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Market Comment

More good property news than bad
Thu, 19 Aug 2010

Property analysts have pored over the flood of statistics compiled at the end of the 2009/2010 financial year and, as usual, have found many points on which to disagree.

Is the supposed ‘bubble’ in Sydney real estate about to burst? Will the growth in property prices come to a screeching halt or will the curve accelerate to new heights?

A good place to begin is with the statistics for the past year. According to figures from property analyst Residex, it is a long time since we have seen such a strong growth in real estate prices.

Not since June 2002 when the rate was 23% has Sydney seen an annual rate of increase higher than the past twelve months, with a rise of nearly $100,000 on the average property.

CEO of Residex, John Edwards says the last financial year started well and finished on a very positive note: “I am looking forward to an equally positive year, but do expect it to provide slightly poorer results. Given last year’s results, even if it turned out to be only half as good it would be a very good year.”

The deflating bubble

There are naturally those who don’t share Mr. Edward’s confidence. As Michael Pascoe reported August 18 in ‘BusinessDay’, Morgan Stanley chief economist Gerard Minack has a different view of Australia's housing market.

“Morgan Stanley's Gerard Minack has diversified from being bearish about US equities into calling Australian housing a dud investment, a bubble, albeit one that just might steadily deflate rather than dramatically pop.”

In his latest newsletter to Morgan Stanley clients, Mr. Minack says that Australian housing is expensive and that it will be a poor performer in the years ahead.

Predicting a gradual deflation of Sydney property prices, Minack concludes: ''Over the past decade property has been an excellent investment. But it is, in my view, extremely unwise to expect such gains to continue given current valuations. The investment fundamentals of housing have sharply deteriorated.''

Adding support to the belief that property prices will at least weaken is the continuing decline in Sydney’s housing affordability. The Housing Industry Association-Commonwealth Bank housing affordability index dropped 9.1% to 108.3 in the June quarter, down from 118.8 in the March quarter which was the lowest since September 2008.

Interest rates hold firm

In previous columns we’ve noted that a sustained high level of growth in real estate prices is a practical impossibility. Yet for the time at least, the spectre of rising interest rates seems to have been removed from the equation.

At its meeting August 3 the Reserve Bank of Australia announced it would retain the cash rate at 4.5%, saying in its minutes: “"Members noted that there remained both upside and downside risks around these central forecasts."

RBA projections show inflation bottoming out at 2.75% before rising to around three percent, saying that growth in gross domestic product would strengthen in 2011 and 2012 to above-average rates.

It is still likely that we’ll see at least one increase in the RBA’s cash rate before the end of 2010, yet the Bank’s apparent lack of concern about the current state of the Australian economy suggests that any increases during the next quarter will be small ones that won’t have a dramatic effect on property prices.

Demand continues strong

In the meantime, demand for property of all types continues unabated. Aaron Gadiel, head of developer lobby group Urban Taskforce, told the Sydney Morning Herald that Sydney is facing a serious shortage of housing and producing only half the number of new homes the government says is required.

''Forget population growth, we're not even seeing the housing needed for existing people. There's an extremely severe housing shortage unique to Sydney.''

The shortage of an estimated 200,000 houses across the nation is expected to increase as builders and planning authorities fail to keep up with demand.

Results of recent property auctions reflect this demand. In the Sydney auctions of August 14 & 15, 61.3% of the 384 homes listed were sold at auction, up 5.3 percentage points on the previous week's 56%, according to Australian Property Monitors.

The final comment this month comes from John Edwards in the Residex ‘Market Wrap’: “I am convinced that Sydney is the next port of call for quality growth over the next few months, and my reasons are as follows:

If Labor is removed from office in NSW, this will result in a much improved view of the State's prospects which will stimulate growth;

The economic position of NSW is improving;

The housing numbers indicate to me that Sydney is at the start of a new period of growth.”

Mr. Edwards confidently predicts that in the next 12 months there will still be good growth in the Sydney housing market which will be similar to that of the previous 12 months, if not quite as spectacular.

“This growth due to affordability issues will not be as high as we have seen in some other house price growth periods. This suggests that by this time next year, the typical Sydney house will have a value in the order of $750,000.”

Where Will We Live in the Sydney of 2036?
Tue, 3 Aug 2010

The Sun-Herald newspaper recently published a report entitled ‘Six million reasons to get back to the future’ forecasting what life will be like in Sydney in 2036.

In the report journalist Peter Hawkins covers topics including Transport, Employment and Population. When he gets to the subject of Housing he notes that: “NSW Transport Data Centre figures show a total of 770,000 new homes will have to be built between 2006 and 2036.

“That is an approval rate of about 25,000 new dwellings a year” he calculates. (‘Six million reasons to get back to the future, Sun-Herald, 20 June 2010)

The NSW Government’s first Metropolitan Strategy called for nearly 250,000 homes to be built between 2004 and 2013, but the total is likely to be more like 160,000. With housing construction at record lows for the past four years, it’s a virtual impossibility to come anywhere near the 2013 target.

Construction figures for the March 2010 quarter were, according to Aaron Gadiel, CEO of Urban Taskforce Australia, the second-worst March quarter in NSW for private housing on record. NSW had just 3572 new housing starts.

So, what’s being done to get things back on track and have a chance at meeting the housing needs of Sydney’s population in 2036?

Stamp Duty Exemptions to Attract Some Buyers

The NSW Government will go into the forthcoming March election having eliminated stamp duty on off-the-plan purchases of new dwellings priced under $600,000. The aim was naturally enough to make property more affordable and thereby encourage developers to construct more housing.

Stephen Nicholls, editor of Domain, explains the details: “To obtain the full $22,490 saving offered in the budget, buyers must sign up before foundations have been laid. If construction has already begun they are eligible for a $5623 discount.

“And to be eligible the building must be completed within two years of a buyer exchanging on the deal.” (‘Stamp duty removal could raise prices’, SMH, 19-20 June 2010).

Concerns have been expressed by Stephen Nicholls and others that the stamp duty changes could have the unintended effect of raising prices. The chief economist of St George Bank, Justin Smirk, said he believed prices would rise for apartments priced under $600,000 which have already been approved but for which construction hadn’t started.

Another doubter was David Milton, managing director of CB Richard Ellis, who told Mr Nicholls that most large developments would not comply because of the two year timeframe and most of the impact of the changes would be felt by new home buyers in Sydney’s southwest and northwest.

“A lot of our projects have 20-month to two-year building periods” he told Stephen Nicholls, “and if there are wet weather delays or if there are issues with your builder, it’s not going to work out.”

Seniors Get a Special Break on Stamp Duty

Seniors got their own stamp duty exemption from the NSW Government. To encourage over-65s to downsize, stamp duty will be abolished for purchases of newly-built homes valued at less than $600,000.

As Kelsey Munro and Jonathan Chancellor noted in a Sydney Morning Herald article, the exemption is only going to benefit a small number of seniors.

“The $10 million allocated in the budget for the seniors' stamp duty exemption would assist 444 buyers in the next financial year if the buyers took the maximum allowable benefit - Treasury estimates between 1000 and 2000 buyers will take it up.” (‘Seniors' duty cut lacks stamp of approval, SMH, 10 June 2010)

The article quoted a Treasury spokesman who said: ''Not everyone will buy a $600,000 home and gain the maximum benefit. More than 75 per cent of properties sold in NSW are worth under $600,000.''

A recent study by Bruce Judd of the University of NSW suggests that stamp duty exemptions will not shift many older people from their large homes: ''Most older Australians generally wish to age in their own home and are not predisposed to vacate to smaller accommodation,'' he told the Herald.

The article concluded that the stamp duty break for seniors “...is likely to have minimal impact on the housing shortage overall as the $600,000 threshold for the exemption will exclude many downsizing couples who want to remain in their suburb and who seek a larger dwelling than a one-bedroom unit.”

BioBanking to Encourage Developers

Another NSW Government initiative, BioBanking (short for Biodiversity Banking and Offsets Scheme) ostensibly aims to assist conservation of our endangered animals, plants and ecosystems while making land available to developers.

BioBanking isn’t a new idea. Offsetting the impacts of development by requiring developers to secure the preservation of habitat or natural values at a different but equivalent site elsewhere has been undertaken for a number of years in both NSW and South Australia.

What is new in this incarnation of BioBanking is the intention of the NSW Government to use it as a stimulus for development.

Speaking on ABC’s Stateline program NSW environment minister Frank Sartor told reporter Simon Palin: “What this allows, this new system allows, is a whole lot of private land owners to develop a privately-owned system of conservation lands throughout NSW which means that we can expand the total amount of land that's being conserved, vegetation that's being conserved, ecological communities that are being conserved throughout NSW.”

Noting that the housing vs. Conservation land use debate would continue, Simon Palin said that a block in Sydney's north-west released for development under the BioBanking scheme was the biggest ever housing land release in the state's history.

“Nearly 1,300 hectares in the Riverston and Alex Avenue precincts was rezoned this week and is expected to house 45,000 people. The land should be available for sale within three months...” (Stateline, ABC, 21 May 2010)

Environmental groups were less pleased than developers, but there are another 37 BioBanking agreements in the pipeline and it does seem that the scheme will continue, thereby freeing up large tracts of land in the Sydney area for development.

Capping Developer Levies will Lower Prices

Council charges, which can be as high as $60,000 per block, have contributed to higher dwelling costs and made newly-released blocks of land unaffordable for many would-be buyers.

To stimulate more development and reduce the costs of housing, the NSW Government has instituted a cap of $20,000 per block on the amount local councils can charge developers.

Councils, of course, don’t like the idea because their rate increases have been linked to the consumer price index. This has left many councils with insufficient funds to finance needed capital works, and they’ve turned to developers to make up the difference.

The day after the state budget was announced, Sydney Morning Herald economics editor Ross Gittins gave the $20,000 cap the thumbs-up: “Yesterday's state budget introduces an impressive '’comprehensive housing supply strategy’ that looks like it really will increase the supply of new homes coming on to the market and thus limit the upward pressure on house prices.”

“If ever there was an area where NSW needed to lift its game, this is it. And now, remarkably, it has”, he added. (‘At last: a strategy that will ease the housing shortage, SMH, 9 June 2010)

A Positive Combination of Government Moves

As recent events have shown, political leaders and governments can and will change, but the need to house the growing population of Sydney demands that regardless of political considerations, housing is both available and affordable.

The initiatives taken by the NSW Government to reduce stamp duty, free up land for development and cap the levy on council charges will not by themselves ensure the supply of housing will meet the anticipated demand by 2036, or any other year.

But these moves are certainly steps in the right direction, and it is rewarding to see our elected leaders responding to a need for change that the real estate industry has championed for many years.

Is the Sky about to fall on Sydney House Prices?
Wed, 30 Jun 2010

Chicken Little has lots of company in the media. His cry of ‘The sky is falling’ is regularly echoed by some journalists seeking to be the first to predict a massive drop in property prices.

Because our outlook for Sydney property remains bullish based on our own observations and those of several analysts who regularly report on the market, we feel it’s only fair to air the thoughts of some of those with opposing viewpoints.

The Australian newspaper carried two articles recently that warn of dire things to come. The first, by journalist Katherine Jimenez, ran on May 3 and was headlined ‘Housing tipped for price implosion’.

The essence of the story is based on comments made by Edward Chancellor from US investment management firm GMO, who estimates Australian house prices are more than 50 percent above their fair value.

The second article, also by Katherine Jimenez, appeared on June 16 with an even more fearsome headline: ‘Australian housing market 'a time bomb'.

The Housing Bubble and its Dangers

This time quoting the thoughts of ‘legendary’ US investor and co-founder of global investment management firm GMO, Jeremy Grantham, the article says that the Australian and British housing markets are the last two bubbles left in the wake of the financial crisis, and it is only a matter of time before they crash.

The basis of the calamitous predictions by Messrs. Chancellor and Grantham is primarily the disparity between the typical ratio of house prices to family income and the present situation.

"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times)”, says Mr Grantham. "You are at near 7.5 times family income . . . which suggests you are twice the size that you should be." (The Australian, 16 June 2010)

Mr Grantham tells us that if the Australian housing market does not return to the normal multiple of family income it will be the first time in history this has happened.

"Sooner or later, the rates will go up and the game is over," he concludes. And he’s not alone.

The Sydney Sun-Herald joined the Chicken Little brigade on June 7 with a story by Penny Pryor captioned: ‘Property: ready for a fall’.

The article referred to a drop in auction clearance rates and a rapid decline in the rate of increase in the RP Data Rismark Hedonic Home Value Index. Ms. Pryor also noted the increase in interest rates from the historic lows of a few months ago, and a substantial drop in the number of loans for home purchases.

Even Jeremy Grantham’s forecast of a drop of around 40 percent in housing prices got a mention. But at least for Penny Pryor the outlook’s not all doom and gloom.

“We should be fortunate enough to avoid a property crash of the magnitude of that in the US but prices in any market rarely go only in one direction. They do fall, so don't be surprised if property values start to soften”, she concludes. (‘Ready for a fall’, Sun-Herald, 7 June 2010)

Compare Today with 2008

There’s a significant gap between prices that are ‘softening’ and those that plummet by 40 percent. For a bit of guidance as to what’s going to happen, consider the market conditions that prevailed two years ago, in June 2008.

At that time the Reserve Bank had slowed the market with 12 consecutive interest rate rises and house prices were beginning to show the effects.

Across Australia the price of houses had risen around 14 percent in the 12 months to March, but then growth began to slow dramatically.

The Australian Bureau of Statistics house price index that bases its calculations on prices in the eight capital cities rose a meagre 1.1 percent in the March 2008 quarter.

Sydney property had posted a 7 percent rise in the 12 months to March, but went backwards by 1.5 percent in the March 2008 quarter. So in May the RBA left its rates untouched as the twelve previous increases seemed to have had the desired result of keeping inflation under control.

That was two years ago, and now once again the RBA has put its interest rates on hold as economic conditions – just like auction clearance rates – demonstrate a bit of softening. The cash rate at the end of June was at 4.5 percent.

Since two years ago Sydney property has enjoyed a boom that has seen prices rise to a median figure of $558,000. (Domain, 7 June 2010)

It’s interesting to note that in May 2008, when the foundations of today’s housing prices were being laid, the official cash rate was at 7.25 percent. Today’s interest rates are still cheap in comparison.

Every Boom has its Limits

It would be naive to suggest that the high volumes of real estate transactions and the accompanying high levels of auction clearance rates would continue unabated from their record levels of just a few months ago.

The reason is largely that outlined in the Sunday Telegraph by Bronwen Gora: “A lot of loans used to go through an almost automatic process, but these days the loan pipelines have slowed because so many more loans are being scrutinised so closely." (‘Lenders say no to loans as buyers knocked back’, Sunday Telegraph, 6 June 2010)

Ms. Gora’s article also quoted a report that indicated Sydney is the second most unaffordable metropolitan area in the English-speaking world.

“The findings come as global real-estate forecasting company Demographia released a report which found that over the previous six months, the amount required to repay a mortgage on a median-priced house in Sydney had jumped from a maximum of 57 percent of median household income to a high of 67 percent.”

Housing Price Rises Ahead says BIS Shrapnel

Despite concerns over housing affordability, economic forecaster BIS Shrapnel foresees an increase in Sydney house prices of 20 percent over the next three years. (‘Economists predict 22pc house price rise’, ABC News, 15 June 2010)

It’s happened before. Two years ago Sydney property values took a brief statistical step backwards, then quickly recovered and returned to follow their upwards pathway on the historic graph of housing prices.

Auction clearance rates and numbers of home loans are important indicators of what’s happening, but interest rates and housing supply are more important factors in determining what’s going to happen.

The legend of Chicken Little tells us that indeed, the sky was not falling and life went on just as before. Affordable interest rates and a scarcity of housing stock relative to demand will ensure that price falls of 50 percent, or 40 percent or anything like that will remain the stuff of fiction.

In Sydney, the sky’s the limit!

Sydney Property – a few Steps Sideways
Wed, 19 May 2010

The real estate market in NSW is slowing gradually with some of the heat coming off Sydney property after a period of record price increases.

The causes of the slowdown include rising interest rates and an often baffling mix of Commonwealth and NSW government policies. For the present time at least, these have outweighed the influence of a chronic housing shortage at a time of unprecedented population growth.

The rate of population growth is of course one of the factors contributing to increasing demand for housing. Forecasting group BIS Shrapnel forecasts a one-off slowing in Australia’s currently high rate of growth, due primarily to a decrease in immigration.

BIS Shrapnel also forecasts that the share of migrants choosing to settle in NSW will decrease due to the high cost of housing and better job opportunities elsewhere. (‘Less migration will slow growth in population’, SMH 17 May 2010)

We think of a high level of employment as ‘a good thing’ and in many respects it is. But it does stimulate inflation, and Australia’s high rate of jobs growth – 235,000 jobs were created in the past year according to an editorial in the Sydney Morning Herald, has the Reserve Bank of Australia worried. (‘Full employment has its challenges’, SMH 17 May 2010)

In the meantime the unemployment rate remained steady at 5.4 percent in April, noting that economists consider a rate of 5 percent to be ‘full employment’ due to the number of people changing jobs or leaving work temporarily.

It’s unlikely that the high rate of jobs growth can continue much longer, especially if immigration programs are scaled back. For the time being, however, employers will have to pay top dollar for skilled workers and that presents challenges for those trying to control inflation.

Housing Loans Drop Again

Australian Bureau of Statistics figures show that the number of housing loans continues to fall as interest rate rises take their toll. The March drop of 3.4 percent was the sixth consecutive monthly decline and the eighth drop in the past nine months.

There’s little doubt that interest rates will continue to rise. An article by Andrew Carswell in the Daily Telegraph (‘Interest rates to nudge double digits’, 14 May 2010) says: “If the Federal Government's optimistic economic forecasts spelled out in its no-frills Budget are fulfilled, homeowners will be paying at least 2 percent more on their current interest rate - or more than 9 percent - within 18 months, economists believe.”

Matthew Circosta, an economist with capital market analysts Moody’s Analytics, told the Herald’s Chris Zappone that the Reserve Bank is trying to avert an asset bubble by raising interest rates, but this has stifled loan demand for the construction of new homes.

"Demand for home loans is plummeting amid rising interest rates, and there appears little light at the end of the tunnel, with borrowing costs raised again in April and May.

"The number of housing finance commitments has declined every month since the Reserve Bank of Australia commenced withdrawing its monetary stimulus from the economy in October." (‘Home loans fall, rate rises bite’, SMH 12 May 2010)

Nevertheless, in the longer-term Sydney will need more housing. A lot more of it, and one of the barriers to its construction is a shortage of available land for development.

Introducing the BioBank

The NSW Government, noted more for its tendency to squeeze blood out of stones rather than helping to create wealth, has its own solution to the shortage of land available for development.

‘BioBanking’, a term that means developers can build on environmentally-sensitive land in Sydney if they pay to protect ‘equivalent’ land elsewhere, aims to provide land for the construction of 180,000 houses over the next 40 years. (‘Swap and chop’, SMH 17 May 2010)

The first of 38 scheduled BioBank projects has gone ahead with the NSW government’s acquisition of 80 hectares (about 200 acres) of grassland near Camden in Sydney’s outer southwest.

Funds for the acquisition were raised from levies on developers, so now it’s their turn to expend their biodiversity credits on Sydney land suitable for development.

It will be interesting to see just how this system works, but it’s the government’s hope that it will help reduce the shortage of land available to developers and thereby stimulate housing construction.

It should be noted that at the same time BioBank is getting underway the same government has introduced a new tax on all property transactions greater than $500,000 in value using as a reason (many have said “excuse”) a previously little-known need to fund greater security in the system of land titles.

Exempting the first $500,000 won’t mean a lot to Sydney vendors. The median Sydney house price in March was $595,745, according to Australian Property Monitors.

This new tax, announced the night of the Federal Budget by Lands Minister Tony Kelly, is progressive and although it adds around $200 to the cost of the average home, it will add about $500,000 to the cost of a commercial development worth $200 million.

In a media release May 12, Glenn Byres, acting executive director of the NSW Property Council, expressed his dislike for the impost: “We now have another tax to sit on top of the highest developer levies in the nation, stamp duty, land tax and other property-related taxes.”

“NSW needs to learn its lesson – you don’t encourage growth and investment by taxing it into submission”, he added.

A Two-tier Market could be Developing

Another bellwether of Sydney housing prices, the auction clearance rate, slipped in mid-May. Figures from Residex show that auction clearance rates dropped by more than 10 percent to 62.5 percent, down from 73.5 percent the weekend before.

High-demand areas however remained above average with the inner west scoring a clearance rate of 84 percent.

In a flashback to the end of the last boom in Sydney house prices, RPData’s research director Tim Lawless sees a two-tier market developing.

“In Sydney the most expensive 20 percent of suburbs have recorded a value gain of 17.5 percent over the past 12 months while the 20 percent most affordable suburbs have recorded a gain of just 7.3 percent.

“Regions such as the lower north shore, inner Sydney and the eastern suburbs have recorded capital gains of more than 20 percent over the past year.” (‘Latest house price figures disguise a two-tier market, Sun-Herald, 16 May 2010)

Tim Lawless says that, because of high housing prices and rising interest rates, we could see prospective first-home buyers moving back into the rental market instead of trying to purchase their own homes.

