Spring 2010 ~ Property Update & Investment Strategies for 2011

Spring time ~ children playing at Watsons Bay, Sydney

Spring time ~ children playing at Watsons Bay, Sydney

July  – September 2010 update

The spring season is well underway in Australia and whilst this has always been a good season for buying and selling property, this year’s spring season has started off slow for 3 main reasons:

  • Uncertainty surrounding the outcome of the 21 August 2010 Federal elections
  • Very strong price growth over 2009 and 2010 which is now starting to slow as a result of 6 interest rate rises over the last 12 months
  • Uncertainty over the weak US economy and how it may affect the Australian economy

It is therefore not suprising to hear and read of many mixed messages in the media as to where property markets are trending over the next few months. Generally, the sellers’ market (more buyers than sellers) of the last 18 months have been gradually shifting to a buyers’ market (more sellers than buyers) recently. There have been more properties on the market for longer periods with auction clearance rates across major capital cities coming off their record highs in recent months. There is also a sense of apprehension from investors as to the sustainability of strong price growth and whether a property bubble is brewing in the Australian markets.

The World and Australian economies at a glance

The US economy is still extremely weak and fragile where 40 million Americans are now deemed to be living in poverty and unemployment is at a rate of 10%. One in every five properties in the US has negative equity, that is, its value is less than the amount being owed to a financial institution. Major economies in Europe such as Germany, UK, France and Italy are still struggling amidst the European crisis which are crippling countries like Greece, Spain, Portugal and Ireland.

In contrast, Australia was the only country in the developed world (apart from Poland) to have avoided a recession in 2009 / 2010 where GDP growth has been strong. Unemployment are at record lows of 5% and inflation is within the 2 – 3% comfort level of the Reserve Bank.

Where are interest rates heading over the next 3 years?

Despite the six interest rate increases of 25 basis points each over the past year, Australia’s current cash rate of 4.5% is still below a 15-year average. This may indicate that interest rates still have an upside due to the strong local economy and is widely anticipated to increase by between 2 – 3% over the next 3 years, bringing the standard variable home loan rate to around 9 – 10% by 2012 and 2013.

It should be noted that although interest rates are projected to further increase over the next few years, this projected increase by the RBA is anticipated to be gradual to avoid any unnecessary “shocks” to the economy.

How does this projected 9 – 10% compare to those of the late 80’s and early 90’s when interest rates were between 18 –  21%?

Interest rates should be analysed against inflation rates to compare its intended effects over two different periods. During the record high interest rates in the late 80’s and early 90’s, the CPI which is the key indicator for inflation was close to 10%. Therefore, the projected increase in interest rates over the next 3 years can be loosely equated to a similar situation in the 90’s although the main difference is that Australia was in a recession during the early 90’s whilst the current economy is anticipated to remain resilient over next few years.

Will the faltering US economy affect Australia?

A$ vs US$ trend

A$ vs US$ trend

The weak US economy may only affect Australia to a small extent over the short term because Australia has significantly reduced its dependency on the US as a major trading partner. Australia’s major trading partners are now the new Asian powerhouse economies of China and India where our mining industries are enjoying record growth due to the seemingly inexhaustible demand for, among other minerals, iron ore and coal. This augurs well for the local economy in the short to medium term as there is no foreseeable major downside apart from China having perceived bubbles within its own economy. The Chinese government has put in monetary and fiscal mechanisms to have a “controlled” slowing down of its economy from the heady 11 – 12% annual GDP growth to a more manageable 8 – 9% annual GDP growth.

Although considered a speculative currency among traders and fund managers, the Australian dollar has also been strengthening on the back of the weak US economy. As at 12pm today, the little Aussie battler has hit a 2-year high and is trading at 95.68 US cents. This strong showing again underlines the strength of the Australian economy and provides confidence to both local and foreign investors as well as international money and equity markets. It has even prompted some analysts to conclude the Australian dollar may be overvalued by up to 27%.

What does this all mean for the Australian property market?

The Australian property markets have had a stellar run over the past 18 months despite the gloom of the Global Financial Crisis where property prices in certain suburbs have climbed a staggering 50%. Here is a recapitulation of 10 hottest locations in Australia over the past 12 months:

Rank Location State Type Growth % Median Price $’000
1 Sunshine VIC Unit 49.86 260
2 Maryborough QLD Unit 49.28 257
3 Woodlands WA Unit 49.11 630
4 Herbert NT House 47.81 540
5 Heddon Greta NSW House 47.71 387
6 Gardenvale VIC Unit 47.54 na
7 Yarram VIC Unit 47.51 na
8 Milton QLD Unit 46.67 594
9 Marulan NSW House 46.40 295
10 Heathcote VIC House 45.87 225

