Property Market Update Feb 2009

Australian Property Market Update February 2009

Interest rates are falling, rents are rising, vacancy rates are at record lows and our housing shortage continues.  Investment property fundaments are looking positive.  Excerpts taken from our Priority Investors Update in February 2009.  Subsrcribe now to receive the latest market updates

Last year was certainly a year of uncertainty and whilst much of that uncertainty continues, what we are starting to see now is action in the property market.  Many property investors and first home buyers late last year were taking a “wait and see” approach, now many are seeing that the time is ripe to enter the market.  

The key indicators are now very positive, from a property investment point of view.

Lets have a look at our current situation:

The two big factors that have started the move:

The Government Stimulus Packages:

Late last year, we saw the increase in the First Home Buyers Grant to $14,000 ($21k for new property), designed to put a floor under the housing market.  Local agents across Australia almost immediately reported an increase in buyer activity, as a direct result of this initiative and this activity is continuing.  This was just one part of the Governments AUD$10 billion stimulus package.

The Government backed this up with a package that was passed through parliament last week, a AUD$42 billion Nation Building & Jobs plan stimulus package,  which includes $12 billion cash handouts to tax payers and families and more importantly, major infrastructure works across Australia.

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,  0.75% cut in early Nov & a 1% cut in February.  The current cash rate is now at a 45 year low of 3.25%. 

Economists are predicting further rate cuts in the coming months, with predictions ranging from a further 0.5% cut to a further 1% cut.  The Reserve Bank Governor Glenn Stevens was quoted recently as saying “We’ll be prepared to go low enough to what is needed”.

It is interesting to note that whilst our rates are at record lows, they are still one of the highest rates in the advanced world, so our RBA still has plenty of room to move, if required.

These two factors alone are bring both first home buyers and investors in to the market: 

First home buyers:
An article in The Age Feb 23rd 2009 leads with the heading “First Home buyers put heat in market short on Supply” the article goes on to talk about the increase in demand from first home buyers due to falling rates and the Governments stimulus package and the underlying lack of property supply.

Investors:
As rates continue to fall and rents increase, investors are turning back to investment property.  The Australian Feb 16th 2009 suggests that “A rise in the number of investment properties whose rental returns exceed the cost of the mortgage will trigger a recovery in the housing market”


So lets look a little deeper at some of our key fundamentals:

Our Population continues to grow:

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.

Despite the World economic crises, 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.  In fact the economic crises, could even put a greater pressure on immigration.

Our Housing is Undersupplied:

The latest Housing Industry Association’s (HIA) National Outlook report, released in Feb 2009 suggests that:
“Builders are expected to break ground on more new housing in the second half of 2009, but a report says “the rise in new dwellings being built will do little to alleviate the housing shortage”
HIA said Australia needed to build at least 190,000 new homes each year to keep up with demand flowing from a larger population and trend towards fewer persons per household
The report suggested that “the number of housing starts was forecast to bottom out at 132,190 for the financial year 2008/09, which would represent a 17 per cent decline on the previous year.”  HIA then forecasts housing commencements to improve to 149,150 in 2009/10 and 158,100 in 2010/11.  Still well below the required 190,000 per year, to meet demand.
Building starts fall as developers struggle to get finance:
It’s also worth noting, that whilst individual investors are still finding it relatively easy to access finance locally, developers are not.  Speaking with developers, we have had several examples of banks requiring developers to contribute far more cash in to projects than they had previously been required too.  We had one case in point where the developer had been required to put over 7 times the cash that they had been required to put in in mid 2008, when they had first approached their financiers.  As a result the project has been shelved and this situation is being repeated all over Australia.  As an alternative to shelving projects, we will see developers turning to secondary funding options, which come at a higher price and will lead to further increases in construction costs.  Either way this will effect property prices either through the direct increase of costs or the lack of supply and increasing demand, pushing the prices up.

What about Rents & Occupancy rates?

Given the above figures on housing supply & demand, it is not hard to see why rents have boomed over the last few years and are expected to continue to rise. 

The Australian Bereau of Statistics reported in Jan 2009 that: “the annual rate of growth in rents across the country has jumped to 8.4 per cent in the year to last month, up 2 per cent from 2007”

Many of our clients have asked if rents can keep increasing, as we have previously reported, according to research completed by Matusik Property Insights, “rents have a long way to climb before they become unaffordable, with 18% rises in Sydney, 38% in Melbourne, 33% in West Australia, and 13% in Queensland before renters will reach the 30% income benchmark.”    So yes, there is still plenty of room for increasing rents.

Vacancy rates:

Vacancy rates remain at record lows, well below 2% in most of Australia’s capital cities.  With HIA figures suggesting an ongoing undersupply, coupled with Australia’s expected increasing population growth, it is difficult to see anything but a continuation of low vacancy rates, certainly in the short to medium term.

Unemployment:

Our unemployment rate will increase and this is certainly not a potive factor, but it is coming off a 32 year low, so it is currently at a very low base.  The Australian Bureau of Statistics just released the latest unemployment figures of 4.8%, the highest rate since June 2006.

Saul Eslake, the Chief Economist for ANZ suggests in the Oct 08 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.

The Treasury has since suggested that they expect unemployment to hit 7%, by mid 2010.  Still a relatively low figure.

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%.

The Stock Market is a mess!

As I pen this article the latest news feed that I have just got through (Feb 24th) reads “The share market followed Wall Street lower in opening trade, with gold stocks the only sector to escape the red as investors digested the US indices’ 12 year lows.”  A 12 year low, wow it’s no wonder investors historically have returned in droves to property when the stock market crumbles. 
The news is no better for Superannuation Funds, with superannuation analysts warning that (from ABC News Feb 23rd) : “only a "financial miracle" will prevent a second year of steep losses in the sector”
According to the latest data, the average return for the month of January fell another 1.8 per cent, taking losses over the past 12 months to almost 18 per cent.  The article goes on to say “"Keep in mind, these negative returns are for balanced funds – there’s a lot more pain for people exposed to higher levels of risk such as international shares."
Looking at the Australian property market it has risen dramatically following previous ASX falls:
Following the crash of 1987, when the Australian all ordinaries fell 42%, the average Sydney apartment, for example, rose by 54% over the following 24 months.  It’s interesting to note that mortgage interest rates at this time were around 15%, as compared to current mortgage interest rates of around 5.5%.

In the previous major crash of 1974, when the ASX fell by 59%, the average Melbourne apartment, for example, increased by 31% by the end of 76 and by 36% by the end of 1977.

Where to from here, is it time to invest?

Will history repeat itself, will investors move again to property.  Well, interest rates are at record lows, vacancy rates are at record lows, rents are increasing, first home buyers are getting in to the market in record numbers. 
There are no guarantees, but where else are investors going to invest?  What other options are available? 

We think that 2009 will be an excellent year for investors to get in to the market.

The above update is part of our February 2009 Priority Investors Update.  If you would like to receive regular market updates and news on our latest release off plan properties, please complete your Priority Investor details.

Go back to the Property Market Main Menu

Go back to the Investors Room Main Menu