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National Property Market Update
By Michael Yardney
Whether you are considering buying your first property or adding to your portfolio, the age old question always seems to crop up - is now the right time to get into property?
And the extreme variance in the Australian markets at the moment, together with the mixed messages in the press, only clouds the view more.
The table of median house prices below show that all capital cities across Australia other than Perth and Darwin have now clearly moved back into a positive growth cycle according to Residex www.residex.com.au
These figures show that all our property markets other than Sydney have performed well over the last 12 months. Examining the growth in the last quarter shows that Sydney is finally picking up, and that Perth and Darwin are now the poor performers.
So back to the original question - is now the right time to buy property?
If you take a long term view, of course it is. Buy a well-located property today in any capital city and its value will double in the next seven to ten years.
But what about the short term?
To answer that question, it pays to take a deep breath and revert to the basics that drive our property markets. I find it useful to understand the nature of cycles and people and learn lessons from the past.
Viewed in retrospect, everything in property can be explained; your job as an investor is to best understand those explanations so as to be prepared for your next move.
Two of the many fundamentals that will impact on our property markets this year are interest rates and levels of finance approvals.
The first if self-evident: how hard will I have to make my money work? The second tells me what the market is doing, moving forward - finance approvals are a forward indicator as people organise their finance, then they go off and buy a property over the next few months.
We should then factor in the status of the rental market and the strength of the economy and we start to form a picture of what's ahead.
Let's tackle these one at the time.
We should prepare for another interest rate rise, despite the RBA's recent decision to keep them at 6.25 per cent. ANZ head of Australian economics, Tony Pearson, describes the case for a rate rise as "compelling". RBC senior economist Su-Lin Ong, says a rise "is a matter of when, rather than if". I agree with both assessments, although with an Australian Associated Press economists' survey noting that only nine out of 19 economists expected a 25 basis point increase, opinion is divided.
The safe position, of course, is to budget for one, if not more, rate rises this year. It's always a good idea to have a buffer in your finance, especially in an election year.
What about finance approvals? The value of loans to property investors has risen for four consecutive months, jumping 8.9 per cent in February alone (compared with a 0.9 per cent rise in loans for homeowners). The message here is simple: investors are on the move (which will only contribute to that interest rate rise).
Some observers are pointing to the looming superannuation deadline, and investors cashing up to take advantage of that window, but smart investors are not selling up. In the words of Commonwealth Bank economist, Joseph Capurso: "It seems that the lure of higher rents - care of low vacancy rates - is too good to resist."
Indeed, the rental markets have seldom been stronger. In Melbourne, for instance, "Rental vacancy rates in Melbourne's are 1.2 per cent, down from 1.8 per cent at the same time last year," explains Pamela Yardney, associate director of Metropole Property Management.
Yardney continues: "Vacancy rates are particularly low in the inner suburbs, where they have fallen to a 25-year low, but vacancies have also tightened significantly in both the middle and outer suburbs, by a third and 45 per cent respectively. With strong demand from prospective tenants, this means that rentals are going to continue to rise across Melbourne for a few more years."
The truth is, if you cut and paste "Melbourne" for any of the other major markets, the story would be the same.
Those who took advantage of the property markets last year and bought counter-cyclically are already reaping the reward of higher end values. To those of us with an eye out for value, here's a look at each of our major markets.
Sydney
The Sydney property market seems to be slowly recovering from its three and a half year slump. The fundamentals, including population growth, jobs creation and lack of supply, coupled with increasing demand and the very low vacancy rate, suggest that the worst is over.
But the Sydney playing field is highly polarised, so it is important to dig deeper into some of the reported property statistics. For example, double-digit growth in the affluent suburbs is hiding a market still in freefall in the outer suburbs, so it has never been more important to do your homework.
There has been an increase in property demand from owner occupiers and investors, with 34.4 per cent of new loans going to investors (compared, for example, with 25 per cent in Victoria).
Auction clearance rates are again consistently north of 60 per cent - being forced up by the shortage of quality property, which remains a concern.