Source: RP Data, May 2010

A further 20 suburbs around Australia recorded growth rates between 40 – 45%. The key question on the minds of investors is whether this kind of growth is sustainable and if not, when will it start to slow? When standard variable rates start to hover around the 9 – 10% region, I believe that’s when the property market will see some level of plateau. However, as it is noted that the projected interest rate increase are gradual over the next few years, there will remain good buying opportunities up to 2013 provided investors and home owners do their research and homework. Let’s take a look at the majors markets:

Sydney property market

Monorail at Darling Harbour, Sydney

Monorail at Darling Harbour, Sydney

The Sydney market had an exceptional year of strong price growth where choice locations among investors and homeowners alike were in the lower north shore, northern beaches, eastern suburbs and inner west. Sound properties located in these areas with good public amenities and transport experienced stong capital growth as well as strong rental demand due to a strong population growth over the year. Although there are signs of weakening, a good observation by John Edwards, CEO of Residex is that units and apartments in selected Sydney suburbs have out-performed houses and landed properties in both rental yields AND capital growth and is expected to continue doing so. This recent phenomena can be attributed to changing demographics such as smaller households, single occupants, growing number of couples delaying starting a family, affordability issues and gentrification of the “old and tired” suburbs such as Redfern, Newtown, Camperdown and Darlinghurst.

As for the immmediate future, I anticipate the controversial New South Wales Labor government to be ousted in the March 2011 elections next year and if so, there should be renewed optimism in a stronger state economy led by a new Liberal State government. Areas which would benefit from this new administration may include those which have been previously neglected by the current Labor government.

Therefore, I foresee good opportunities for strong growth in selected suburbs in New South Wales up to around 2012 – 2013. These suburbs include those which may currently be “undervalued” compared to its surrounding neighbourhood such as Granville in western Sydney, Darlington, Chippendale, Erskineville in the heart of Sydney, Maroubra and Matraville in the eastern suburbs and Dee Why, Freshwater and Brookvale in the northern beaches.

Melbourne property market

Rowers at Melbourne's South Bank

Rowers at Melbourne's South Bank

Melbourne was easily the outstanding property market of all Australian capital cities over the last 18 months where property prices have surged up to 50% in some suburbs. Although Sydney remains Australia’s largest capital city, I believe this strong showing has a lot to do with Melbourne stepping up as a world-class city both in terms of living standards and as a business and commercial precinct. State initiatives such as cajoling Tiger Woods to appear in the Australian Masters golf tournament in November 2009, hosting the annual Australian Open Tennis tournament, the Australian Grand Prix at Albert Park are just some of the good work the Victorian government is claiming bragging rights over New South Wales.

In terms of economic management and performance, the Victorian government is also miles ahead of its nearest state rivals. It has recorded the fastest growing population across all of Australia and good properties in established and prestige suburbs in the east will continue to receive strong support from this growth. Skilled immigrants are beginning to call Victoria, Western Australia and South Australia as their new home over the traditional favourite of New South Wales due to better housing affordability, public amenities such as schools, hospitals, child care and transport.

I envisage Melbourne’s population to grow outwards towards the west, south and northern parts from its established inner eastern suburbs over the next 5 to 10 years. There seems to be a fairly large number of new and off-the-plan apartments coming on-stream in and around the CBD areas such as Brunswick, Prahran, South Bank and Richmond to name a few. Personally, I would tend to avoid buying apartments right in the heart of the CBD for a few key reasons:

  • Although new, most of these apartments are relatively small in terms of living areas. A typical 2 bedroom apartment in some of these new projects may only have anywhere between 75 – 85 sqm of total living space and some only come with a single bathroom. Many 1 bedroom apartments in new complexes around the CBD do not come with a car space which is an invaluable feature for city living. This is probably attributed to changing demographics, rising value of real estate around CBD areas as well as construction and marketing costs which render these apartments relatively expensive compared to those slightly further from the city.
  • Off-the-plan projects carry a certain level of risk in terms of expected completion dates, market conditions and valuation upon completion as well as the level and quality of its finishings. These projects have indeed made speculators tidy profits in a booming market where some may even have no intention of settlement but to simply offload upon completion. However, I believe the boom times have since passed. In a climate where the market is anticipated to start slowing, these off-the-plan projects become even riskier and unless you intend to buy as an owner-occupier with the intention of living in the property for the long term, I would avoid getting into these investments.
  • Many new apartment blocks are now being marketed to foreign and overseas investors and in some cases, a very significant majority of eventual occupants will consist of tenants as opposed to owner-occupiers and unless management and body corporate maintenance is effective, these apartment blocks will depreciate more quickly and worse still, develop a stigma of having very transient occupants and affect future capital growth.
  • Due to tighter lending guidelines, major banks now have restrictions of 15% for lending to any one off-the-plan project to limit their exposure to inherent risks. In many cases, pre-approval cannot be given as bank valuations will only be done at the “lock-up” or completion  stage of the project. Even after obtaining finance approval for these project, one may encounter issues with getting the desired  Loan to Value ratio as this is dictated by the bank’s valuation.
  • There appears to be many new projects in various stages of construction and over-supply may be an issue in the future.

