AMP Capital chief economist Shane Oliver claims that residential property has been second to cash and the bond market in predicted five-year returns, but forecasted this to change.

Oliver said that for the past five years bonds and cash have been “the place to be” and that while yields on bank deposits have been single digit, they’ve still been higher than returns from both shares and residential property.

Going forward, Oliver expects this situation to change, signalling good news for those investing in the property market.

“Shares and to a lesser degree property, are likely to be a better option for investors as global recovery supports growth assets and low yields hamper the returns from bonds and cash.”

Oliver said residential property and shares already offer higher yields than cash and bonds and will benefit as economic growth improves.

“House and apartment yields are running around 3.7% and 4.8% respectively, which are well up from their lows last decade. With mortgage rates well off their highs and likely to fall further the residential property market appears to have bottomed out after falling since mid-2010, with a mild cyclical recovery likely over the next 12 months.”

Oliver warned that short-term gains are likely to be restricted to around 5-7% as buyers remain cautious about taking on excessive debt, particularly as job insecurity remains high.

“More broadly, capital growth in residential real estate is likely to be constrained over the next five to 10 years by still very high property prices relative to incomes.

“This suggests that a cyclical rebound in real estate prices over the next year should be seen as part of a broad range-bound market for property prices in real terms as the market continues to work off the excesses that built up over the property boom that started in the mid-1990’s and continued into last decade.”

Oliver said that while good quality properties in sought after locations will do well, the medium-term outlook for property returns is likely to remain constrained, though still better than cash and bonds.

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