Even the top tier is feeling the winds of change, according to Jonathan Chancellor, the Sydney Morning Herald’s property editor.

“Sydney's priciest residential listings are languishing unsold as cautious buyers await serious price adjustments from the mostly steadfast sellers.

“Top-end properties are averaging 173 days on the market before sale, double the typical 85 days across Sydney, according to Australian Property Monitors.

“There were 48 house and unit sales above $5 million in the March quarter, only slightly above the low of 42 sales during the trough of the global financial crisis and below the 61 and 72 sales in previous March quarters.” (‘Top homes take double time to sell’, domain.com, 15 May 2010)

What happens next? Australia won’t experience a US-style crash in housing prices, according to Dr Luci Ellis, the RBA's head of financial stability, who says the majority of Australia's housing debt rests with those who can most afford it.

"Our assessment is that the increase in debt has broadly been concentrated in the hands of those generally more able to service it," Dr Ellis told a residential property conference. (‘Reserve says Australian housing crash unlikely, ABC Online, 18 May 2010)

A May 1 Business Day poll on the Sydney Morning Herald’s website asked the question and 14,586 voters responded. 40 percent said ‘prices will fall’; 41 percent said ‘prices will flatten out’; and 20 percent said ‘prices will keep rising’.

The recent amazing rate of increase in Sydney property prices couldn’t last forever, and it now appears that the slowdown that real estate analysts expected is beginning to take shape. It will be gradual, and much to the relief of property owners, it won’t lead to any dramatic falls like those experienced elsewhere.

And Now for Sydney House Prices
Wed, 21 Apr 2010

In our last column we covered the subject of interest rates and what’s likely to happen over coming months and in the next couple of years.

This month we’ll examine house prices and where they’re going. David Potts, writing in the April 18 issue of Investor in the Sun-Herald, stated what we’ve been saying in this column for the past twelve months: “The growing housing shortage can only help property prices despite rising interest rates.”

The very fact that property prices are rising is in direct opposition to the forecasts of UWS associate professor Steve Keen who on April 15 began his 225 kilometre trek to Mount Kosciuszko after losing a bet that Sydney house prices would fall by 40 percent.

His predictions were somewhat wide of the mark - about 52 percent wide from the latest RP Data statistics that show Sydney’s property prices climbing at an annual rate of 12 percent.

The Sydney Morning Herald’s property editor, Jonathan Chancellor also noted on April 19 that the professor had sold his Surry Hills apartment in 2008 for $540,000 and a similar two-bedroom unit in the same building sold recently for a price that was 8 percent higher.

To be fair to the professor, there are plenty of reasons to suggest that the market’s growth could be going to slow.

The reasons the rate of growth can be expected to take a breather are evident. The government’s home owner’s grant has been reduced and interest rates have been raised. We’ve earlier stated that interest rates will continue rising for a while and agree with professor Keen that these factors may impact property prices.

On the other side of the coin, the rate of new housing construction remains at extremely low levels. The Performance of Construction Index by the Australian Industry Group and the Housing Industry Association fell 4.1 points to 48.7 in March.

This is well below the 50-point level that indicates expansion. Demand is there but where’s the supply to meet it?

Property research authority and NSW managing director of project marketer MLG, Chris Freeman, says the market in Sydney is grossly undersupplied when compared with population growth: ''When you look at dwelling supply against population growth the entire country is undersupplied.''

What is most affected by rising interest rates is construction of new housing. Senior economist with the Housing Industry Association, Ben Phillips, says the strength of the nation's housing recovery is looking shaky.

"Industry hopes for a sustained and necessary recovery are fading under the impact of higher interest rates and continued pressure from credit and land restraints," he told ABC News Online.

Australian Industry Group spokesman Peter Burn also expressed his concerns about a big fall in new orders in the house building and apartment sub-sectors: "That fall comes at a time when there is already a shortage of housing and a growing gap between demand and supply."

The number of home loans has fallen since September, 2009 – down 27 percent in NSW. This prompted the Sydney Morning Herald’s economics correspondent, Peter Martin, to say that “Buyers are deserting the Sydney property market at the rate of 1000 a month.”

He sees real estate prices plateauing for the rest of 2010 in what’s termed an ‘exhausted market’. Echoing this sentiment is David Airey, president of the Real Estate Institute, who is quoted in the same article saying: “This will lead to a slowing of price growth, no question about it.”

Some NSW statistics stand out as signals that we’re about to see real estate prices stabilise. In February the number of first home buyers dropped from 5941 to just 2293. But the question must be asked, how important have first home buyers been to the overall real estate pricing structure?

Taking a long-term view and relating recent activity to historic prices, the impact of the first home buyers will be seen as having created a ‘bubble’ at one end of the spectrum rather than having driven the market.

Their shopping has been in the lower levels of the housing market and has certainly affected the volume of transactions, but not the prices people pay for the mid- to upper-levels of real estate offerings.

Underpinning the continuing strong demand for Sydney real estate is the rush by investors to acquire properties for rental. This is one of the key reasons that auction clearance rates remain high, averaging 71 percent since October, 2009.

Figures from the Australian Bureau of Statistics show that the value of lending to investors in February was well above the levels of a year ago, up by 26 percent. It’s not about the number of the loans; it’s about the total volume of funds borrowed, and as long as interest remains tax-deductible, investors are willing to borrow.

But wait! The sharemarket, on its knees not all that long ago, has rebounded and shares are once again an option for investors to consider as they look at rising real estate prices.

The Investor’s David Potts believes it’s the time to get into shares. When reporting on increases in disposable income and housing affordability, he says: “Even so, the sharemarket looks a better bet for the next year or so than property.”

We disagree. When those same investors see the returns they’ll get from ever-increasing rental rates and recall the advice they heard from their elders about the security of bricks and mortar, they feel a bit less confident about entrusting their funds to companies whose managing directors often earn a few millions more than their shareholders.

Every now and then there’s a slowdown in price growth. Very occasionally there’s even a step backwards. But those backwards steps don’t happen often, and there’s enough experienced investors around to know a ‘buy’ signal when they see it, so the backwards steps don’t last long.

What else could be keeping Sydney’s real estate prices high? One theory comes from director of research at economic forecasting group 4CAST Ray Attrill who noted that '...the rise in activity and prices in the first half of 2009 looks to have been stronger than the acceleration in housing credit and added value of first home buyer incentives alone would suggest, hinting that an increase in overseas demand (for which domestic finance will not have been required - or available) likely had some influence.''

JPMorgan economist Stephen Walters recently told the Sydney Morning Herald’s Chris Zappone that there’s a possibility there are more home buyers entering the market without needing loans. ''Maybe that points to offshore money that's coming into the housing market and could be actually inflating house prices.''

According to the Herald’s April 16 article: “Frustrated would-be home buyers and real estate agents report a rising number of auctions to foreign buyers, with visitors from China being among the overseas investors frequently reported.”

However, in the same article, Moody's Analytics Matt Robinson says he doesn’t believe foreign buyers are the cause of Sydney’s housing price increases: “My scouts in auction rooms suggest it's not foreign buyers, but simply overly exuberant Aussie buyers pushing prices up, at least in Sydney.''

And why shouldn’t Sydney’s would-be homeowners be exuberant? The GFC is a distant memory, or at least hasn’t seemed to affect our lives all that much. NSW may be at the bottom of the employment and economic league tables, but most people who want work are in work, even if it’s only part-time.

It’s all about Sydneysiders wanting to buy housing. They’ll do it regardless of everything from rising interest rates to economic doom and gloom.

A report on AAP News quotes Martin North, managing consulting director of Fujitsu Consulting, who said Australia’s buoyant economy and strong job market have inspired established home owners to invest in property or upgrade their homes as house prices continue to rise.

"There's such pent up demand for property that, even if first home buyers are pretty much excluded from the market because they just can't afford to get in, other sectors of the economy will continue to buy.''

The real factor that will probably cause a gradual slowdown in the rate of increase for Sydney’s real estate prices was pointed out by national president of the Real Estate Institute, David Airey.

Commenting on the RP Data figures showing Sydney prices are rising at an annual pace of 12 percent Mr Airey told the Sydney Morning Herald that we won't have that kind of extraordinary growth continuing: ''If we did, nobody would be able to afford to buy property.

“Plenty of people smarter than me will say Melbourne will be the first to slow, but they've been wrong before. Sydney has a way to go to catch up so its prices might continue to climb for longer.''

Steven Long on ABC Online said that the current trajectory of house prices and household debt is unsustainable.

“The simple maths tells you that real estate ‘values’, for want of a better word, can't keep on outstripping incomes in the way that they are doing. Yet dwelling prices are being driven up by a chronic undersupply, exacerbated by record rates of immigration.”

Although we must accept the simple truth that there are limits to the prices buyers will pay for property, we haven’t reached the level of those limits yet.

In the meantime the Daily Telegraph’s Joe Hildebrand notes that the population of NSW is set to boom.

“Some Sydney suburbs will have their populations double or even quadruple in just 25 years, official NSW documents reveal, as the city hurtles towards a population of six million people by 2036.”

So, it isn’t interest rate rises that will slow housing prices. Nor is it a drop in demand. It’s the prices themselves, and as yet there’s no way of knowing when the increases will begin to slow.

The president of the Real Estate Institute of NSW, Wayne Stewart, puts the situation into perspective: ''The marketplace is driven by supply and demand. It's not driven by interest rates,'' he told Business Day’s Jessica Mahar.

The market forces that drive prices upwards remain in place, with no signs of a serious slowdown. Price growth will probably slow in the second half of 2010, but it will most likely be a temporary slowdown brought about by a pause in the acquisition of rental properties by investors rather than a broad-based pullback of buyers.

The reason why this slowdown will be a temporary feature was pointed out in the Sun-Herald by David Potts; there’s a shortage of property in Sydney and a growing demand for the same thing.

In an article captioned ‘Economists baffled by robust property market’ (SMH 19.4.10) Jonathan Chancellor wrote: “Leading economists are stumped for answers as to what’s happening within the residential property market.”

In reply we’ll give MLG’s Chris Freeman the last word. ''As long as returns are evident for investors, which they certainly appear to be at the moment, prices look to only be heading one way, and with finance approvals for investors up almost 30 per cent over the year in NSW it looks sure to continue.''

The future is on its way
Tue, 23 Mar 2010

The new year of 2010 is already 25 percent gone, and it’s given us clear signs of what’s in store for the rest of the year and beyond.

Take interest rate rises. The question isn’t if they’re going to happen, but when they’ll occur and what the increase will be.

Commonwealth Securities chief economist Craig James said the March interest rate rise of 25 basis points would be followed by at least two further rate hikes before the end of the year.