Generally, I would consider suburbs which are fairly close to the CBD with good public amenities and transport to be a better option. Having identified these areas, the location within each of these suburbs and in turn the specific street on which to purchase is important. Thereafter, I will consider the type of property and finally its intrinsic price compared to similar properties which have recently sold in the same vicinity.

The Growth Areas Authority is an independent statutory body within the Victorian state government with a broad and facilitative role to create greater certainty, faster decisions and better coordination between all parties involved in planning and development of Melbourne’s growth areas. The GAA was established in 2006 and reports to the Minister for Planning as part of the Victorian Government’s plan for outer urban development. The GAA has been appointed by the Minister for Planning to oversee planning and development in Melbourne’s five growth areas:

Perth property market

Northbridge's entertainment precinct, Perth

Northbridge's entertainment precinct, Perth

The Western Australian property market saw its heydays in the mid 2000’s amidst the resources boom of the century where property prices tripled and even quadrupled in many suburbs which were previously sleepy hollows. The exploits from the heady days of Alan Bond, Lang Hancock and Robert Holmes a Court to the current mavericks in Fortesque Metal’s Andrew “Twiggy” Forrest and Gina Reinhart, has accorded Perth as as Australia’s third largest capital city.

Suburbs within Perth city’s 5km reach such as Leaderville, Shenton Park, Osborne Park, Woodlands, Northbridge, Subiaco, Swanbourne, East Perth, Claremont and Wembley have all cashed in on this once in a life-time property boom. Needless to say that prestige suburbs such as Dalkeith, Peppermint Grove, City Beach, Cottesloe and Mosman Park which enjoy both the Swan river and Indian Ocean views are some of the priciest residential real estate suburbs in the whole of Australia.

However, prices slowed and even tumbled during the height of the GFC where days on the market for many properties were languishing amidst weak demand. The Western Australian economy is forecast to remain slow in recovery as a result of uncertainty surrounding the proposed mining tax and concerns about the global economy. East Perth, Tuart Hill, East Victoria Park and Fremantle all recorded weak price and rental growth and remain as some of the weakest areas in Australia.

Brisbane property market

Brisbane city skyline

Brisbane city skyline

Unlike the Sydney and Melbourne markets, the Queensland property market has generally been flat over the last 18 months. Having said this, almost half of Brisbane’s metropolitan suburbs have experienced negative growth whilst the remaining half have seen some level of activity. There seems to be a lot of high rise apartment blocks coming on-stream within the CBD and this should be a sign of caution for over-supply within the next couple of years. The Brisbane market is fragmented to the extent that investors need to understand which suburbs within the 10km radius of the CBD that is going to experience growth as a result of scarcity, good amenities and strong demand from those which are in areas which could experience an over supply in the coming years.

For this market, I would generally invest a little further away from the Brisbane CBD to take advantage of potential capital growth in suburbs which have good transport links to the CBD, close to schools, hospitals and shopping as well as properties with the potential to “add-value” from simple renovations to more extensive upgrades.

Rental market

In general, the rental market in major capital cities is expected to be tight due to a growing population and a lack of stock in and around popular suburbs which have good public amenities and transport to the CBDs. The current vacancy rates of between 1 – 3% for each of the major capital cities should only be taken as an indication. Suburbs with local attractions such as the convenience of shopping with commercial centres, parklands, beaches, good schools and good access to the CBDs will continue to attract tenants. Even in this tight market, there are suburbs where vacancy rates are in double digits due to either poor quality offerings and poor location.

Investment strategies

“The mother of all evil is speculation” – Gordon Gekko, Wall Street, Money Never Sleeps

As the market is beginning to slow down, I would, generally, consider the following strategies:

  • Invest in areas where there is a strong demand from both investors and home-owners alike. These areas would invariable be in popular suburbs with good access to public transport and amenities and fairly close to major capital cities.
  • Stay away from off-the-plan projects due to a slowing market and potential uncertainty.
  • Consider properties which have the potential to “add-value” and manufacture equity in addition to potential up-side in capital growth.
  • From a finance perspective, do not overextend and stay within your borrowing and servicing capacity.

Related posts

Albert Wong is economics writer for wealthruproperty.com

Disclaimer: Views, opinions and comments expressed in this article are general in nature and do not constitute investment, legal or financial advice. Readers are advised to seek their own professional advice as and when required.

Related Posts Plugin for WordPress, Blogger...
0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply