Property Market – Latest Market Conditions

Property Market Update Nov 2008

It continues to be a bumpy ride as the world financial crises continues.  Whilst Australia is very well positioned, compared to many other countries, the world economic factors are and will continue to impact us.

So lets have a look at our current property market.

Affordability
The recent issue in the Australian property market has been one of affordability, particularly for first home buyers.  So lets have a look at how this is being impacted with the changes that we have seen over the last few months:

Government Stimulus Package:

The recent announcement of the increase in the First Home Buyers Grant to $14,000 ($21k for new property) is designed to put a floor under the housing market and local agents across Australia have already been reporting an increase in buyer activity as a direct result of this initiative.

Interest Rate Cuts:

Since Sept, we have started a significant rate cut cycle, with 0.25% rate cut in Sept, 1% rate cut in Oct and then the most recent 0.75% cut in early Nov.  The current cash rate is now 5.25%.

These rate cuts already take housing affordability back to the levels of 1999-2000, just before the last housing boom.

The prediction is in 2009 the cash rate will be brought back to as low as 3.75% (a further 1.5% cut).  Major lenders are already lowering their 3 & 5 year fixed rates in expectation of lower variable rates.

Unemployment:

The only brake is job security and this will vary from one industry to another, flowing on to property types and locations. 

As regards unemployment, Saul Eslake, the Chief Economist for ANZ suggests in the Oct ANZ Economic update that:

“I’m not suggesting that unemployment wont rise at all: clearly it will…however I would suggest there are two good reasons to believe that unemployment won’t rise by anything like as much as it did during the recessions of the early 1980’s or 1990’s”
1. Australian employers are under much less pressure from high levels of
business debt and high interest rates, or from steeply rising real labour costs,
than they were on either of those two occasions.
2. Employers are aware that, as a result of demographic changes, one of the
biggest challenges they are likely to face over the medium term is a shortage
of labour, rather than an excess of it.

The report goes on to suggest that the unemployment rate is expected to rise to 5.75 per cent by June 2010.

According to the Australian Bureau of Statistics Sept 2008, looking at unemployment now relative to Unemployment in early 2000:
1. NSW: 6.3% in Oct 2001, down to 4.8% in Aug 2008
2. VIC: 6.6% in Nov 2001, down to 4.5% in Aug 2008
3. QLD: 8.6% in Apr 2001, down to 3.6% in Aug 2008

So whilst we may have a rise in unemployment, we are coming off a very low base.
Whilst history is no guarantee of the future, it is interesting to note that if we look at previous times that the Reserve Bank has cut interest rates when our economy was in a downturn, unemployment rates have risen and house prices have risen also.  In the 1991 recession, unemployment in Australia rose from around 6% to 10% and house prices still rose by around 8%.

So is Now The Time to Buy?
John Edwards, Chairman of Residex, was recently quoted in the Oct “Your Mortgage” magazine as suggesting that:

“while many would see this period as a time of high risk, for those investing in housing this perception was incorrect”
He noted that rentals were rising and at the same time interest rates were decreasing. So in the not-too-distant future your investment could be a net generator of cash, not a net user.
He suggested that “we have entered a low-risk and high-rental-return period for housing and using our cash now will ensure that we have assets to support us and allow us to make even more money”

So lets have a look at our Fundamentals, to see just how we are shaping up.

Our Population is Growing:

Not only is it growing at a record level, but much of it is as a result of immigration, people needing immediate accommodation.

Last year our net immigration was 184,500 a record for Australia.  With a total population growth of 317,000, our net migration accounted for over 50% of the total growth.

The Federal Government is forecasting continued strong immigration, expected to reach 227,000 per annum within the next 10 years.  With most of the growth expected to be in Australia’s major capitals.

Housing Supply:
So we are growing, no doubt about that.  But what about our supply of houses.  Michael Matusik suggested in his June 2008 report that:

“On an accumulative basis – based on the new housing market being balanced in
2001 – new dwelling supply is undersupplied by 32% across the country”

The Chief executive of the Housing Industry Association, Chris Lamont is in agreement, suggesting that :
HIA research confirms that just in 2008-09 some 190,000 new dwellings are required, this is 40,000 more dwellings than expected production.
So not only is Australia currently experiencing an undersupply of new dwelling, but the problem is expected to worsen over the coming years. 

Population up & House supply down!
The fundamentals are looking very positive on a medium to long term basis.  Tim Lawless, national research director at property research firm RP Data, was recently quoted in The Australian (Nov 11 2008) as saying:  low supply and strong population growth are “at odds with each other”, and the result is a “remarkably resilient” market.

To the Future:
There have been some suggestions that Australian property is over-valued on an international comparison. The International Monetary Fund’s  (IMF) World Economic Outlook released early this month specifically acknowledges that:
“if some country-specific factors are taken into account, the results of a cross-country
study of the extent to which house prices could be explained by ‘fundamentals’ by IMF researchers do not produce evidence of an overvaluation of Australian house prices”

We expect that we will likely see some significant property growth from mid next year.  Property is (and should always be viewed as) a medium to long term asset.  The time to find the right property is now.

In the 1980’s Australia had an investment boom.  We had aggressive lending practices by banks, which lead to an oversupply of residential and commercial property.  Our market fundamentals this time round are quite different, we have an undersupply of property and as a result our vacancy rates are at record lows.  The short to medium term expectation is that our building industry will not even come close to meeting the increasing demand.
The current financial crises is certainly a slow down to the property cycle, but many of Australia’s seasoned researchers are suggesting that there is certainly another leg to our property cycle.
Michael Matusik, respected property analysts was quoted recently as saying:
“All investment markets gravitate towards their long-term average overtime” and this should be the advice for 2009 and beyond.    The fact is that Australian property has performed extremely well over the medium to long term and there is no reason to expect that it will be any different on this occasion.

Detached and attached residential property now show similar total returns. Many
still believe that detached houses given their land content and freehold ownership,
are better investments. But given the generally superior location of many attached
properties (and in particular new product) at a lower price point with a higher net yield these product types will look to continue on par.

Looking forward, investment in direct property should pick up given the recent stock market fluctuations. A stampede to property similar to the late 1980’s is, however, unlikely. With an increase to the First Home Buyers Grant to $21,000 (for new property) and continuing reductions in interest rates (improving affordability), the likely effects will be seen in the first half of 2009 as the general mindset improves and investors look to balance their portfolios.

The time to find the right property is now.

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