When asked by the Sydney Morning Herald what he thought the increase would be, he said: "Our view is that the cash rate will be somewhere between four and a half and five percent over the second half of the year."

He added: "The best the average person can do is assume that by the end of the year interest rates could be as much as one percentage point higher, which is equivalent to four typical rate rises.”

In its minutes from the March meeting the Reserve Bank said its decision to raise rates was influenced by ‘strongly rising’ house prices, noting that prices were rising strongly for ''for all but the bottom segment of the market''.

This makes it likely that the timing of future rate increases will be based at least in part on how the RBA views the strength of real estate prices. Rising housing prices will influence future increases.

Macquarie Group's interest rate strategist, Rory Robertson, told Melbourne Age economic correspondent Peter Robinson that the RBA’s way of looking at housing prices had changed.

''The Reserve seems to be taking the view if house prices are rising rapidly, rates are too low.

''Some analysts think the bank is actually targeting house prices but I think that it is more that if house prices are rising rapidly it takes it as a sign that the economy is doing well.”

Westpac chief economist Bill Evans said he believed that the Reserve Bank was likely to take a breather from raising rates at 4.5 percent.

He said it would only take another 50 basis point increase to put the standard mortgage rate back to around 7.5 percent, which is its average level over the past decade.

Forward activity in Australian financial markets suggest the Reserve Bank will step up its interest rate increases over coming months with the official cash rate expected to hit 5 percent by the end of the 2010.

Markets are now giving a further rate increase in April a 40 percent chance, up from 24 percent in the first week of March.

Michael Workman, senior economist for the Commonwealth Bank, said each RBA meeting would be considering the need for further increases. ''There are nine more board meetings this year and it looks to be a 50/50 call at each one,'' he said.

The Reserve Bank has already raised interest rates four times since October by a total of 1.00 percentage points.

The big four banks are already showing an appetite for higher rates. On March 23 Gail Kelly, CEO of banking giant Westpac, told the Herald’s Eric Johnston that her company was ‘under pressure’ to raise interest rates further.

According to Ms Kelly, the reason for this pressure came from Westpac’s need to borrow money from overseas for its long-term funding. The article also noted that Westpac already has one of the highest mortgage rates among the big banks with a standard variable rate of 7.01 percent.

The only factor that might impede a steady progression of interest rate increases would be a larger pullback in housing finance than is already anticipated following the end of the first home buyers’ boost and recent rate rises.

Australian Bureau of Statistics figures show that the volume of housing finance commitments for owner-occupied housing fell 7.9 percent in January, seasonally adjusted, to 51,056.

This was in contrast to previous expectations by economists that the number of owner-occupier housing finance commitments would have risen by 2 percent in January.

ABS figures also showed that total housing finance fell by 3.3 percent in January, seasonally adjusted, to $21,159 billion.

Loans to buy established houses nearly halved, sliding from a peak of 19,100 in March to 10,041 in January.

The biggest retreat in was in housing finance for new dwellings which fell 13.2 percent.

ABS statistics show that only 667 NSW residents took out construction loans in January, down from a peak of 1270 in September, 2009 before rates rose and the first home owners' boost was scaled back.

And only 472 loans were issued to buy new houses in NSW, down from almost double that a few months earlier.

Consumer sentiment figures released on March 10 reflected the fall in lending. The proportion of Australians agreeing that ''now is a good time to buy a dwelling'' dropped from 53 percent in December to 42 percent in March.

In September, 2009 before the rate rises and the phasing out of the boost, 62 percent of those surveyed believed it was a good time to buy a house.

RP Data senior research analyst Cameron Kusher told the Sydney Morning Herald that because of the March interest rate rise by the RBA "we will probably see a lesser volume of first-home buyer finance commitments".

Higher interest rates were expected to result in a lower level of property value growth this year, since activity among first-home buyers and investors alike would most likely stall, Mr Kusher added.

"The Reserve Bank has previously indicated that they would like to see the supply of dwellings nationally increase," Mr Kusher said.

"Given this, they would like to see the number of dwelling approvals increasing, as well as the number of housing finance commitments for construction of new dwellings so that the supply of housing continues to increase at a rate commensurate with demand."

Mr Kusher said the Reserve Bank would therefore adopt a "careful, careful" approach when considering the amount and timing of rate increases.

So there’s the future in a nutshell. We have the RBA raising interest rates to somewhere between 4.5 percent and 5.0 percent by the end of 2010. It’s also likely that there will be a series of small increases rather than one or two big ones. (This is an election year, after all!)

The statistics to watch, and which will be watched closely by the Reserve Bank, are those that will indicate homebuyers are deserting the market.

Assistant Reserve Bank Governor Philip Lowe told an urban development conference in Sydney to expect further increases in house prices unless something could be done to ease ''constraints'' holding back the construction of new homes.

''With population growth above average, and growth in the housing stock below average, it is not surprising there has been upward pressure on housing costs.

''If we are to build more dwellings, we need to ensure that planning guidelines and infrastructure provision can accommodate this,'' he said.

If there is a sudden indication of buyer flight from capital city real estate we may see a pause in upwards rate movements while the RBA considers its position. Nevertheless, we have no reason to suspect that rates will go anywhere but up in the foreseeable future.

Fair winds blow for Sydney property
Tue, 23 Feb 2010

About 45 years ago Bob Dylan wrote a song titled ‘Subterranean Homesick Blues’ that contained the immortal lyrics “You don't need a weather man to know which way the wind blows.”

He could have been writing about today’s Sydney property market. Figures released by the Australian Bureau of Statistics in early February showed that the house price index for Sydney rose 5 percent in the fourth quarter of 2009, and was up 12.8 percent from a year earlier.

The Sun-Herald newspaper has just published its annual Property Guide for 2010 and the report’s tone is decidedly upbeat for homeowners.

The report’s author, Kate Farrely, begins by saying: “Combined with the highest buyer sentiment since 1994 for NSW and an unexpected reprieve from a further interest rate hike, the year is off to a sizzling start.”

But how long will the sizzle last? Ms Farrely quotes a senior research analyst at RP Data, Cameron Kusher, who expects at least first-home buyer demand to fall during 2010, yet at present there’s no indication this will have a significant impact on the overall market as any slack is being absorbed by investors and upgraders.

We’re also in for a rise in interest rates, or to be more precise a series of increases during the next twelve months. On February 19, Reserve Bank Governor Glenn Stevens told Parliament’s Economics Committee that he expected the RBA to raise interest rates ‘between two and four more times’ between now and the end of the year.

The timing of these increases as yet remains unknown. JP Morgan chief economist Stephen Walters told the Melbourne Herald-Sun: "Further hikes are coming, that remains clear, but the risk now is that the pause the RBA has embarked on could be longer than we currently expect," he said.

"We are sticking with our call for the next hike to come in April but the next hike even could come as late as mid-year."

Whatever the RBA’s timing might be, the net result for the rest of 2010 will be a rise of around 1 percent. This could possibly affect buyer demand but despite the certainty of future rate increases, borrowing for property remains at high levels.

One reason may be that a return to what the RBA considers a position above ‘emergency’ levels will still leave interest rates lower than when the first impacts of the GFC were being felt in 2008.

Matthew Bell, an economist with Australian Property Monitors, says that “Once we reach 7.5 percent to 8 percent, rates will start altering people’s buying decisions”, and he may be right, but the present rates are well below this and there’s no reason to expect the RBA’s actions to drive rates up to a position near these levels in the next two years.

Let’s return to the Sun-Herald’s Property Guide for a moment. In its pages there are some interesting quotes from several property experts who give their thoughts on 2010 and what it will bring.

Louis Christopher, managing director of SQM Research, says: “Our general growth forecast is between 6 percent and 8 percent.” He does note that any further rationing of credit by the major banks could reduce these figures if owners and investors find it hard to borrow money.

Mark Armstrong, a director of Property Planning Australia, is also bullish about property. “Sydney prices grew by more than 12 percent last year and there’s no doubt we’re going to see the market grow by more than that this year.”

Not everyone is quite so optimistic. RP Data’s Cameron Cusher who was mentioned earlier, believes that “The major influences this year will be the impact of rising interest rates and the removal of the first-home buyer grant boost. These two factors are likely to result in the Sydney market seeing lower levels of property growth than that witnessed during the past twelve months.”

Mr Cusher does see a bright spot in the market’s upper echelons. “Over the next twelve months we believe the upper end of markets in the capital cities will continue to bounce back and should be one of the standout performers in a market that will, overall, reflect slower rates of growth.”

There are some other interesting factors at work that may help explain the ongoing strength of the Sydney property market.

Although many commentators on the market have stated their belief that Sydney housing is becoming unaffordable with a median house price just under $600,000, real estate group Rismark International’s Dwelling Price-to-Income Index found that Australian house prices have not risen relative to disposable household incomes since late 2003.

Rismark’s managing director Christopher Joye, stated: "In contrast to claims that Australian house prices are 7-8x incomes, Rismark's National Dwelling Price-to-Income Index implies that the true ratio across all regions and all property types is around half this estimate.

"This suggests that Australian housing is not as expensive as is commonly believed. It also reconciles with RBA analysis highlighting Australia's internationally low mortgage default and mortgage stress rates," he said.

Upgraders are another contributor to rising property prices. Owners who purchased their first home during the housing boom of 2000 - 2003 have realised real growth in their equity. They now have higher incomes and survived the last series of interest rate rises. Many are now selling their first home and upgrading to a better location or a larger home.

As always, undersupply relative to demand drives prices upwards. BIS Shrapnel senior economist Jason Anderson said in the Australian newspaper that the lack of new building and the influx of migrants had led to a mounting housing shortage.

"We estimate the national shortage will reach about 150,000 dwellings, concentrated in NSW, where there is an 84,000 shortage."

This is positive news for Stockland, the country's largest residential developer, which reported a $214 million profit for the first half of the financial year.

Interviewed in The Australian, Stockland managing director Matthew Quinn said that, although the company's sales were already above the previous residential market peak in 2004, he expected the recovery to be sustainable.

Mr Quinn also said that the undersupply of housing and the return of upgraders and investors would underpin the market.

Spare a bit of sympathy for Professor Steve Keen from the University of Western Sydney who lost his bet after confidently forecasting back in October 2008 that the value of Sydney property was going to drop 40 percent and the fall to the bottom of the trough would take 10 to 15 years to reach.

(We note that at that time we stated: “Our view of Sydney real estate is that prices will continue to stabilise over the next six months, perhaps with further modest decreases but with no dramatic declines... and investors will return to property where they can generate capital gains and rental income with renewed confidence.”)

Although Professor Keen remains defiant about the logic underlying his forecast, he is now repaying his losing bet by walking from Parliament House to Australia’s highest mountain, Mt Kosciousko - a distance of 224km.