Vacancy rates have reached all-time historical lows in February, according to the REINSW, and Sydney rents could rise by as much as 40 per cent between now and 2010, according to BIS Shrapnel research.
All this adds up - finally - to a slow upturn in Sydney values.
Melbourne
The Melbourne property market has really moved forward this year. Last year it was the more affluent and bayside suburbs which grew strongly in value; in 2007 rising prices have pushed buyers out further to the middle ring suburbs as well.
According to Jack Henderson, Melbourne director of Metropole Property Investment Strategists, Many suburbs between two and 15 kilometres from the CBD, especially in the south-east, have shown strong owner-occupier demand, and investors are now firmly back into the market." (Victorian investors' share of new mortgages increased 35 per cent year-on-year).
"With limited quality stock available, auctions are hotly contested, with multiple keen purchasers pushing sales prices up. Private sales are being snapped up within days of properties coming onto the market. No longer can we find a bargain in these suburbs. Home owners and investors will have to be content with paying a fair market price for good property," said Henderson.
"Prices are likely to continue rising throughout 2007 due to continuing demand, coupled with a lack of new developments, falling vacancy rates, higher rents, continued increasing population, a strong economy and low unemployment.
The REIV confirmed the strength of the Melbourne market, reporting that auction clearance rates are nearing 80 per cent - right at the high end of the national scale.
In mid-April, the REIV reported that inner city vacancy rates dropped from 1.7 per cent to 0.7 per cent - the lowest rate since 1982! And the knock-on effect: Residex figures indicate rent for houses across Melbourne has increased more than nine per cent over 12 months
Brisbane
Queensland's capital is also performing strongly. Brisbane sales increased almost 15 per cent in the three months to the end of February, compared to the previous quarter - an extraordinary spike given it encompasses the Christmas / New Year slowdown, though numbers are still not quite the boom level of 12 months earlier.
"Prices of property in suburbs within the 10km radius of the city are moving upwards sharply," according to George Kafantaris, Brisbane director of Metropole Property Investment Strategists
"Don't sit around waiting for auctions - good quality property is selling before the first open house, and normally with multiple offers. Even second-rate property is selling rapidly," said Kafantaris.
"I’ve seen a number of buyers overpaying for property simply to get into the market - and this applies to both owner-occupiers and investors. Of course, the 12 per cent increase in rent over 12 months has certainly attracted investors back into the market.
"I think rents still have room to move upwards, as they have not yet caught up to increased value of properties. When they do - and they will - the market could spike yet again," he continued.
"Lots of WA-based investors are putting their money into Brisbane at present. And a lot of this money is landing in secondary suburbs, not inner city or affluent suburbs. While the 'Brisbane bargain' seems to have evaporated, property still represents a good purchase for those with a longer term perspective."
Kafantaris also offers some words of warning: "For those looking to the Brisbane market, it has never been more important to organise a building inspection. The continued drought is causing a lot of structural problems as footings move.
"And an unpleasant side effect of the backlog of sales to manage is that some finance companies, finance brokers and valuers are struggling to keep up with demand, and are missing critical deadlines creating stress for their clients."
Gold Coast
There is no doubt the coast is enjoying some rub-off from Brisbane's current prosperity. And just as West Australian money is pouring into Brisbane, the Gold Coast is enjoying interstate support as investors target the region's range of property opportunities.
"We're seeing a large proportion of buyers emerge from interstate looking for growth opportunities," says Luke Woollard, director of Pacific Lifestyle Property After a muddling couple of years to 2006 - when in fact the median price slipped - the trend is clearly on the up. Some experts are predicting a new boom through 2008-09.
Credit the Baby Boomers, perhaps, who have played their role in the area's status as (per capita) the fastest growing population region (an extra 13,600 residents during 2006 (ABS Feb 2007) in the country.
"Sales volumes have been boosted by a return to the high-rise investment, especially at Broadbeach and in Surfers Paradise proper," says Woolard. "The feature property of the area, the 40 and 50-tower Oracle Broadbeach project, reported more than 100 sales in the December quarter, as the million dollar apartment market remains impervious to any interest rate fear."
