AMP Capital chief economist Shane Oliver has forecast a turbulent residential property outlook for the next five to 10 years.
Mr Oliver said that while house prices will continue to grow in the short term, with average gains of 5 per cent expected over the next 12 months, the longer-term outlook is not so positive.
"The residential property outlook for the next five to 10 years is messy," he said.
"Housing is expensive on all metrics and offers very low rental yields compared to all other assets except bank deposits and government bonds."
Gross rental yields on housing are around 2.9 per cent (after costs this is around 1.0 per cent), compared to yields of 6.0 per cent on commercial property and 5.7 per cent for Australian shares (with franking credits), Mr Oliver said.
“This means that the income flow an investment in housing generates is very low compared to shares and commercial property, so a housing investor is more dependent on capital growth to generate a decent return," he said.
Mr Oliver believes that shares and commercial property represent better value to investors.
He noted that over the very long term residential property adjusted for costs has provided a similar return for investors as Australian shares.
“Since the 1920s housing has returned 11.1 per cent per annum compared to 11.5 per cent per annum from shares,” he said.
While low interest rates are expected to lift house prices in the short term, Mr Oliver says this is likely to be constrained by the economic environment and the impact of tougher prudential scrutiny of bank lending by APRA.
“Over the next 12 months, home price gains are likely to average around 5 per cent, maybe a bit stronger in Sydney and Melbourne (key beneficiaries of the post-mining boom rebalancing) but remain negative in Perth and Darwin (as the mining bust continues),” he said.