Professor Keen begins his walk at 2pm on April 15. He says he’d be delighted to have the companionship of anyone wishing to accompany him. We don’t plan to be there.

The crystal ball is crystal-clear
Mon, 25 Jan 2010

2010 will be an interesting year in real estate, especially in two areas – property prices and the cost of renting. What happens in the next twelve months will lay the foundation for at least the next three to five years.

Indications are already clear that Sydney property prices will rise and so will weekly rental rates. Equally clear is the likelihood of continuing interest rate increases.

Statistics compiled by Australian Property Monitors show that median rents for houses in Sydney are up by 2.2 percent over the year. This may not sound like much but it’s a statistic that’s going to rise just as certainly as will interest rates.

An interesting study by the influential UK-based magazine The Economist concluded that Australian house prices are overvalued by a factor of 50 percent. Affordability is a growing problem for those wishing to enter the property market, and there’s little in the way of relief to ease their pain.

A shortage of vacant land, combined with high levels of taxes and charges, ensure a continuing decline in new dwelling approvals. Housing Industry Association chief economist Harley Dale summarised the situation in an interview with the Sun-Herald:

"A standard new house-and-land package is more expensive in Sydney than any other capital city," he said.

"Compared to Melbourne, the price differential is in excess of $100,000, and much of that has to do with the fact that taxes and charges are on average higher in Sydney than anywhere else."

The cash-strapped position of government bodies at both the state and local level will ensure that this situation remains unchanged in the foreseeable future.

Just before the end of 2009 the Executive Committee of Australian Business Economists forecast that the Reserve Bank would raise interest rates to rise to a peak of 5.5 percent in 2011. This figure is already looking a bit optimistic with more rate increases likely in early 2010.

An interest rate rise in February would be the first time since the RBA started announcing interest rate moves 20 years ago that the bank has raised rates at four consecutive meetings.

But ICAP economist Adam Carr has no doubts about a February rate rise. ‘‘A February hike is a done deal,’’ Mr Carr told the Sydney Morning Herald.

La Trobe University professor Don Harding explains why: ''The board will look at [the CPI], see there's not much inflation in the system, say that's nice to know, but then say the labour market is getting tight, retail sales are looking strong, any number of indicators are looking strong and we probably think inflation is about to pick up.''

Even if Professor Harding’s expectations of a pre-emptive strike by the RBA aren’t borne out by the February board’s meeting, there’s a good chance that inflationary pressures will continue to grow in the first quarter of 2010 and the Bank’s alarm bells will be ringing.

As Commonwealth Securities economist Savanth Sebastian said in an interview with the Sydney Morning Herald: ''Price pressures, though mild, are once again rising.''

Just how long the ‘mildness’ will last is anyone’s guess, but all the factors that were working to keep inflation under control are fading away as Australia’s economic recovery from an unexpectedly ineffectual Global Financial Crisis gathers momentum.

The numbers tell the story. The national unemployment rate was a seasonally adjusted 5.5 percent in December according to figures from the Australian Bureau of Statistics.

The economy gained 35,200 jobs in December, raising total employment to an all-time high of 10.906 million.

Full-time employment increased by 7,300, while the number of part-time jobs rose by 27,900.

These figures almost guarantee ongoing interest rate increases, but are the people worried? Not much, according to the Westpac-Melbourne Institute consumer sentiment index which rose by 5.6 percent in January 2010 to 120.1 index points from 113.8 in December.

"This is a very strong result," said Westpac chief economist Bill Evans, noting that the index was 33.6 percent higher than a year ago. "The index is seasonally adjusted and therefore takes account of traditional January optimism."

Even share prices on the Australian Stock Exchange had a glow of optimism. ''The share market also supported confidence with a rise of 4.2 percent although petrol prices did increase by a solid 4.4 percent,'' he said.

One of the most telling statistics in the index was that the confidence of those respondents who currently hold a mortgage reached its highest level since 1994.

If those already paying off mortgages aren’t worried about the likelihood of rate increases, there’s a good chance tenants facing increasingly high rentals will see the benefits in opting to purchase property.

John Edwards, CEO of property analyst Residex, said there is only one word that can describe 2009 and that is "remarkable!"

He said that pent up demand and a lack of supply of desired stock drove the Sydney market in a situation where low interest rates provided an acceptable level of affordability.

Mr Edwards noted that Sydney’s capital growth of 10.2 percent was amazing enough, but over the last six months of 2009 achieved 21.4 percent on an annualised basis. He then asked, can this growth continue?

“For the moment it probably will until the Reserve Bank increases interest rates by about 0.5% to 1%, and the skilled immigration slows. This is unlikely to occur in the short term, but will over the next 12 to 18 months.

“Hence, we can expect these current quality rates of growth to continue but be reduced slightly.”

Residex notes that government subsidies for first home buyers removed a number of renters from the market during 2009. These temporary high levels of government subsidies had the effect of raising property prices, but have now been withdrawn.

As John Edwards sees it, those who were unable to take advantage of the grants now face increased prices for both purchasing property and rentals.

“This leads us to the view that towards the middle or end of this year, we will again see rental rates move back into a growth pattern.”

There were however some signs that rising interest rates are making consumers more worried about making some financial commitments. A report by David Uren in the Australian newspaper showed that new borrowing for home renovations, motor vehicles and blocks of land all fell in November.

“Spending on home renovation has been sliding since March last year, with the $465 million borrowed for that purpose in November down by 13.9 percent. Spending on new blocks of land has fallen by 12.7 percent since it peaked in June.”

In the article, Housing Industry Association chief economist Harley Dale said one reason for the fall in spending on renovation was that more people were confident enough to trade up to a new house.

"You would hope to see some sustained turnaround in renovations as general economic fortunes improve and people are more comfortable that house prices are growing in a sustainable way again," he said.

For investors the outlook is still towards property rather than the sharemarket. According to the latest Citibank Australian Wealth Report, most people feel an investment property is the best place to park their money, with 74 percent believing now is a good time to invest in bricks and mortar.

In an interview with The Australian newspaper, Citibank's Andrew de Graaff said that people were willing to lock away their capital in property.

"The perception we got from the survey is people are just wanting to get that sense of security again,'' Mr de Graaff said.

The trends are in place - rising interest rates, rising property values, and rising rates of weekly rentals. Unless something intervenes in the scheme of things, we can expect to see a continuation of this scenario until at least 2013, and for those who own property it’s a very positive outlook.

What a difference twelve months can make
Wed, 13 Jan 2010
At the end of 2009 it’s worth glancing back to where we were a year ago as 2008 was drawing to a close.

Looking around now at the Australian economy and especially the thriving Sydney property market it seems hard to believe that just twelve months ago we were preparing for what was termed ‘an economic disaster’.

2009 was set to be a year of great challenges with rising unemployment and a deteriorating Australian economy. In hopes of staving off a full-blown depression the Reserve Bank of Australia had lowered its cash rate to 4.25 percent and there were forecasts the rate would go even lower in the New Year.

The rest is history and a tale of great relief as well. Twelve months after we were facing what seemed like a financial Armageddon the Australian economy was back in the black, although not by a large amount, expanding by 0.2 percent in the three months to the end of September, and by 0.5 percent for the 2009 year.

The RBA, whose policy of lowering cash its cash rate to stimulate the economy proved successful, has already raised its rate from an historic low of 3 percent to its current rate of 3.75 percent and further increases are likely, although perhaps not as soon as might have been expected last month.

Ric Battelino, deputy director of the RBA said on December 17 that “...it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range.”
If the RBA sees the current level of interest rates as ‘normal’ it also means that rates are more likely to remain where they are instead of being raised again.

However, Mr Battelino also indicated that because the major banks were raising their interest rates beyond their usual margins borrowers were actually paying more for their loans than in previous periods of relatively low cash rates.

Money is therefore already more expensive which acts as a buffer against inflationary pressures in the eyes of the RBA.

Although the Federal Treasurer, Wayne Swan, has said that the economy will remain reliant on government stimulus during 2010, the housing market could well be affected for a period of time by the end of the Commonwealth’s ‘boost’ to first home buyers’ grants when it comes into effect on December 31.

The Market Intelligence Strategy Centre (MISC) has warned that the scaling back of the first home buyers’ grant will combine with tighter lending criteria from banks and other lenders to cause a fall in the value of mortgages.

It forecasts a $14 billion drop in the value of mortgages written over a twelve month period and says the mortgage market is likely to reach a bottom in the first quarter of 2010.

Although there’s little doubt that the reduction in the first home buyers’ grant will have an effect on sales at the entry level end of the market, at least during the first quarter of the year, there are other factors in play that indicate the Sydney housing market’s strength will continue.

The first is the action at Sydney’s property auctions. The Daily Telegraph reported on December 20 that this December has been the strongest on record with a clearance rate of more than 70 percent. This isn’t bad for a month that’s usually the slowest for clearances.

The next factor to examine is the demand for mortgage funds. Despite rising interest rates there is a boom in lending to people building new homes. Loans issued to fund the construction of new housing rose 9.2 percent in October to a 15-year high following a 9.8 percent rise in September.

It should be noted that the total number of new owner-occupier housing loans fell 1.4 percent in October, and that the first home buyers' share of the market eased to 26 percent, down from 29.5 percent in May.

Talking with the Sydney Morning Herald, Westpac senior economist Andrew Hanlan said: "Demand for housing has surged over the last year, reflecting the very favourable combination of historically low interest rates, government incentives, strong population growth and pent-up demand for housing stock."

If there is any slackening in demand for finance from first home buyers, it may well be picked up by a growing number of builders returning to the market after their self-imposed retreat over the past few years.

Then there’s the affordability factor. John Edwards, CEO of property analysts Residex, has raised an interesting point about Sydney’s residential real estate.

“Although the Sydney housing market has the greatest (and increasing) housing shortage of all our capital cities, this has not always flowed into higher housing prices, due to the Sydney housing market's extreme unaffordability in periods of high interest rates.”

He notes that at these times housing prices are somewhat contained but rents increase instead. However, he adds that the RBA’s lowering of interest rates in the early part of 2009 enabled Sydney’s housing price levels to rise while at the same time rents began to fall.

One of our biggest worries at the start of 2009 was the spectre of unemployment, forecast to hit a peak of 8.5 percent or perhaps even higher by the end of the year. Instead, look what’s happened.

Australia’s unemployment rate is now 5.7 percent and according to the Australian Bureau of Statistics the rate is now trending downwards. NSW added an extra 11,800 jobs between October and November, bringing the state’s jobless rate down from 6.4 percent to 5.98 percent.