Some further positive news for potential investors: the Tugun bypass roads project will make traffic flow in the region much, much easier.
Adelaide
You'll find mixed messages in the market about the prospects of investing in Adelaide property. Whatever the reality, one thing seems certain: you'll need to be patient.
The South Australian capital is ideal for the long-term investor. Extremely low rental vacancies (hovering around one per cent), consistent if not spectacular growth, and a reliable economy to support it all.
The market showed signs of emerging from its slumber through the end of 2006. The REISA reported that, in the March quarter, Adelaide's median price topped $300,000 for the first time, kicked along by a major spike in the western suburbs such as Alberton, North Haven and Fulham Gardens.
As expected, inner city areas also experienced promising signs, far outstripping the 1.7 per cent rise in the quarter through end-January 2007. While volume was on the increase, it was still lagging well behind the numbers of 12 months earlier.
Perth
The Perth property market is now clearly in a correction phase. The magnitude of any correction will depend upon the state of the local economy and the effect of future interest rate rises. The heat has gone out of the market, which has flattened dramatically and will be a poor target for investment in the short to medium-term.
One figure that caught my eye was available listings: stock rose by 21 per cent in the quarter to end-March. Couple it with "zero growth" (REIWA) in a number of outer areas, and it's a sure sign the market has "come off".
This, despite the fact that REIWA figures tell us that rental vacancies are at 20-year lows, sitting at one per cent in Perth, and could drop further as the resource boom draws more interstate and overseas immigration.
REIWA president Rob Druitt said the rental shortage had been exacerbated by indications from the state Government that it might offer stamp duty relief in the May budget - with many potential first-home buyers now delaying purchasing plans. "As a result, thousands of first homebuyers are holding back until later in the year, putting extra pressure on the rental market."
Home building approvals in Perth have also fallen, causing further pressure in the rental market. Figures released by the ABS show Perth house approvals fell 15.7 per cent in January. Other data from the Housing Industry Association found that, for the first time, Perth house prices were now the least affordable in the nation.
It makes for a market that investors should avoid, and probably for some time in the future. Population growth might be up, unemployment at a national low and the economy almost twice the national average, but the market was simply too overpriced. Contrary to what many locals believe, this is not just a 'pause in the market'. "That's it" for this cycle - Perth has had a great run but it is not immune to the laws of nature; property values just cannot keep rising at the levels they have for the last few years.
Canberra
The Canberra market has remained buoyant with strong demand from owner-occupiers. Rental vacancies remain low and Canberra rents are among the highest in the nation.
Another benefit when considering the nation's capital is the strong investment in infrastructure and robust immigration figures. While the nature of the population is slightly transient (government postings, for instance), you are dealing with a consistently strong demographic.
The inner city has delivered the goods for seven straight years - being largely accountable for the 110 per cent growth in median price since 2003. Overall, the market increased by 9.2 per cent last year, and is likely to perform well throughout this year.
Affordability may become an issue as, after Sydney and Perth, Canberra median prices rank as Australia's third most expensive place to buy a house.
Darwin
The bucket of water thrown on this market last year (in the form of three interest rate rises) has had its impact, without killing the patient. The Darwin market is no longer the over-heated animal it has been, with prices continuing to come off in what can best be described as a "correction".
Having grown the fastest, the housing market is obviously suffering, with apartments holding their price. But they, too, are surely destined to find a more natural level.
While the rental market remains buoyant and rents are comparatively high, there is better value for investors in the east coast property markets.
Hobart
Hobart property owners have had joy in recent years but the lack of sustained economic and population growth was always likely to bring that price climb undone.
Prices are starting to slip backwards and, despite the low vacancy rate, I would be looking elsewhere for investment property.
Michael Yardney
This article was written by Michael Yardney, a leading property commentator and director of Metropole Properties. He is author of "How to Grow a Multi Million Dollar property Portfolio - in your spare time" and publisher of Property Investment Update e-magazine. Subscribe for free at www.PropertyUpdate.com.au
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