Property outlook July 2010 ~ should you believe the hype?

Lavender Bay, Sydney

Lavender Bay, Sydney

The outlook of property markets has changed recently from the heady days of mid 2009 to early 2010 where on average, property prices across major capital cities in Australia increased by a whopping 16% to the year ended March 2010. There have been mixed news in the media about a property bubble in Australia, the continued strong performance of the economy where inflation is creeping beyond the comfort levels of the Reserve Bank, record low unemployment rates, healthy export figures, weakening consumer sentiment, rising rents, low housing stocks and strong immigration numbers and most recently, a change in leadership in the government. What does all this mean to the property market in Australia?

Here are some key messages from the media and property experts recently:

  • Recent auction rates in July are falling, particularly in the major property markets of Sydney and Melbourne. Therefore, the property market is faltering after such a strong performance last year.
  • There is a property bubble that has been brewing. This view is further compounded by Jeremy Grantham, a US investor that a property crash in Australia is imminent.
  • Consumer sentiment has dampened in recent months due to the successive rise in interest rates.
  • The Australian economy depends largely on the economy of China, which may slow due to the European crisis and poor performance of the US economy.
  • Recent interest rate rises have put a strain on households and housing affordability.

Before we dive into what this all means for the property market, here are some facts and some of my personal perspectives:

  • The strong performance of the residential property market in Australia over 2009 and early 2010 was largely due to a number of key factors –  record low interest rates, significant government stimulus, First Home Owner’s Grant and pent-up demand from investors holding back from late 2008 to mid 2009 as a result of the GFC.
  • Current interest rates are slightly below 15-year levels. Therefore, further rises over the next 6 – 12 months in addition to the last 6 rate rises should not come as a complete surprise.
  • Property prices move in cycles. The significant price rise over the last 12 months will need a “breather”. This is also not to imply that prices will crash as there is no credible basis for this outlook at this point in time. However, as strong as the current Australian economy is performing, we sometimes forget Australia as part of a global economy that depends upon what happens to the rest of the world.
  • Statistics quoted by the media and “property experts” are general in nature and as such, should only be taken as a general guide. Indeed, there have been suburbs which have experienced stagnant prices and even price falls over the last 12 months and vacancy rates in certain suburbs are up to 8%.
  • There is a shortage of properties in and around well-located suburbs in and around Australian capital cities.
  • There is strong migration of skilled immigrants into Australia each year.
  • Organic growth of the Australian population is very strong and there are significant changes in demographics such as an increasing number of people living alone and smaller households, retirement of the baby-boomers, people working from home, casual employment, women delaying having a baby.
  • Unemployment in Australia is at record lows compared to other developed countries around the world.
  • Auction rates account for a mere 10% of property sales in Australia. Whilst it is an indicative factor, investors need to look at individual suburbs, the type of property and the time of the year when property are sold. Auctions account for less than 1% in certain suburbs and winter is generally a slower market than spring and summer.

What should you, as a property investor, do?

First and foremost, as an investor, one needs to understand there is more than one property cycle at any given time.

Each state within Australia has its own property market moving in their own respective cycles. In major capital cities, there are also minor cycles within each suburb which may or may not move according to the general statistics of house prices, auction rates, investor sentiment and number of new buildings quoted by the “experts” and the media which are predicated upon very general terms across the entire country.

In reality, there is the “real property cycle” and the “perceived property cycle”. These two cycles are identical except in property markets, perception generally lags reality, that is, the general crowd is always late in reacting to changes in the market.

Generally, properties located in suburbs with good public transport and amenities with easy access to the CBD will continue to be in demand over the medium to long term. It is not enough to say that good locations will always be good investments. One need to zero in on which capital city that is having the positive credentials of a strong state economy, good infrastructure and strong demand. Then, one would examine the well located suburbs within that capital city, further identifying good streets within that particular suburb which satisfies the criteria of strong demand from BOTH investors and owner-occupiers alike. Thereafter, I would further zero into the better side of a particular street and then to the type of property with the element of scarcity and/or “hidden potential” to value add.

Once the right property is identified, only then the element of price comes into play. Further research to ensure fair market value by comparing recent sales up to last 6 months will minimise the risk of buying the wrong property  at the wrong time in the wrong location at the wrong price.

Most analysts and observers agree that property prices will soften over the next 6 to 12 months, that is, general price growth will moderate to more modest figures. Having said that perception lags reality, the strategy is to obviously decide what is your own perspective right now and act, react or do nothing before the entire crowd does.

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