Let’s return to interest rates for a moment. The December survey of the executive committee of Australian Business Economists showed the Australian economy bouncing back next year to near-normal growth of 3.2 percent and interest rates peaking in 2011 at 5.50 percent.

The economists also said they expected the Reserve Bank to push up its cash rate from its present 3.75 per cent to 4.75 per cent next year. This would mean an increase in standard variable mortgage rates to more than 7 percent.

Is this figure affordable? A November survey commissioned by mortgage broker Mortgage Choice found that more than one third of Australians plan to buy a property in the next two years despite any concerns they may have about rising interest rates.

Mortgage Choice corporate affairs manager Kristy Sheppard said this would hopefully stimulate more housing construction.

"As a housing market service provider, Mortgage Choice is pleased to see 41 per cent of respondents planning to buy property in the next two years and 43 per cent of them planning on an investment property.”

The survey also showed that found 40 percent of mortgage holders believed they could afford to make repayments at an interest rate of more than 11 percent.

It’s always been possible for changes to happen quickly in the property market, but seldom before have the changes been more sudden or more dramatic.

The end of the first home buyers’ ‘boost’ will impact on the market, but its effects will be mitigated by other factors. Interest rates will pause for a time, but will then increase along a generally predictable path to peak in 2011.

Fears of a fiscal collapse and a massive rise in unemployment have passed, seemingly to be replaced by confidence in most sectors of the economy.

Much has changed in the past twelve months, but our outlook remains the same. Just like Old Man River the Sydney property market will keep right on rolling along, with continuing strong demand for housing and prices that reflect the scarcity of supply.

Gen Y - moving on but not in
Mon, 30 Nov 2009

A recent housing study commissioned by the Commonwealth Bank found that homeowners aren’t changing addresses as much as they used to, making it harder for those up-and-coming members of Generation Y to purchase real estate.

Economist Craig James, author of the study, noted: “That may be good for the Baby Boomers and Generation X, but if they don’t want to move, and state and territory governments don’t increase housing supply, then it really puts big pressure on Generation Y to find their homes, and at reasonable cost.”

Gen Y faces a few more problems in the current market. In November the Reserve Bank raised interest rates for the second month in a row, up to 3.5 percent. The big four banks weren’t slow to follow suit and quickly hiked up their borrowers’ home loan interest rates to around 5.5 percent.

Despite a bit of verbal opposition from Federal Treasurer Wayne Swan, the banks have made it clear that they’ll raise their loan interest rates whenever they please, which is likely to be whenever the RBA raises its rates.

The RBA is playing their cards close to their chest regarding the timing of future rate increases, but they’ve left no doubt that rates will continue to rise, saying further interest rate increases are "most likely appropriate".

In the Bank’s November statement, RBA Governor Glenn Stevens expressed a mood of optimism. ''With the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.''

In a speech on November 25, Reserve Bank Deputy Governor Ric Battellino said that the domestic economy had held up much better than expected in 2009. "With the economy having only recently entered a new upswing, it is reasonable to assume that we will see this growth extended for a few more years yet," he said.

This optimism is to be expected since the worst effects of the GFC seem to have largely bypassed Australia. The RBA is now looking at economic statistics that indicate financial markets are in much better shape than they were six months ago, and borrowers have easier and less costly access to funds.

Another sign of economic recovery is the brisk action at Sydney’s property auctions. Australian Property Monitors noted that, with just one week remaining in the traditional Spring selling season, 68 percent of properties offered at auction were sold compared to just 43 percent in November a year ago.

That may sound like good news for Gen Y’s would-be homeowners, but it also means there’s a chance for inflation to rear its ugly head and that’s something the RBA clearly wants to prevent. Its main weapon against inflation is the interest rate increase, and the battle is already underway.

Gen Y’s home ownership aspirations will also be impacted by the coming reduction in the first-home owners grant. Already reduced in September to $10,500 for existing homes and $14,000 for new homes, it returns to its original level of $7000 on January 1, 2010.

Steve Martin, President of the Real Estate Institute of Australia, told the Australian newspaper that moving interest rates upwards too soon could spell disaster. “If we have a double whammy with the first home owners boost being wound back in December and rates potentially going up it could very well bring us to a very serious crossroads again.”

As if that’s not enough bad news for Gen Y, more evidence is coming out that indicates the supply of housing in NSW is falling even further behind demand than previously thought.

Speaking to property writer Chris Zappone in the Sydney Morning Herald, the ANZ Bank’s head of property analysis Paul Braddick warned: "The housing industry and the policy authorities face a considerable challenge in the years ahead to deliver an adequate physical supply of housing."

He noted that dwelling completions are forecast to fall below 130,000 in the year ahead, and that we can expect a further "dramatic tightening of the housing demand-supply balance".

Writing in the National Times, Aaron Gadiel, who is chief executive of Urban Taskforce Australia, pointed out that in the financial year ending June 30, NSW accounted for only 23 percent of Australia's building activity, although it has 32 percent of the nation’s population. The effect of this situation on rent levels is predictably upwards.

He writes: “Sydneysiders have already been feeling the pinch of housing shortage. Rents in outer suburban Sydney have gone up by more than 20 percent in the past two years. In the middle-ring suburbs rents have jumped near to 30 percent.”

Compounding the Sydney housing shortage is the fact that much of the construction that has taken place in recent times is apparently not quite what the market wants.

Developers have been pressured by a combination of local and state government regulations into constructing row after row of high-density apartment buildings alongside Sydney’s congested transport corridors. Sales of these high-rise developments have been slower than expected and don’t reflect the huge demand for housing being felt in other sectors of the metropolitan area.

The strength of this demand can be gauged by the rise in the home price index of 4.2 percent in the three months to September. Australian Bureau of Statistics figures show that home prices climbed by 6.2 per cent in the 12 months to September, but most of the gains are in recent months as availability of housing stock dries up.

Immigration is another key contributor to this situation. Expanding migration raised our population growth rate to 2.1 percent in the year to March. This translates into an additional 439,000 people looking for a place to live across Australia.

There is at least one plan to produce housing for Sydney’s expected 40 percent population increase over the next twenty years. A group of major property companies has submitted its Urban Renewal Action Plan to the NSW Government calling for the removal of a number of obstacles to development so that 640,000 new homes could be built.

This comes at a time when the NSW Government is about to announce a review of its own 5-year old Metropolitan Strategy planning document. But plans are one thing and housing construction is quite another.

The ANZ Bank’s Paul Braddick has a medium-term view of the housing supply that’s positive for existing property owners but worrying for those expecting to enter the market in the next few years.

"Unless significant action is taken to remove the structural impediments to housing supply, Australia will face an intractable shortage of housing that will drive a deterioration in housing affordability - both purchase and rental - beyond anything we have ever seen before".

All those years of housing supply falling short of demand have left a widening gap that may not even be bridged by the time Gen Y reaches retirement age.

Sydney market surges ahead
Mon, 26 Oct 2009
Anyone expecting the Sydney real estate market to pause or even move backwards once the first home buyers grant began its phasing-out will have been sorely disappointed by the incredible strength this market possesses.

Even a somewhat sooner than expected interest rate hike by the Reserve Bank of Australia in early October has had little or no impact. Although small (just a quarter of a percent) the RBA has left little doubt that further increases lie ahead, with at least one more increase in the range of half a percentage point likely before Christmas.

Minutes of the Reserve Bank's last monetary policy board meeting reveal the bank’s perception that low interest rates could lead to economic problems: "Keeping interest rates at very low levels for an extended period could...threaten the achievement of the inflation target over the medium term.

“More generally, very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth."

Economic consultants Access Economics say they expect interest rates to reach 5 percent by early 2011. CommSec chief economist Craig James agrees with this line of thought and told the Sydney Morning Herald: "Budding homebuyers need to do their sums. Rates will continue to rise in the next 12-18 months, probably between 1.5 and 2 percentage points."

So, what’s really going to happen in Sydney real estate? As reported in the Sunday Telegraph (25.10.09), Sydney’s median house value has reached its highest-ever level. Figures from market analyst Residex show a rise of $11,000 in the median Sydney value just in the month of September, bringing the median price of a Sydney home to a whopping $610,000.

The RBA will of course take note of this and tweak interest rates a bit at a time to apply the brakes to what it perceives as a massive inflationary price movement. The banks will go along happily with the trend, many of them having already boosted their loan interest rates by slightly more than the RBA’s quarter of a percent.

But will it work? Is there anything to stop the Sydney market’s prices trending upwards? Frankly, we don’t believe there is.

For one thing, it’s not just about interest rates. The historically low 3 percent was a figure set in desperation to offset the impacts of the Global Financial Crisis. The GFC has wrecked the real estate markets in the UK and USA, so what makes Australia different?

First, the state and federal governments made a quick and accurate assessment of the situation and concluded that a stimulus was necessary to stave off the GFC. Not just in the area of real estate, but that was one of the market segments specifically targeted with incentives like low interest rates and packages of grants for buyers. And it worked.

In the 18 months prior to the October rate increase, the RBA dropped its rates by 425 basis points. Properties suddenly became more affordable and as a result thousands of tenants became homeowners.

However, what didn’t happen was construction of new homes; the number of new homes dropped by 25 percent while sales continued to rise.

The most important underlying metric that could have had a genuine impact on rising housing prices – the rate of new home construction, has remained moribund for the past several years.

In 2002 Australia built 173,000 new homes, but this year the figure’s just 124,000. It’s woefully inadequate to meet the demand for new housing, and there’s no turnaround in sight.

Another worry that never materialised was an expectation the GFC would drive unemployment levels up to 9 or 10 percent, cause permanent losses of jobs in a number of key industries, and reduce pressures on wages. It just didn’t work out that way.

Economic consultants Access Economics latest Business Outlook report says that the unemployment rate is likely to peak at just 6.8 percent in the middle of 2010. Instead of cutting jobs Australian employers have wisely elected to reduce hours of work performed by their employees. Finding the human capital needed for the recovery won’t be a huge problem and once again, Donald Horne’s ‘Lucky Country’ has lived up to its name.

Tenants will soon begin to feel the effects of housing shortages. Although rents have stabilised over the past year or so, fewer first home buyers will make the move from renters to owners and competition for rental properties will increase. Analysts forecast rent rises across Sydney from 5 to 15 percent over the coming year.

In the past month the number of vacant rental properties in Sydney's inner suburbs fell slightly to 1.4 per cent while the number of vacant rental properties in outer suburbs rose by 0.1 per cent to 1 per cent.

"These results are a double-edged sword; great news for landlords but grim news for tenants," REINSW president Steve Martin said in a statement to the media.

"The results for Sydney and Newcastle are concerning and show that, despite a low interest rate environment and additional first home buyer and other buyer incentives the rental market remains extremely fragile."

Now, let’s return to our question: What’s really going to happen in Sydney real estate? Five things are certain.

