Property Market Update March 2011

Our economy is strong, rents are expected to rise and we continue to have a property under supply with strong population growth.  The current market indicators suggest long term sustainable growth for property investors looking to buy off plan property.

Excerpts taken from our Priority Investors Update in March 2011.  Become a Priority Investor now to receive the latest market updates and pre-launch information on our latest off plan properties.
Let’s  start with a quick recap of 2010:
Melbourne led the House Price Growth:
Melbourne followed by Sydney led the house price gains across the country.   The non-performers of the year were Brisbane and Perth – however both managed to hold their value.   When you compare even the worst performers to some other asset classes it’s not a bad result for property overall.

Funding was an issue:

2010 saw a continuation of funding issues which were a major slowdown on property supply as there was still a world wide shortage of equity post GFC. In fact as we have suggested in previous articles, we expect a number of projects that were offered in 2010 to be put on hold indefinitely until the funding climate improves.  Even though many developers have made significant pre-sales they are still unable to obtain finance, gone are the days when  vendors could be confident that as long as they had made significant sales the finance was a given, that was not the case in 2010 and whilst this issue is slowly improving it will continue to be a factor in 2011.  We had a focus in 2010 which will continue in 2011 to ensure that our vendors have full  finance in place or extremely strong finance backing.

Units outperformed Houses:

As we have mentioned previously the old adage that Houses will always outperform units, due to their land content is under serious challenge.  In 2010,  the unit market in all of our capital cities outperformed the housing markets, the ACT was the only exception to this.  We believe that the current trend will continue, it started  in early 2008 and we think it is here to stay.

There are a number of reasons for this and whilst it’s largely an affordability issue it also relates to our demographic shift.  The average household size is smaller today than it was 20 years ago.  Young people are leaving home and looking for their own accommodation, they are getting married later in life, or not at all, they are having children later in life or not at all, this increases the demand for smaller accommodation – units, townhouses & duplex’s.  Our older age bracket are downsizing, they don’t want to maintain a large house and yard anymore since the kids have moved out.  Our divorce rate is greater today, again increasing the demand on one & two bedroom dwellings rather than larger houses.   So there is a major demographic shift.

And looking at where people prefer to live.  Many don’t want a long commute to work, they want to be close to the action, close to amenities.  Even if they would prefer a house, if they are looking to be close to the inner city there is not the opportunity to buy a house and land package in these locations and where the opportunity exists to buy an existing house or even land to redevelop, for most it is unaffordable.  So people look for an apartment or townhouse.  It’s more affordable but it’s also often a preferred choice.

Moving ahead to 2011:

Our Economy
Australia remains the fastest growing economy amongst developed countries.

Our superannuation assets have leapfrogged Canada’s to be the world’s 4th largest by value, behind US, Japan & UK.

The Australian dollar is now the 5th largest traded currency in the world

In US dollars if we look at our GDP per head of population, as an example:
Australia GDP = $1.18 Trillion (population 22,500,000 approx)
India GDP = $1.24 Trillion (population  1,232,680,000 approx)

When you look at these figures in context, Australia is a significant player in the world market.

As reported in January our unemployment rate is 5.0%.

Employment rose by a seasonally adjusted 24,000 to 11.441 million in the month.

Unemployment remains at its lowest level in almost 2 years with strengthening in investment capital expenditure in the resource sector

Unlike the USA or Europe our concerns are those of growth, not lack of it, which is why we saw interest rate increases in 2010, as the Reserve bank is looking to slow our growth.

In fact as we reported recently, the Reserve Banks greatest fears is that we will have a shortage of skilled labour as our economy continues to grow.

Our economy is strong and it’s expected to stay strong for the foreseeable future.
Housing Affordability & Supply
As reported by the Housing Industry of Australia (HIA) as at September 2010, Australia’s house price to household income ratio was 4.1.

The International Monetary Fund (IMF) recently slashed its earlier view that Australian houses were overvalued by 25 per cent and while stating that prices could be 5 to 10 per cent higher than market value, it signalled that the Australian housing market will continue to be supported by fundamentals including strong population growth and high real incomes.

HIA’s updated projections of the underlying demand for housing suggest that Australia built 22,000 too few dwellings in 2009/10, with a projected deficit of 16,800 dwellings in 2010/11 and 21,000 dwellings in 2011/12.

Here’s what Andrew Harvey, HIA’s Senior Economist had to say on the issue:
“HIA’s work on underlying demand indicates that Australia continues to run large annual deficits between the underlying demand for dwellings and the completion of dwellings, so in the longer term Australia’s housing market is underpinned by the immutable forces of insufficient supply and robust underlying demand”
“In addition to the strong fundamentals in terms of housing supply and demand, Australia’s housing market has already been correcting in terms of price movements and most Australian home owners can readily meet their debt servicing obligations”
“Looking forward, supply-side factors such as the increasing scarcity of land in the main urban centres in Australia will continue to play a major role in driving Australia’s housing prices, a point also raised by the IMF”
Interest Rates
There’s no guarantee on what the future holds but what we do know is that the cash rate futures market is not pricing in a further 25 basis point increase to official interest rates until Dec’11 / Jan’12.
Despite the futures market pricing, many economists expect that further interest rate hikes by the RBA should be expected during the latter part of this year.

