Property Market Update March 2010

Population growth at record levels, a major under supply & a very healthy economy.  The current market indicators are excellent  for property investors looking to buy off plan property.

Excerpts taken from our Priority Investors Update in March 2010.  Subsrcribe now to receive the latest market updates and pre-launch information on our latest off plan properties.

Dear Investor

It’s been a hectic start to the year, sales across the projects that we have been involved with this year have run at a phenomenal rate.  The anecdotal market update is that the property market is very much alive and well, as expected whilst first home buyers have decreased, investors and owner occupiers who are upgrading are now very much back in the market.
 
That’s a very quick market wrap, but for those who would like a little more substance, let’s have a look at just why investors are back in the market now and why we believe they will be for the foreseeable future.

Some of the key issues for 2010 will likely be:

• Our Global, National and State economies
• Australia’s population Growth
• Migration
• Interest Rates
• Funds Availability – at the builder/developer level
• New housing starts – Yes, we do have an udersupply?
• Housing affordability

So let’s have a look at these issues and how we expect they will impact on property prices & rents.

We have a confident Australian economy:

The Australian outlook is looking increasingly positive:

• Consumer & business sentiment is strong
• Exports to China are rising strongly (again) in fact Rio Tinto have just suggested that they expect China’s demand for steel will double in the next 10 years.
• Business investment intentions suggest upside risks to growth outlook

Economic growth of 3% plus in 2010:

• Improved global economy, increase in demand from China, strong population growth and investment likely to see the Australian economy perform well in the years ahead.

Property markets  are looking good:

• Our critical housing shortage continues to worsen
• Price momentum is strong
• First Home Buyers are being replaced by up graders and investors

As an economy we are however still cautious, there are still issues:

• Interest rates will continue to rise throughout 2010.
• We are seeing the direct Government stimulus withdrawal as cash handouts and the First Home Owners Grants are scaled back.
• Whilst our credit markets have improved –  supply of funds & the cost of funding still remains difficult
• The rest of the developed world still has issues

Australia stands tall:

Australia has effectively ‘decoupled’ itself from the developed world during the Global Financial Crises, our Real GDP is rising whilst many other economies (such as the UK & USA are in negative territory).  Some of the reasons that Australia has been able to do this is because Australia has:

• Conservative bank lending practices
• No sub-prime mortgage issues
• Full recourse loans
• Minimal exposure to CDS
• A housing shortage
• Record population gains
• Significant pre-emptive & effective monetary & fiscal policy action, and
• China rebounding with demand for Australia’s resources increasing.

Australian Property Prices:

For the reasons above, Australian property prices have outperformed the rest of the world.  In fact Australian property prices have come through the GFC, unscathed and are on the increase.

Looking at the figures which were recently released by Residex (Feb 2010):

Year to Jan 2010 growth in Melbourne was 15.98% for units and 14.46% for houses
Year to Jan 2010 growth in Sydney was 11.38% for units and 13.10% for houses
Year to Jan 2010 growth in Brisbane was 4.8% for units and 7.44% for houses

Year to Jan 2010 growth in Australia overall was 9.19% for units and 9.82% for houses.

Are we in a Property Boom:

Not according to John Edwards the CEO of Residex who was recently quoted as suggesting that:

“The most significant feature of both the house and unit markets is that Australian median growth in the last twelve months is very close to the ten year annual average.
In other words, our housing market is performing in accordance with its historical growth average, something that has not happened for a long time.

Of course, within this median figure are hidden rises in some markets and falls in others.”

And the Property Outlook Remains Positive:

Auction clearance rates are historically high at the moment, especially in Melbourne and this is always a great indicator of where the market is at, as it is showing that there are plenty of buyers out there and in Melbourne in particular they are seeing a record number of properties on the market, so lots of properties on the market and a large number of them being sold, the market is most certainly on the move.

Paul Braddick Head of Property  & Financial System Research for the ANZ Banking Group made the following suggestions in his recent commentary on the property market:

The 2009 price movement was very strong due to:
• Record low interest rates
• First Home Owners stimulus
• Demand / Supply Issues
• Relaxation of FIRB restrictions

Paul suggests that price gains will remain positive due to:
• Strong market momentum and severely restricted supply
• Housing shortage will get (much) worse
• Improved economy / labour market / sentiment
• Foreign demand increasing
• Vacancies will begin to tighten again

Interest Rates:

Interest rates will rise according to the Reserve Bank as the economy gains strength, in order to control inflation. 