1. Interest rates will increase, probably by at least two percent over the next twelve months.

2. Real estate prices will increase, and the closer the property is to the CBD the greater the increase will be. Rises of 5 to 12 percent are not unlikely.

3. Returns on rental property will increase, by 5 to 15 percent if analysts’ forecasts are accurate.

4. Housing construction will continue to fall short of demand. This situation will persist for at least the next three years based on the housing industry’s forward estimates, although without massive government action the ongoing shortfall is virtually assured for the next decade.

5. Investors who have been burned by the sharemarket will continue to move their capital into property. Smaller investors in particular will avoid property-based funds and opt for direct ownership of rental properties.

In our website’s ‘Market Comment’ section you can see our articles dating back to June, 2008. It’s not really all that long ago, but the world has changed much in this time and Australia has weathered a global economic storm that has had serious consequences for property markets worldwide.

Fads and fashions come and go; today’s olive groves and tree plantations are tomorrow’s economic casualties. The one constant for value has been property, and in particular Sydney real estate.

We are in a rising property market with affordable interest rates. This is an excellent time to purchase a home, to upgrade your residence, or to buy property as an investment. The signals are clear and the time to act is now.

Not much rain on this parade
Tue, 6 Oct 2009

Potential property investors have been given some additional motivation by the latest house price data from analysts RP Data-Rismark and BIS Shrapnel.

RP Data-Rismark’s figures showed price gains in all capital cities. Even better was their finding that market growth is happening across all suburbs and not just in those areas most appealing to first home buyers.

Forecasters BIS Shrapnel say that prices will keep going up, accelerating into double digits once the rate of unemployment peaks in 2010/11. There are already signs that unemployment may peak at a much lower level than earlier thought.

If there is any market sector lagging behind the rest, it’s right at the top. Australian Property Monitors found that the number of houses and units sold for more than $1 million in the past six months had declined by 28 percent over the past two years.

Indications are, however, that this is largely due to vendors holding their properties off the market in expectation of rising prices in the near future.

There’s a lot of debate about the likelihood of higher interest rates between now and the end of 2009.

For the moment the Reserve Bank of Australia seems to feel that the better-than-expected unemployment figures – stabilised at 5.8 percent for the past three months – aren’t enough reason to hike rates just yet.

Another factor no doubt causing some angst in the corridors of the RBA is the continuing strength of the property market. Rising prices are usually a signal for rates to be increased.

Sydney's housing prices were up 6.6 percent in the first seven months of 2009 to $537,396, according to RP Data-Rismark’s Home Value Index. However, the market is still responding to the stimulus of the first home owner’s grant which begins to scale back from October 1.

Until the effects of the grant’s reduction from $14,000 to $10,500 for existing properties are known the RBA will probably hold off any decision to raise interest rates.

A growing number of forecasters are predicting the Australian economy will stage a recovery in 2010, albeit a modest one, and a too-early rise in interest rates could imperil this optimistic scenario.

Admittedly there’s little doubt that the RBA will increase its rate from the present record low sometime soon. This is unlikely to have much of an impact on the Sydney property market where rental yields are good and new housing construction is at historically low rates.

And despite several recent strong performances, the Australian share market is still awash with uncertainties about future earnings and the security of invested funds.

When your investment is in bricks and mortar you don’t have to worry about it disappearing into the corporate graveyard. You can choose to live in it or rent it out; with the present low cost of funds it’s possible to adopt either a positive or negative gearing structure depending on your financial position.

In the news recently was the Commonwealth Government’s ‘discovery’ that population growth would be much stronger than previously forecast. By the year 2050 there could be 34 million Australians where there are now just 21 million or so.

Even before this discovery the Housing Industry Association estimated the shortfall between underlying demand and supply of homes to reach 56,600 in 2009. Of an estimated 186,100 homes needed only 129,500 would be built.

The NSW Government’s Metropolitan Strategy, released in 2005, expects that the population of Sydney will grow by about 40,000 people per year. By 2050 Sydney’s population will have rocketed upwards, from the present 4.2 million to a possible 6.9 million.

Estimates for the shortfall in housing construction by 2050 vary widely, but it’s safe to say that unless there is a significant reversal of current building trends there will be massive unmet demand for accommodation throughout the greater Sydney region forty-one years from now.

Signs of unmet demand are already easy to see. Rising rents and property values are two good indicators, and we’re now seeing them across Sydney. What it will be like in 2050 is anybody’s guess, but a future of housing shortages is virtually guaranteed.

So why not buy a home? In the interests of journalistic balance, we’ll present a somewhat differing viewpoint from respected financial writers David and Libby Koch.

Writing in News Limited newspapers, David and Libby Koch say in their September 14 column that renting “...could be more lucrative than buying a home”.

They point out that Australian real estate is defying global trends. Residential property prices are 10-30 percent more expensive than the rest of the world, and a shortage of property has kept rents up.

They rightly say that buyers are faced with high property prices and banks reluctant to do their part in easing the property shortage. Their proposal is to rent a home rather than buy, and invest the capital difference elsewhere.

The Kochs say: “The key to this option is having the discipline to invest (and not spend) the difference between your rent and potential mortgage repayments on a similar property.”

They cite a university study that looked at investing $50,000 in a financial institution and renting a home versus buying a home with a $50,000 deposit.

The study found that buying a home is “...sounder financially, provided there is long-term ownership. It found the financial break-even point for continuous home ownership was 17 years.”

Up to that 17 year point renting could be a better financial alternative because tenants don’t have to pay the up-front establishment costs like stamp duty and legal fees.

It’s an appealing argument for short-term renting but raises the question of where one should invest all that freed-up capital? We know what’s happened in recent times to equity investments, and the performance of many superannuation funds has been badly hit by the GFC.

If, on the other hand, you were to rent a property as your home and were able to fund the purchase of an investment property, it could be financially advantageous. Crunching the numbers could give you an interesting option to consider.

And if you were to acquire a property in Sydney right now, what is likely to happen to its value in the very short term? The Spring Property Guide in the September 19-20 issue of ‘Domain’ in the Sydney Morning Herald has some interesting answers.

The Guide predicts the movement in median prices of housing over the next twelve months, based on figures from Australian Property Monitors. We’ll focus on the Lower North Shore for obvious reasons, but if you want to know about other parts of greater Sydney it’s all in the Guide.

For Neutral Bay and Cremorne the Guide forecasts an increase of 6-9 percent for houses and units. For North Sydney it forecasts an increase of 9-12 percent for houses and units, and for Mosman it sees houses increasing 12-15 percent and units increasing 3-6 percent.

The area’s hotspot is Milsons Point where units are predicted to rise by more than 15 percent, but there are good gains to be had across the Lower North Shore.

If BIS Shrapnel’s forecasts are accurate, these price rises in 2009/10 will be eclipsed in each of the next two financial years. Today’s Sydney real estate prices are without doubt tomorrow’s ‘good old days’ for value.

Lots of news in a new month
Thu, 20 Aug 2009

A month is a long time in today’s real estate market. Last month the Reserve Bank left its cash rate at a 49-year low of 3 percent, and RBA Governor Glenn Stevens was sending out messages that the rate would be likely to stay there for a while.

Well-respected ANZ economist, Dr Alex Joiner expressed a similar view: "Given the risks the economy faces going forward we believe interest rates will be on hold at 3 percent until late 2010."

But despite Dr Joiner’s expectations, this month it’s looking increasingly like interest rates will go up before the end of 2009, possibly by a ½ percent or maybe a dash more.

Supporting this is the August 15 warning by the RBA’s Governor that borrowers should be prepared for an eventual 2 percentage points increase in their mortgage repayments.

Not that this is going to have much of an impact on the present Sydney market.

Even before the start of the Spring season which is traditionally the time of year when aspiring vendors put their properties on the market, sales are strong and auction clearance levels are running hot – around 70 percent.

Even better is the news that the value of properties sold in the first weekend of August had risen from $70.4 million at the same time last year to a healthy $96.5 million.

A single weekend does not a market make, we must admit, but the key figures relating to Sydney real estate are trending upwards with no sign of abating just yet.

The Housing Industry Association’s Chief Economist, Harley Dale, said that the latest set of market statistics should remove any concerns about a possible drop in residential real estate such as happened in the USA and the UK.

"Very low variable mortgage rates, the First Home Owner's Grant boost, and attractive deals from volume builders have generated increased new home demand."

Reflecting this demand, the Australian house price index rose 4.2 percent in the June quarter. Sydney had one of the biggest house price index increases, up by 4.9 percent in the quarter.

As always, the amount of price increase varies depending upon the demand in a particular area. The upper north shore was Sydney’s strongest performing district during the June quarter, with house prices rising 8.9 percent.

Prices rose 4.2 percent in Canterbury-Bankstown and 3.1 percent in Sydney’s west. However, there was only modest growth of 1.1 percent in Sydney’s east and 1.7 percent growth in Sydney’s inner west.

AMP Capital Investors chief economist Shane Oliver said that the Australian Bureau of Statistics housing figures could well indicate that the Sydney market has bottomed out.

"It's confirming the information from the private sector surveys, which all suggest that house prices have bottomed out for now and are on their way back up again.”

The Australian economy may not be quite as buoyant as the real estate market. Economic forecaster BIS Shrapnel has forecast falling household incomes, rising employment and a 17 percent decline in business investment over the next year.

However, beyond 2010, BIS Shrapnel predicts a solid recovery with economic growth rising to 4 percent by 2011/2012.

On August 19 Olivier Blanchard, chief economist for the International Monetary Fund (IMF), declared that the global recovery is underway.

“The recovery has started”, he announced, warning however that the recovery will be slow and unpredictable.

Housing affordability remains a concern. In early August the IMF suggested that Australian property prices could be overvalued by as much as 20 percent. This doesn’t mean that a sudden drop of 20 percent in prices is likely anytime soon, if ever.

It’s clear that recent demand for affordable residential real estate has prompted buyers to pay thousands of dollars more than the advertised price for many Sydney properties.

This helps confirm that the actions taken by various governments to stimulate activity in the housing market have been successful, and that prices have been to some degree supported by these actions.

In recent weeks turnover in the middle to lower end of the market has doubled for many Sydney real estate agencies compared with the same time last year.

Many agents have reported stock shortages, prompting the Chairman of one national real estate group to comment in the Australian newspaper: "The stock shortages are as acute as any of us can remember. It has changed to a vendors' market, which was unthinkable six months ago."

There are some indications that the shortage of housing stock is being addressed with Australian building approvals showing their biggest increase in four years thanks to a number of new apartment projects. Approvals rose by 9.3 percent in June, outperforming market expectations of an eight percent increase.

