Property Market Update July 2008

 
Australian property market update July 2008

Population grows and the housing shortage increases – Our fundamental criteria for investment property selection stays the same.  Excerpts taken from our Priority Investors Update in July 2008.  Subsrcribe now to receive the latest market updates

Dear Investor

As usual, we have tried to take a logical look at the current market. Given the varying press of late with vastly differing views and headlines designed to sell newspapers rather than indicate what the data is really showing, we thought it important to predominately focus on the key fundamentals and provide input from industry experts.

For ease of reading, the following is in bullet points.

Please enjoy!

Property & Recessions
Given the situation in other markets around the world we have had a number of clients asking about the possibility of Australia’s property prices falling dramatically and Australia falling into a recession.
According to the Economics @ ANZ Property Outlook April 2008:
– “Australian house prices have never fallen and going forward we believe there will be no reason that they will”
– “Despite affordability being difficult, we believe interest rates havepeaked…”
– “We do anticipate the economy will slow in the coming years but thereis little chance of a recession. The Australian economy has unprecedented insurance against the downturn …”

These comments seem to be in line with the recent commentary from the Reserve Bank following their last few months of no change on current rates.  In fact the latest NAB (National Australia Bank) quarterly Business Confidence& Conditions Survey suggested: “the RBA could cut rates by 1.25% in total from next year into 2010 from the present rate of 7.25%.”

What has happened over the last 10 years:
Based on data from the ABS (Australian Bureau of Statistics)
– The amount first home buyers borrowed doubled in the 10 years to 2006.
– The proportion of first home buyers purchasing new houses fell from 23% to 14%.
– More popular were townhouses and apartments which made up 27% ofpurchases, up from 15%.
– Nearly 30% of households were renting their homes and the biggest renting age group was 35 to 44 year olds.

Looking at The Fundamentals:

Our Population is growing & our supply is limited:

According to Michael Matusik(Matusik Report July 2008)

Population:

– Net immigration reached a record high of 184,500 last year, accounting for 55% of the population expansion
– Total population grew by 317,000 –another record
– Growth is forecast to remain strong with annual immigration to reach 227,000 within a decade.
– Most of the growth (70%) is to take place in the capital cities – over 85% if you include the Gold Coast,Wollongong,Geelong and Newcastle.

Property Supply:

– In 2007 – the vacancy rate was 1.6%(lower in capital cities), rents rose 13% and there were just 153,000 new housingstarts – down considerably from the 182,500 estimated to adequately house theAustralian population.
– On an accumulative basis – based on the new housing market being balanced in
– 2001 – new dwelling supply isundersupplied by 32% across the country.
– The undersupply is expected to worsen in coming years at the same time that
– new residential building costs are estimated to increase by 1% per month over the next 12-24 months.
– Reinforcement steel prices have shot up by more than 60% in 6 months.

Population Up, NewHousing Down – according to HIA (The Housing Industry Asscociation):

HIA  research confirms that in 2008-09 some 190,000 new dwellings are required, this is 40,000 more dwellings than expected production. HIA’s chief executive Chris Lamontsays 1,000,000 new homes are needed over the next 5 years to comfortably house Australia’s growing population.

What effect will the Oil Crises have on Property:
Here are the research findings from a recent study:
Its central finding is that 34 percent of new residential growth to 2013 will be vulnerable to soaring petrol prices "because it is not well served by public transport".
Since World War II, the design of suburbs in Sydney, Melbourne and Brisbane has centred on the motor vehicle."If shifting energy insecurity was barely noted by planners, then the oil vulnerability of the city’s suburban areas was almost completely ignored,“
New growth areas with insufficient public transport faced a potentially rapid decline in popularity.

Study: Planned Household Risk: Mortgage and Oil Vulnerability in Australian Cities
Author: Dr JagoDodson –Griffiths University Date: June,2008

Property has been a very consistent performer over the last 27 years:
According to data from REIA (Real Estate Institute of Australia)median unit prices have performed very well over this time. 

Looking at Melbourne, Brisbane & Sydney from 1980 to 2007:
Melbourne:
An increase in the median price from well under $50,000 in1980 to just under $400,000 in 2007. Over this period there have only been 4 years of negative growth (two years of which were only marginal) and 23 years where the value of property has increased, compared to the previous year.
Brisbane:
An increase in the median price from well under $50,000 in1980 to just under $350,000 in 2007. Over this period there have only been 3 years of negative growth  and 24 years where the value of property has increased, acompared to the previous year.
Sydney:
An increase in the median price from $50,000 in 1980 to around $370,000 in 2007.  Over this period there have only been 6 years of negative growth (two years of which wereonly marginal) and 21 years where the value of property has increased, compared to the previous year.

Australian Property compared to the share market:

As John Edwards, CEO of Residex was just recently quoted as saying:
 “Our housing markets (using Sydney whichhas suffered the worst) on average since the peak in January 2004 have fallen just0.05%… while in the last 6 months the ASX 200 has fallen about 19%”

Where to from here:
According to Michael Matusik’s July 2008 Update:

Sales volumes and new dwelling starts are likely to be subdued with the market remaining in undersupply.
Residential property prices (both houses & units) to increase on average around 8% p.a over the next 3 yearswith much of it taking place in late 2009…price growth is anticipated to be stronger in Queensland and Melbourne (due to higher overseas migration).
Annual rental growth of 12% p.a over the next 3 years, with most of the growth taking place over the next 12-18months.
History is likely to repeat with end prices and rents rising over the next couple of years. Prices could rise by up to 25% with rents being around 30% higher by late 2010.

So the criteria for the properties that we look for have not changed:

  • Projects in areas of growing population.
  • Locations that have a strong reason for existence, principally locations
  • close to the CBD of major capitals.
  • Projects & locations with a strong rental growth potential
  • Locations with easy access to public transport options.
  • Projects that will have re-sale appeal to owner occupier

The above update is part of our July 2008 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.