Research conducted by Performance Property for Capspace reveals expected price gains for housing, with building approvals in Australia not keeping up with demand in capital cities. Tim Keith, Managing Director of Capspace, said continued evidence of high construction costs and limited construction activity will mean the apartment and housing markets remain in an undersupplied position, especially in Australia’s two biggest cities, Sydney and Melbourne.

“Building approvals are simply not keeping up with population increases. The probability of valuation increases in the residential unit sector in Melbourne, Sydney and Brisbane are high over the next 24 months,” he said.

“Strong rental growth is still evident across the country for the residential housing and apartment sectors across most capital cities. The current national vacancy rate remains low at 2%. There is, however, evidence of rental growth starting to slow down in regional locations, which could provide some much needed relief to renters,” he said.

“With a growing accommodation shortage, this will put further pressure on rental markets nationally. Evidence of further increases to net interstate migration for Queensland and Western Australia are positive and that could also make an argument for investors to get more exposure to these capital cities for further diversification,” Mr Keith said.

Capspace uses property as security on loans that it offers customers, so it is important for the private lender to continually research and understand the property market. While property owners have benefited from price rises, investors should consider diversifying their portfolios into other assets, according to Mr Keith.

Australians have stockpiled their wealth in property; around two-thirds of household wealth is now held in residential property, a proportion that has increased over time with rising property values. That makes many Australians vulnerable to a correction in the property market over the longer term, especially if rates rise again, and the economy slows,” he said.

Recently released economic data, ABS Household wealth data^[1], shows household net wealth sat at a record $16.2 trillion in the March 2024 quarter, boosted by rising property prices and a record level of property assets, which totalled $11.0 trillion as at 31 March 2024.  As a proportion of net household wealth, residential property accounted for around 67.9%, up from 61.7% in December 2020. In contrast, households also held just $1.46 trillion directly in equities and $1.73 trillion in cash and deposits.

According to Mr Keith, Australians should be devoting more of their household wealth to fixed income assets such as private credit to diversity their investment risk and to reap more attractive income yields.

“Private credit can deliver investors yields close to 10% per annum and investors understand their capital has protection based on the stringent loan process, lending and compliance policies, along with the security taken over borrower assets,” said Mr Keith.

The variable interest rate on the Capspace Private Debt Fund was 9.3% in July, well above prevailing interest rate on term deposits. The average advertised interest rate on three-year term deposits, for example, was just 3.95% in May 2024, unchanged from a year ago, according to the most recent data from the Reserve Bank.^[2]  The one-year rate was a little better at 4.55% and not much more than the official inflation rate of 3.6%.

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