Unemployment:

Unemployment has stayed low, it peaked just under 6% in 2009 (well below where many had suggested) and is now on a downward trend.  Currently it is around 5.3% nationally.

Our Population is Booming:

Immigration levels are at record rates, particularly in Victoria and these rates are continuing to boost house prices, infact historically there is a direct correlation between population growth for Skilled Immigrants and housing price growth.  With a lag of about 18 months (which makes sense as it takes migrants 12 to 18 months to establish themselves, decide where they want to live & then buy).  In Vic within 18 months of skilled immigrants arriving, 80% have bought a property.  So you can see how this form of population growth has a sizable & immediate effect on housing demand.

The historical data and the knowledge that we have of the Australian Governments current immigration policies provides us with a window of opportunity, if history repeats itself we will see continuing house price growth as our immigration levels continue to grow.  And our immigration is not likely to slow anytime soon, in fact last year, when Australia allowed 170,000 new immigrants, they knocked back over 1,000,000 applications, so the demand to live in Australia is certainly high.

Housing Undersupply:

Along with the increase in Population comes a lack of supply and this is where the problem (or opportunity if you are an investor) lies.  We have a record undersupply.

According to the latest ANZ Economics Report (Feb 2010):

It is estimated that underlying housing demand is running at an annual rate of 200,000 while dwelling completions are expected to fall to under 130,000 in 2009-10.

An additional shortage of another 70,000 dwellings will have an immediate impact.
It is highly unlikely that annual completions will get anywhere near the 200,000 required to meet demand in the foreseeable future.

In recent months we have shown signs of adding to our dwelling numbers with finance commitments for construction of new dwellings and purchase of new dwellings both increasing.  Construction finance is also encouraging after levels had virtually flat lined since 2003.

A Changing Demographic and closing the rental gap:

We have talked for many years now about the demographic shift which Australia is experiencing, as our average household sizes fall with more singles & couples housing required rather than the traditional 3 to 4 bedroom house for mum, dad & the 2 kids.  See our October 2009 update for further details of this, click here.

This demographic shift is part of the reason that the gap in the difference in rent for an apartment compared to a house is declining across Australia(according to Residex Jan 2010).  Melbourne is leading the way with just a $20 difference between the rent of an average house & average apartment.

What should we expect for 2010 and beyond:

Our GDP is forecast to continue to rise & unemployment is forecast to continue to fall.
Inflation is expected to remain within the RBA’s target band 2% to 3%.

The Reserve Bank Deputy Governor Rick Battellino in a speech delivered to the Housing Industry conference back in Nov 2009 suggested that Australian’s can look forward to “years of brisk economic growth built on booming resource investment, rapid population growth and rising household incomes”.

The Australian Property Outlook from ANZ Economics Dec 2009 suggested:
“Inadequate supply remains the single greatest issue facing the Australian housing sector. Unless significant action is taken to remove the structural impediments to home building, Australia will face an intractable shortage of housing that will drive a deterioration in affordability (both purchase and rental) beyond anything we have ever seen.”

Jan 2010 RP Data was quoted as “The higher gains in the unit market are a deviation from normal performance.  Historically houses have tended to outperform units.  The recent reversal in fortunes has occurred due to more buyers leaning towards units because they have a more affordable price tag and are often located in more strategic locations in relation to transport and amenity than many detached housing options.”

And John Edwards from Residex was quoted throughout the media in Feb 2010 following their report to suggest that: “As young Australians leave home each year they form 60,000 new households and join the 110,000 households created annually by overseas migration to generate demand for around 170,000 new dwellings.

This is far in excess of the 140,000 dwellings approved or commenced each year and generates unmet demand for 30,000 houses or units which increases pressure on both prices and rents

According to the Housing Industry Association of Australia Report released in March 2010:
Australia’s shortage of available homes will more than quadruple to almost half a million by 2020. HIA, sees a need for 466,000 new homes to be built by 2020 unless the pace of construction is increased. The gap currently stands at 109,000 homes, the group said.

According to the HIA, the strong economy has helped drive up house prices, with the increases exacerbated by lags in housing construction. The nation’s population is on track to swell to 36 million by 2050 from 22 million, potentially straining housing affordability even more.

In Conclusion:

It’s a great time to invest, our population is rising, we have an undersupply of housing and our economy is very healthy and by all accounts is expected to stay so for the foreseeable future.

We hope that you enjoyed this market update.  If you would like any further information on our current and upcomming projects, please let me know.

Regards

John

 

The above update is part of our March 2010 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.