Australian Bureau of Statistics (ABS) figures relating to consumer prices showed that inflation came in well below expectations for Dec Qtr 2010
Most economists had expected a core inflation figure of around 0.7% for the December 2010 quarter however, it came in at just 0.4% for the quarter or 2.7% annually.
The lower than expected result reduces the risk of an interest rate increase in early 2011.

If we have a look at the:
December statement from the RBA:
“Employment growth remained strong and the expected pick-up in private investment looked to be broadly on track.
Household consumption and borrowing, however, remained restrained despite high levels of confidence, and the saving rate had increased noticeably over the last few years. This restraint if continued would provide some scope for investment to rise without causing aggregate demand to grow too quickly and inflationary pressures to build”

and the February Statement from the RBA:
“The continuation of subdued growth in consumer spending and the lower-than-expected inflation outcomes provided additional time for the Board to assess at future meetings the evolving balance of risks to both output and inflation.”

This is as positive as it could be…reading between the lines it suggests that they too are not looking at further increases in the short to medium term.

Between September 2005 and the end of 2008, rental rates were typically trending upwards at the rate of almost 11% year on year.

In 2009 capital city rents increased by just 0.9% – this is where affordability in the market improved greatly due to a reduction in rates.  As such many would be renters were buying, rental demand decreased so prices didn’t increase.

We are now seeing the first evidence of rental growth once again returning to the market.  RP Data reported that they are expecting to see average rental increases of 7% this year.
So what’s likely in store for 2011
The property market is historically very predictable, it moves in cycles.

In 2009 we suggested an uplift in the economy and as we expected that led to house price growth.  Interest rates were low, more people entered the market.  In 2010 we had interest rate increases as the RBA tried to slow things down.  That’s had the desired effect and we think that most of the property researchers are spot on when they suggest that 2011 will be a year of consolidation.  We will not see the big growth that we experienced in some parts of Australia in 2010.  But the expectation is that in late 2011 and in to 2012 and beyond we would expect solid growth.

 We are now in that phase where we will see rents increase dramatically.  As that happens, from an investors point of view, the rental yield increasing means  a reduction in holding costs and as such more investors enter the market.  From a renters point of view, as rents increase some renters will become first home buyers.  These two factors lead to an increase in demand which sees price growth and on we go in to another cycle.

Given that our fundamentals remain solid, our economy is strong, our unemployment is low, our population growth is expected to continue at relatively high levels, we have a current undersupply of property etc.  It’s very difficult to see  our property markets doing anything much different to what they have done in the past.  The cycle continues!

From an investors point of view, now’s the ideal time to be locking in to the market, especially looking at an off plan opportunity that will not complete until 2012 or 2013, to take advantage of the projected rental increases which will then lead to price increases.
The Brisbane Floods
We have had a number of investors ask us about the Brisbane floods and what affect we expect it to have on the property market.

The floods were a tragic event and approximately 28,000 properties have been affected by the flooding.  But looking from a market point of view, this only represents about  2% of the wider Brisbane property market., so 98% of properties are unaffected, so as devastating as the floods have been for those effected, long term they are not expected to have a huge impact on the entire market.

But looking at the areas that were affected.  A majority of new developments in the Brisbane Local Government Area (LGA) and west of the city will now be significantly delayed or abandoned due to the difficulty in obtaining funding (& insurance) for new developments in flood affected area’s. This will likely lead to a significant dent in supply in the coming years, which will further compound the shortage within the market.

In the short term business will be hard hit after which things should improve markedly – assuming most legitimate insurance claims come through the Queensland economy is likely to be stronger than would have been the case without the flooding.

The Brisbane Times quotes John Edwards, the CEO of Residex as suggesting that  “Infrastructure redevelopment means that the existing shortage of up to 7000 properties is going to cause the market to move into a growth period, coming out of a mild correction period last year,’’ He predicted the market would start to move forward as investors take advantage of a potential rental shortage resulting from the floods.
In short, we expect that the quality locations in Brisbane that were unaffected by the recent floods will make an ideal investment.  As Edwards suggests Brisbane did have a mild correction last year, as such, floods aside it was going to be one of our areas of focus in 2011.  Given the floods we expect that in the medium to long term they will in fact be a benefit to investors as their impact will put further pressure on rents and capital growth.
Our areas of Focus for 2011:
We expect to be providing our investors with property investment opportunities  in Melbourne, Brisbane & Sydney this year as we feel that these markets will be the ones that offer good returns to our investors over the medium to long term.
John Faulkner
Managing Director – Licenced Real Estate Agent


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 .