the differences between the two countries, including:

  • the higher population concentration and urbanisation in Australia;
  • the lower level of income (including medical expenses) spent on non-housing consumption in Australia; and
  • the tendency of Australians to pay off their debt more quickly.

For these reasons, Battellino stated that:

"... the Australian household sector as a whole appears to have the financial capacity to sustain a relatively high ratio of housing prices to income."

Recent Research

More recently the Commonwealth Bank Economics Research team released its analysis of housing and housing costs. Reassuringly, the report concluded that 85% of households spend less than 30% of their gross weekly incomes on housing.


Despite the often-overheated commentaries in tabloid papers, the evidence does not seem to suggest that prices in the Australian housing market have been increasing at an unsustainable rate in recent years. Indeed, it seems that the correction that has been occurring dramatically in the US and the UK over the last couple of years has, in fact, been occurring at a more measured pace in Australia since the market peak in 2003.

Although predicting the future is always a risky venture, the experts suggest that the fundamental demand and supply position means that the Australian housing market is likely to remain strong and attractive to investors for the foreseeable future.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
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(3) As at 30/11/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf
(4) 3.75 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.
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(6) The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.
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