2018 is kicking off with the share market trading at its highest level in almost a decade and the housing market starting to weaken, with prices falling in Sydney, Perth, Darwin and Melbourne, and flat-lining or slowing in Adelaide, Brisbane and Canberra. House prices in Hobart are the only shining light amid the increasing nation-wide gloom on housing.
These unfolding trends present an interesting choice for investors, who in recent years have generally been well rewarded with a high allocation of investment funds towards housing and a lesser allocation to stocks.
This is changing and could well be set to continue through the course of 2018 and beyond. The prospect of half a decade of flat or falling house prices is not conducive for investors, almost regardless of the alternatives.
The dynamics of housing are well understood. Extraordinary prices gains over the past decade or so have delivered stellar returns, albeit with a relatively low rental yield, rising costs of ownership (council rates, insurance and the like). The very low interest rates that provided financial comfort to investors as many maximised their debt on the expectation house price rises would offset those costs is less and less relevant as prices start to fall.
In other words, with house prices now flat and falling, these dynamics mean that investing in housing is at best marginal, even with the absurdly generous tax policies in the form of negative gearing. Add to that a rise in the interest rate the banks charge investors as a result of the regulatory changes imposed by the Australian Prudential Regulatory Authority, and it is fair to say housing, as an investment, has almost no appeal.
So what alternatives for investors are available?
In simple terms, it appears to be the stock market.
The Australian and World economy are still growing, business investment is on the rise and company profits remain robust. These are the bedrock fundamentals of a solid stock market.
With the stock market also offering a very high dividend yield, many which are fully franked, making the attractiveness of the ASX all the more compelling. Ongoing low interest rates will help to ensure company profits remain strong, but will also mean the yield on term deposits and other interest earning investments will remain dull and unlikely to attract fresh funds.
There are clearly risks investing in stocks. Prices can fall (like housing) if economic conditions change or policy mistakes are made.
As 2018 kicks off, those risks appear most obvious from a potential US inspired correction after its stellar run in recent years. With the US Federal Reserve hiking interest rates, Trump as President, mid term elections and the slow unwind of quantitative easing, the US stock market is vulnerable. Add to that concerns about the Chinese economy and its management of debt and it is possible that stocks could be subjected to a so-called X-Factor hit.
For now, the stock market is aware of those risks and is continuing to perform solidly.
In Australia, there seems little doubt that house prices will continue to falling away and as an investment asset, housing will for a time lose its appeal. While ever this is the case, investors will look to put their money elsewhere and it looks like stocks could be asset class that attracts those flows.