View Point - Housing Market

One of the common responses to the recent Australian housing market paper “Stairway to Heaven or Close to the Precipice”, is a concern as to how else to invest when the Australian housing market is apparently over-valued and the share market seems captive to ongoing global risks? Many investors are gravitating towards cash by default. That poses its own problems however. The post GFC investment environment is certainly challenging yet there may be strategies and investments that offer reasonable return opportunities.

Before elaborating further, it is important to get a sense of what to expect of the current investment environment. The pre GFC period was notable not just for the high returns experienced by investors but also for the extremely low volatility of those returns – an investment nirvana in fact.

Between early 2003 and its peak in late 2007, the Australian share market delivered average annual total returns of 26% with only one (slight) negative quarter of return out of 18 quarters in that entire period. By stark contrast, excluding the GFC itself, in the period since the bottom of the share market in early 2009, returns have averaged only 12% pa with 3 of the 10 quarters (30%) over this period experiencing negative returns, including the most recent June and September quarters. The past two quarters have been particularly difficult however, with -18% recorded for the share market in aggregate over this period.

From 1980 to the current date, the Australian share market averaged total returns of 11.5% pa with 40 out of 127 quarters (31%) providing negative returns. That’s amazingly close to what we have seen since early 2009. It seems then that we may have been spoilt by the apparently favorable investment period persisting prior to the GFC. Returns were strong and risk was perceived to be low but in fact this was a mirage…and something we are continuing to pay for.

Not surprisingly, many investors have become extremely risk adverse in the “new normal” environment evident since the GFC. One understandable reason for this is that a higher proportion than ever of Australians are already in or, are now approaching, retirement. As a consequence they no longer have the ability to use current income to top up diminished superannuation balances. A commonly voiced concern is that they can’t afford to lose more capital should shares continue their decline – the ramifications on their retirement lifestyles would be potentially too severe. It is a difficult choice they face – to capitulate and jump into cash may give them short term comfort but it isn’t likely to provide them with sufficient returns to make their savings last through their retirement.

Are there alternate approaches to investing which seek to address these concerns whilst also providing reasonably attractive longer term investment returns? It is important to stress that there is no magic bullet which can provide returns in excess of cash without taking some element of risk. Neither is there likely to be a quick return to the heady investment environment which existed prior to the GFC.