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What drives property prices?
Price growth in Australian residential property markets is basically determined by the forces of supply and demand in two major sub-markets – owner occupiers and investors.
Owner occupiers tend to focus on lifestyle choices and affordability criteria that will best satisfy their needs. Investors focus on net returns – resulting from either capital gains or cashflow (or both).
Population & Migration growth: A growing population means more roofs over more heads. Australia recently passed the 20 million mark of which over 4.16 million live in Sydney.
Our low birth rate is supplemented by immigration which will see our cities continually grow.
Interest rates: The cost of credit is a key driver in determining price growth. This factor is closely tied up with affordability as the cost of finance determines serviceability and the amount that people can borrow.
Demographic trends: The ABS report that the number of households in increasing but the average household size (now at 2.5 persons per home) is becoming smaller with families having less children, more childless couples, divorce rate increasing, more one parent families and other social trends.
Construction costs: Increasing costs of labour and building materials has a direct effect on house price growth. As the demand for housing increases, construction activity increases as will the demand for trades and materials.
The ability of the housing market to absorb increased construction costs will in turn be determined by the position of the housing market in the economic cycle.
There is often a lag between the time that price signals get through to developers looking to cash in on the boom times.
Market sentiment: How people feel about the direction of the property market and how they respond to media reports plays an important role.
People like to avoid risk and feel safe about buying property. Nobody wants to pay too much for a property. When market sentiment is high, boom periods tend to follow. As the market sentiment falls, buyers and sellers adjust their expectations.
Purchasers tend to adjust their price expectations downwards more quickly than vendors. However, vendors are also purchasers and purchasers become vendors at different points in housing cycle.
While in 2003 was a sellers market, 2005 has become a buyers market and vendors are having the meet the market to get property sold.
Affordability: The demand for property is closely related to affordability. The simplest measure of affordability is the percentage of average wages used to service the average mortgage.
If most social groups find that housing is unaffordable, then this will reduce demand for housing. This is exactly what is happing at present in Sydney and Melbourne.
There is a temporary adjustment in the usual upward rise in average prices over time. Low interest rates, easy access to credit and the demand by baby boomers for financial independence in retirement has resulted in strong property demand in recent years.
Land shortage: Sydney provides the classic case of land shortage. Land shortages have consistently driven property values as demand outstrips supply.
Planning future land releases and providing adequate infrastructure do not come overnight. This is a perennial problem that the State Government has been grappling with for decades.
Since new land releases take considerable time and are very costly there will continue to be demand for houses and land in excess of supply.
The tireless forces of supply and demand will continue to work its way out in the marketplace regardless of market sentiment.
The head of Australand Property Group, Brendan Crotty, is predicting an upswing in housing demand is likely in the next 6 to 9 months. This view is based on the key predictor of housing demand being growth in full time employment.
Crotty was recently quoted in the Financial Review as saying that "You don't go to a capital city to live there...you go to work. Any every new full time job flows through to one extra dwelling. It's quite a good predictor."
In the last two years job growth has been highest in Melbourne (76,000 new full time jobs), Brisbane (62,000) and Perth (31,000).
The Real Estate Institute of NSW has just released the latest figures on prices from the March quarter 2005. Rental vacancies are declining and now stand at around 2.2%.
As this rate declines further it will put pressure on rents to rise. In Sydney the total volume of sales is down significantly since the last December quarter by over 25%.
Sydney house prices in Sydney increased slightly by 1.2% over the quarter to a median of $511,000. Similarly, unit prices also increased around 2.7% reaching a median of $380,000. The median prices for the Sydney Metropolitan area are shown below:
House price growth in Metropolitan NSW
– March Quarter 2005
Region |
Median Price |
Growth in Quarter |
Average Annual Growth - 1yr |
Average Annual Growth - 10yrs |
|
$'000 |
(%) |
Mar'04 - Mar'05
(%)
|
Mar'95 - Mar'05
(%)
|
| Sydney |
511 |
1.19 |
0.20 |
9.35 |
| Gosford |
408 |
-0.37 |
-2.22 |
9.81 |
| Wyong |
322 |
-5.29 |
-8.65 |
9.58 |
| Hunter |
300 |
-1.15 |
0.67 |
9.33 |
| Illawarra |
370 |
-0.54 |
2.78 |
9.82 |
| NSW |
390 |
0.00 |
2.63 |
9.32 |
Source: REI NSW 2005
The most interesting thing about these figures is the 10 year average annual growth. Look at this last column above again...the average is almost 10% pa growth which confirms what property history has been doing for the last 100 years.
The rule of 72 says that property values double every 7 years (based on 10% growth). While we are unlikely to see even growth each year, history has shown that falling or stagnant property markets are temporary, and always recover and then exceed the levels from which they previously peaked.
The current real estate market can be characterised by:
- Prices are falling or increasing only slowly
- Less investors (less competition)
- There are generally fewer buyers
- Properties are on the market for longer
- Rental vacancies declining/ more people renting
- More properties are sold at prices considerably below asking prices
- Rents may start to increase
- Agents actually call you back and chase you to get a sale.
Albert Einstein suggests that in the middle of difficulty lies opportunity...the same applies to the property market. With a down property market opportunities abound!
The key is to recognise value and only purchase properties which have the correct fundamentals for:
- future capital growth
- adding value/ renovation
- development potential
- strong rental yields.
Propertybuyer assist clients in sourcing properties that meet strict investment criteria. If you are thinking about buying a home, investment property or development email info@propertybuyer.com.au and request our FREE report on the Top 20 Criteria for Buying Investment Property. You may also like to visit our website for more information at www.propertybuyer.com.au or click on our Buyers Wishlist to let us know what you are looking for. We can help you find the right property for the lowest possible price. Call us on 02 9975 3311 for a chat or to arrange an obligation free meeting at no cost (valued at $295) to discuss your specific needs in more detail.
Rich Harvey
Managing Director
propertybuyer™ (exclusive real estate buyers agents)
This article was written by Rich Harvey, founder and Managing Director of propertybuyer™, Sydney & Australia's leading Buyers Agency. propertybuyer™ helps property investors and home buyers make wise buying decisions, sourcing properties with high capital growth potential. Rich has won numerous awards including the NSW Real Estate Institute Award for Excellence 2005 & 2006, International Business SWAP Entrepreneur of the Year 2005 and Business of the year 2006. He is currently shortlisted in the 2007 Telstra Business Awards and a finalist for 2007 Northern Beaches local business Awards. For further details please visit www.propertybuyer.com.au or call +61 2 9975 3311.
Copyright © 2007 propertybuyer™.
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