Is 2007 the right time to invest?
If you haven’t given yourself a new year’s resolution, here’s one for you. Stick to well located residential property investments in major capital cities and you won’t go wrong in the long term.
Over the last couple of years many beginning investors who bought properties in Australia’s eastern states have realised a harsh reality. Like other investments, property values move in cycles. These investors have learned a lesson that investors in Western Australia and Darwin should head - booms never last!
But the good news is….neither do busts.
And even better news is that Santa has brought us one of the presents at the top of our wish list. Confirmation that all is well in the property markets of Australia. I see 4 green lights to selectively invest in now…..
1. Predictable Interest Rates
Last year saw 3 interest rate rises and now most commentators agree that it is unlikely that there will be any further interest rate rises this year. If there is it’s likely to be a minor (0.25%) rise in the first half of this year, but its even more likely that the next interest rate movement will be lat in this year and a downwards movement.
2. A stable Australian economy
The Australian economy’s vital signs are healthy and ultimately it is indicators like strong employment levels, wage and productivity growth and manageable inflation that drive prosperity and the demand for goods including property.
But watch out - every year there is one “X factor”, one unknown that pops up and surprises us and the economy. The one to watch out for in 2007 could be the effects of our droughts and severe bush fires in Victoria on the economy.
3. Rents will strengthen in 2007
Rents increased by about 9.8% on average in the year to September 2006, with demand for rental properties outstripping supply in every capital city. Record low vacancy rates, fewer investors bringing new properties onto the market and lower housing starts all mean residential rents will rise even further in 2007.
4. Demographics - our population is fragmenting and more people are living alone; people are living longer and immigration is strong and likely to increase over the next few years. All of this means that more people will be seeking more accommodation both as tenants and owner occupiers.
All this makes 2007 a great time to buy properties as there are now great opportunities to create long term capital growth as our markets are primed for some special results in select markets.
But you have to be careful because not all properties will perform well. Our property markets are fragmented and patchy. Some suburbs will out perform while others will under perform. Some houses within those suburbs will increase in value and some will be duds.
Affordability will be the key issue that limits property price growth in 2007.
The just released HIA/Commonwealth Bank December 2006 Quarter affordability index is at its lowest since the index was established in 1984 with the average first home buyer needing more than 30% of their disposable income to service the minimum monthly payments on a new mortgage.
Having said that, the more affluent suburbs in our capital cities have exhibited strong capital growth over the last year and should continue to perform well over the next year while the outer “mortgage belt” suburbs are likely to experience slowing demand and possibly even further price drops due to deteriorating home loan affordability.
This will only widen the gap further between the 2 tiers of the property market – the more affluent suburbs near the city and the water will become even more expensive and “the rest of the suburbs” are likely to languish.
So while the news is not the best for first home owners and renters, the current property markets offer good opportunities for investors who buy selectively
With that general overview, now let’s look at our major property markets in more detail…
Sydney
The Sydney residential housing market has suffered over the last 3 years and the 3 interest rate increases in 2006 will further prolong any market recovery. But with decreasing vacancy rates and growing rentals, smart investors will begin searching the market for opportunities later in 2007 looking for a recovery in Sydney in 2008.
Like other states, Sydney’s housing market has been fragmented. The more affluent suburbs have recorded the highest annual growth in the median house prices. For example property prices in Manly grew 12.7% in the last year; North Sydney recorded 12.7% growth rate and Waverley LGA recorded 9.41%. On the other hand the worst performing areas included Campbelltown where values dropped 9.6%, Strathfield (-9.39)% and Wollondilly (-8.44)%.
The values of units also fell across much of Sydney.
Good news for investors, but bad news for tenants, is that Sydney’s vacancy rate decreased to 1.9% in the September 2006 quarter. Rents are likely to increase strongly over the next few years due the strong tenant demand and very limited supply of rental housing.
Melbourne
Melbourne coped with last year's interest rates rises by the market performing in two tiers. The more highly sought after and affluent suburbs as well as those close to the water showed strong increases in value. .
Last year strong capital growth occurred in the blue-ribbon south eastern suburbs including the Caulfield/Carnegie though to East Brighton, Bentleigh and East Bentleigh. The eastern suburbs of Armadale, Toorak, South Yarra, Malvern, Camberwell, Hawthorn and Kew performed strongly as did the bayside suburbs of Port Melbourne, Albert Park, Middle Park and Brighton.
People buying in these suburbs were basing their decisions more on lifestyle choices than financial factors. However values in many of Melbourne’s outer suburbs have languished as families find it increasingly difficult to make ends meet.
And this divide is likely to increase in 2007.
But it’s not only are owner occupiers who are back in the market. “We are seeing strong investment interest in the inner suburbs and south eastern suburbs from smart investors who are back in the market” said Jack Henderson, director of Metropole Buyers Agency Melbourne www.metropoleproperties.com.au “They seem to see the long term opportunity the market now offers and realize that vacancies are low, rents are rising and their yields will increase."
“Overall, Melbourne present as safe opportunity for property investors. We have strong population growth; the state’s economy is solid and now is a good time to get set for the next property boom that has already started to occur in some suburbs. But not all properties will perform well. I suggest investors look for suburbs that have a long history of strong capital growth and then look for properties in those suburbs to which they can add value – creating even more capital growth.
“Vacancy rates in Melbourne are the lowest they have been for years, with an overall vacancy rate of 2.3%” explained Pamela Yardney, director of Metropole Property Management www.metropole.com.au
“Tenants are queuing up to lease available rental properties pushing up rentals. The median rent for a 2 bedroom apartment increased 4.3% over the last quarter. Strong tenant demand and a severe undersupply of rental properties should see some rents increasing by up to10% in the next year.”
