My View on Australia's Property Market

Its customary for those of us in the finance and investment industry to peer into the future in an attempt to predict what’s ahead for our property markets in the coming year and beyond. I have learned that while making such forecasts is not an exact science but I can predict that those investors who get it right will do very well out of real estate this year and set themselves up for the years ahead.

We already know that this will be a year of more moderate growth in property values with prices falling slightly in some areas. It will be a year where markets will be patchy with some areas performing better than others. Different states will perform differently as they work their way through their own property cycles and within each state different price brackets will perform differently.

What I understand from my fellow AMP colleagues:

• Houses at the top end of the market ($1.5 to $4million) will perform poorly over the next 12 months and maybe even more, only picking up when the share market starts to show more positive growth and business confidence returns. This is because these high end properties tend to be bought by people in the elite corporate world, investors and professionals. This demographic tends to upgrade into new homes when business is booming or when the stock market is on a high and stays put when it’s a straight line or dropping like the case at present.
• Likewise, lower priced properties – those typically bought by first home buyers, lower income group (35K – 50K) mid low income group (50K – 75k) and in regional areas (30kms++ from the city) – will also suffer this year with a lot of talk about affordability issues for those trying to enter the housing market at present. Gen Y’s looking to make a break from mom and dad or their landlord will struggle with the relatively high house prices of our inner city property markets which is where many want to live.  Increasing interest rates later in the year as well as rising rents will add to their woes and force many to remain on the rental roundabout. Others will opt to take the plunge into the housing market buying into the more affordable apartment market as house prices remain out of reach. But for those whose only option is to stick it out as tenants, the already tight rental market will take its toll with vacancy rates decreasing even further into 2011 causing already rising rents to continue on their upward trajectory.

But will there be a crash? By trying to sound positive I can say that despite all the doom and gloom we hear in the media about USA defaulting, financial problems in EU and about our economy and the property markets, I honestly don’t see how things will fall in a heap.

The best measure of supply is the property listings. RP Data’s assessment of online and newspaper listings shows there was a record of 260,000 properties advertised for sale over the four weeks to April 3. That is 24.1% more than a year ago, when the market was booming. While the properties on the market are rising, the number actually being sold is falling.

Although housing prices fell in 2008, the first sign of change emerged in early 2009 as the average size of first home owner loans jumped by $20,000 to $287,000. Buyers were leveraging the government grants to spend more.

That was then. The number of first home buyers has dwindled from a peak of about 18,000 a month to an average of about 6,000 this year. The stimulus incentives did not increase the pool of first home buyers – they simply encouraged people to bring forward the purchase.

Most market economists argue that Australia cannot suffer a housing market slump, because there has been under-building for years despite strong population growth generating a shortage.

Investors are a source of volatility in the Australian market. The generous negative gearing and capital gains tax provisions mean that Australia’s property investors are driven by capital gain and surprisingly not by rental yield. The role of capital gain seeking investors helped drive Australian property prices higher and rental yields lower. Average rental returns are 4.8% in most markets.

Now with the increasing weakness in the capital gain outlook, investors are deserting the market.

But, I am confident to stay that property values ALWAYS go up and investors who stay in the game for the long terms always do well. Yes, there are periods of flat and falling values, but the sceptics who like to warn investors away from real estate usually gets it wrong. If you think back over time, the nay sayers are out in force when the property starts to slow down.

• In 2008 when the GFC rocked the world – many suggested property values in Australia were set to crash and we were all going to lose out jobs but of course that never really eventuated.
• In 2004, the property markets in Sydney and Melbourne housing values stalled due to high interest rates that peaked in late 2003 but look what’s happened to property values in those cities since.
• In 2000, there was a heap of negative press and worry about the impact of the GST that was being introduced in 2001. People said this new tax would destroy the housing market. Kinda sound a bit of the drama going on about the new carbon tax doesn’t it?
• In the early nineties, when interest rates peaked and the markets crashed, everyone said it was the end of Australian property wealth and it would all be downhill from there.

As you look back it becomes clear that there’s a cyclical pattern to our property markets with the media and “clever” commentators offering lots of reasons not to invest.

But lets face it, we have periods of prosperity and periods of slow or negative growth in the property market – this has always been and will continue to be the case.

According to AMP, 20% of those who invest in property will sell within the first 12 months and 50% will sell within the first 5 years. They will not gain the long term wealth creation that property investing is all about.

So again in my opinion, those who get it right will do very well and again this has always been the case. Most clever investors who see the negative press about property as a countercyclical opportunity have consistently done well for themselves. They recognise the slower market as an opportunity to invest when others are afraid to buy and when there are more willing sellers in the market than purchasers.

But let’s think a little deeper. We cant just buy any property and expect it to outperform well in the long term. The key is to buy the right type of property, in the right location. At this time in the cycle, we need to buy a property below its intrinsic value and one that has a “twist”. Something special about it – like value, potential for growth, etc.

Ideally I would feel at purchasing an investment in the inner areas of our major capital cities that have a historical pattern of above average capital growth, regardless of the ups and downs of the property cycle.

Of course I am not encouraging everyone who reads this blog to run out and score themselves a new property! Who am I to suggest that? This is just opinions from a girl trying to put her thoughts in her blog.