Brisbane
The Brisbane property market has also shown resilience over the last year but the effects of the 3 interest rate rises have begun to show.
“Investors will need to purchase selectively in this market” explained George Kafantaris, director of Metropole Buyers Agency in Brisbane www.metropoleproperties.com.au Only 33 suburbs recorded more than 10% growth last year in Brisbane, compared to close to 140 -150 suburbs that recorded double digit growth in 2002, 2003 and 2004.”
“To maximise capital growth over the next few years investors will need to buy selectively. The more affluent inner suburban locations should perform well in 2007 as should riverside suburbs. I also recommend that investors look for properties with upside potential where they can create some capital growth through renovation or for properties that will benefit from improved infrastructure in their vicinity.
Low house vacancy rates are causing a crisis for the additional 1,200 people coming to Queensland from interstate or overseas each week. “There are simply not enough houses to accommodate everyone” said Kafantaris. “Brisbane’s inner suburbs has house vacancy rates of just 1.4%, vacancies in our middle suburbs are as low as 1.7% and it is almost impossible to find vacant properties in the outer suburbs where the vacancy rate is 1.3%.”
REIQ Chairman Peter McGrath said "The middle ring suburbs (between 5 and 20 kilometers from the city centre) were the strongest performers in Brisbane over the September quarter, with a high volume of sales and robust price growth.”
“In the north-west corridor, Everton Park (9.1%), Ashgrove (7.5%), Windsor (6%) and Kedron (5.2%) all performed particularly well. Similarly in the east, suburbs such as Hawthorn (13.5%), Murarrie (7.1%) and Camp Hill (5.7%) showed similar trends.”
Mr. McGrath believes a major attraction in these areas is the dining and entertainment precincts that are increasingly considered as highly desirable features of suburban living and favourable attributes to potential buyers. “Brisbane has really come of age as a cultural and entertainment hub. Residents appreciate the outdoor dining and café experience and this has created a stimulus for the growth of trendy dining and retail strips in many middle-ring suburbs," he said.
The Gold Coast experienced fewer sales in the September 2006 quarter, compared with the same period last year but maintained a steady median sale price of $400,000. “Central Gold Coast suburbs such as Ashmore, Parkwood and Biggera Waters experienced good growth in the September quarter, largely due to the fact that they represent such good value for money” according to McGrath.
The Sunshine Coast house market recorded fairly flat figures with Caloundra on 1.6%, Maroochy on -2.6%, and Noosa on -3.4% with growth stunted by affordability issues.
Queensland's mining towns continued to benefit from the resources boom and subsequent population growth. Mt Isa recorded a very strong 10.8% increase in the September quarter, with Bowen (8.5%), Dysart (8.3%) and Gladstone (5%) among other solid performers.
Perth
The Perth property market is slowing down after its frenzied times of the last 2 years.
REIWA data shows that the number of sales in metropolitan Perth had dropped by 15% in the December quarter, that the average number of selling days has risen from 32 days in the September quarter to 47days and the number of properties for sale in Perth has jumped by 29%.
Yet REIWA figures suggest Perth's preliminary median house price still grew by $20,000 or 4.5% during the December quarter, to $460,000.
Mr. Rob Druitt REIWA President, explained “While the Perth market is slowing, the reality is that prices continued to climb in the December quarter on the back of our strong local economy and demand for housing. REIWA anticipates further modest growth throughout 2007, which will see affordability become even more of an issue for many people trying to enter the market.”
Data from the Australian Bureau of Statistics showed a 13% cent fall in overall finance approvals, with loans for established properties, excluding refinancing, falling 18% over the same period.
"It is very concerning that first home buyer loans continue to fall even more quickly, with a further 16 per cent drop in such loans in the 3 months to November on the back of the 10 per cent fall in the previous period. Clearly the absence of first home buyers underpinning the market is having a flow-on effect reflected in the increased stock of listings and fall in sales volume," Mr. Druitt said.
REIWA data shows the Perth rental vacancy rate eased a little to 2.1% late last year, but it's still a tight market and the median rent for a house in metropolitan Perth rose by 3.8% in the December quarter to reach $270 per week. Rents for units have grown by 4.2% to $250 per week, making the overall median rental for Perth $260 per week.
Property owners in WA should be prepared for a slower market and even price drops of 10 – 20% over the next few years. If you think about it, property prices had risen a lot more in Perth than they did when the boom ended in Sydney at the end of 2003 boom, and they could now fall further than the 10% drop suffered by Sydney in 2004. Even if they did drop 15-20% that would only be half of last year's gains.
South Australia
The median price of a property in Adelaide, increased to $290,000; being an increase of 4.32% over the year to December 2006.
Real Estate Institute of South Australia (REISA) president Mark Sanderson says Adelaide’s inner suburbs were the standout performers of 2006 despite 3 interest rate rises during 2006, as “Fullarton, Unley and Prospect all recorded growth rates higher than 20% for the year to December. The outer suburbs of Stirling, Gulfview Heights and Marino also performed well over the past 12 months with rises of above 35%.”
This report was written by Michael Yardney, director of Metropole Properties, a successful property investor and a leading property commentator. He is author of "How to Grow a Multi Million Dollar property Portfolio - in your spare time" and publisher of Property Investment Update
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Michael Yardney
Director
Metropole Properties
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