But the housing stock crunch is a long way from over. On an annual basis overall building approvals are down 14.3 percent, and apartment building approvals are 45.7 percent weaker compared with a year earlier.

In this column a year ago we wrote: “Housing supply is short and demand for housing of all types is strong. There is a lag of at least two years before supply can begin to catch up with demand, and in the meantime prices of existing housing will level out and inevitably rise.”

And that’s precisely what happened.

Real estate is still the investor’s friend
Thu, 23 Jul 2009

As usual lately, news from the real estate market battlefront is mixed. Depending on which segment of the market one examines, the conclusions can range from pessimistic to optimistic and everything in between.

At the very top end the global financial crisis has taken its highest toll. Many of these properties were sold, often for greatly enhanced figures with regard to their previous sale prices, to players in the financial sector - merchant bankers, stockbrokers, currency traders and others whose lifestyles accelerated to match their burgeoning incomes.

Pressures from reduced incomes and margin calls have meant that the number of elite purchasers has dwindled. Until the economic recovery is complete this will be the place where the bargains are greatest – at least in dollar terms.

Elsewhere, in the market sectors with which most householders are more familiar, the news is much better. The reasons for this lie in the other factors that influence prices on the kinds of houses most of us think of when we think of ‘home’.

New construction continues to languish. Nobody has much faith in ‘build it and they will come’ at the present time, although the decline in housing construction does seem to be slowing slightly.

Nevertheless, new housing stock will be in short supply for years to come. The Australian Industry Group/Housing Industry Association Performance of Construction Index (or ‘the Australian PCI’ as it’s more commonly known) fell to 44 points in June, representing the 17th consecutive month of contraction.

Interest rates are still contained. The July meeting of the Reserve Bank of Australia resulted in the RBA leaving its cash rate at 3 percent. This is a 49-year low and analysts are mixed in their outlook for what the bank will do next.

They note the bank has ‘room to move’ and the RBA has suggested it may lower rates again in future. But whether the next move is going to be up or down is still fairly uncertain, and it won’t be a big move whichever way it goes.

Financial markets are predicting the official interest rate will start to move slowly upwards, pricing in a half-percentage point increase to 3.5 per cent by July 2010. Before then we could well see another small rate cut.

The Bank’s governor, Glenn Stevens, allowed himself to become fairly upbeat in early July when he gave his appreciation of global economic conditions.

“The global economy is stabilising, after a sharp contraction in demand during the December and March quarters. Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way.”

He was similarly positive in his comments on the real estate sector. “A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise.”

That other big competitor for investors’ funds - the share market, is up and down on an almost daily basis, awaiting leads from overseas or some other place where a direction can hopefully be discerned. Profit forecasts are generally down.

Many investors have cashed in what was left of their share holdings and transferred their investment capital into real estate, although a survey by research group CoreData found that seven out of ten retirees had not withdrawn the majority of their invested funds from the market.

Superannuation funds have announced their worst returns since super was introduced with most funds falling in value from thirteen to twenty percent over the past twelve months.

This has to be influencing disappointed investors, especially the baby boomers in their retirement phase, towards the acquisition of real estate to meet their needs for returns on capital. So what do property analysts think?

Alex Joiner, an economist with ANZ Bank, says that investors are likely to be considering re-weighting their portfolios from shares into property because they can buy in an area they know, at a good yield, with low vacancy rates.

Investors also seek capital gains. In its report ‘Residential Property Prospects 2009 to 2012’, researcher BIS Shrapnel concludes that although first-home buyer demand is expected to ease after the end of the Federal Government's grant scheme in December, upgraders and investors will pick up any slack in overall demand.

Matthew Bell, an economist at Australian Property Monitors, agrees. "For Sydney and Melbourne, I expect to see the unit median price grow moderately for the remainder of 2009, with stronger growth in 2010.”

The chief economist at Commonwealth Securities Ltd., Craig James, told the Sydney Morning Herald that the combination of low interest rates, tight rental markets and generous grants to first-home buyers has driven up house prices.

"Sydney and Melbourne dwelling prices are back at record highs while other capital city home prices are not far off peak levels.

"It is a simple case of supply and demand. Demand for homes is being spurred by improved affordability, the fastest population growth in 40 years and weak returns on other assets," he says, also noting the decline in new home construction.

According to property market research firm RP Data, Sydney house values rose by 5.1 percent in the first five months of 2009.

Louis Christopher, managing director of another researcher, SQM, says that we should ‘be careful’ of these figures because they can vary from one month to another, but he admits to being a bit surprised at the strength of the present market.

“These figures suggest that the market is holding up better than we all expected throughout the first and second sectors of the year,” he says.

Well, some of us expected the present conditions. We’ve been bullish on Sydney property for several months, and now we’re certainly not alone.

Without a doubt these are tough economic times and house prices have taken a battering, more in some areas than others.

As the recession enters its next phase, rising unemployment will have some impact on real estate prices. The number of people seeking to buy property may decline somewhat, and economic constraints could force some additional homes onto the market.

Sydney rent levels, reflecting the downward pressures on incomes and a transition of many tenants to homeowner status thanks to grants benefiting first home buyers, are stabilising and not likely to surge in the short- to medium-term.

But it’s no longer a matter of forecasting that housing prices may rise; they are rising across Sydney and have expanded upwards from the lower end of the market into the middle segment.

Even the upper end of the market is strengthening; multimillion dollar sales are starting to happen, although prices are nowhere near the peak of the market a couple of years ago.

Now is a great time to buy property. First home buyers, upgraders and investors are increasingly active, and even parts of Sydney that were formerly trending downwards have stabilised.

Giving appropriate weight to all the factors now at play in the Sydney real estate market, we say that we’ve weathered the storm and from here the only way this market will go is upwards.

Are we really moving forward?
Tue, 23 Jun 2009

It might be impolite to say “we told you so”, but we did. Admittedly, there were a few others who also said that real estate would lead the way towards Australia’s economic recovery in 2009, but six months ago there weren’t many willing to go very far out on that limb.

Having given those optimists a bouquet, we’re pleased to say that confidence in ownership of real estate is once again growing, both for property as an investment and also as the best means of providing a roof over our heads.

Across Australia property auction clearance rates have reached the mid 60 percent, and with the exception of the ‘millionaires rows’ at the very top end of the market we’re seeing growth return. The buyers are back with a vengeance.

So it looks like the worst is almost over and we can put those days of plummeting property prices behind us. Well, maybe not everywhere, but in Sydney it’s pretty easy to pick winners from losers.

Start with the Sydney market overall. Property analysts Residex have a way with words so we’ll quote them here: “Our predicted rates of capital growth are moderate with Sydney offering the best outcome.”

It’s not that the days of ten- or twenty-percent annual gains on property have returned, but those times were only a temporary paradise for speculators. For those who are serious about investing or about purchasing a home that will retain its value, today’s market conditions are a reward for patience - for waiting out the downtime.

Let’s give the government some credit where it’s due. The First Home Owners Grant has kept the pot bubbling when everything else, including the share market, was going cold. First home buyers are still borrowing at record levels, taking up 28 percent of the value of all housing loans.

Lower interest rates were the Reserve Bank’s contribution to ensuring the real estate market still had life in it. Rates are now stable and the only concern we have about that end of the business is the reluctance of the four big banks to resume lending at the level sought by the market, but they’re giving signals that they’ll lend more if they can pump up their interest charges a bit as they’ve done recently.

NSW Treasurer Eric Roozendaal has provided us with an incentive to buy a newly-built home with a 50 percent reduction in stamp duty on new homes worth less than $600,000 in the state’s 2009 budget.

This yields a saving of up to $11,245, but be quick. The discount ends December 31, 2009. And it doesn’t apply to homes purchased with the First Home Owners Grant, so the benefits will go mostly to second home buyers and investors.

The acting head of the NSW division of the Property Council of Australia, Angus Nardi, thinks the stamp duty cut, together with other government measures, will have a massive impact on the housing market. "I think the Government has implemented a handful of measures that should bring about a boom in the residential market," he told the Sydney Morning Herald.

He may be right, but both the First Home Owners Grant and the RBA’s rate cuts also have use-by dates. They’ll come to an end as activity in the real estate market is recovering. As Peter Icklow, CEO of property developers Monarch Investments, told the Australian: “First home buyers have had their opportunity. You can’t get $24,000 forever.”

So where do we think the stimulus will come from once the props have been removed? It’s an old story for those who’ve studied economics, but it never fails.

A shortage in supply provides support for prices. If a commodity like housing is in demand because everybody needs a place to live, those who want it have to compete with others who want the same thing. And there’s not a lot of housing stock to meet the demand.

But not everyone wants just a place to live. They want to live in places where there are good sources of public transport, schools, a trip to work as short as possible, access to retailers, and the availability of dining and entertainment amenities.
It is the suburbs that offer these amenities that will be the biggest beneficiaries from the resurgence in the Sydney real estate market. The first home buyers have just about had their day with the bottom end of the market. Now activity is moving up the housing chain.

Australian Property Monitors picked up the indicators of a market shift in the two months from mid-March to mid-April. Not only had auction clearance rates recovered to 2007 levels, but the numbers of properties sold from $700,000 to $2 million were significantly rising.

Property valuer HTW also commented on the growing strength in the ‘middle market’ – properties priced from $600,000 to $900,000 and up to $1.2 million in areas near the CBD: “Commonly we are seeing the natural progression of the first home buyer moving into the next bracket”.

This will have the natural consequence of driving Sydney real estate prices upwards - by how much is the only question. Research firm BIS Shrapnel recently forecast gains of 19 percent over the next three years, although this high rate of growth has been disputed by other analysts who forecast lower rates. Nevertheless, the forecasts all now say “growth” lies ahead.

There are lingering concerns about future rates of unemployment and their effects on the housing market but people with worries about their jobs have already taken themselves out of the market, and activity levels are still rising.

The present state of play clearly indicates that the peak of the crisis has passed. A measure of stability has been restored and both current rental returns and probable rates of future capital growth have real appeal for investors.

The demand for accommodation will continue as population growth, augmented by immigration, drives the quest for family homes, both separate dwellings and home units. All this is happening at a time when construction of new homes has reached a 50-year low.

The Sydney market is once again on the rise, responding to forces that are so familiar we might call them ‘historic’ or even ‘classic’, aided by helpful government support at both state and Commonwealth levels.

Are we really moving forward? Without a doubt, we are!

There's a lot going on
Mon, 25 May 2009

It’s been years since the property sector has enjoyed as much media coverage as it’s now receiving and, to put it mildly, the signals are mixed. Let’s try to make some sense out of a very complex situation.

We’ve seen that property prices can behave independently of other economic factors such as unemployment and inflation. Thanks largely to a financial stimulus from the federal and NSW governments, at least one segment of the real estate market is booming. This has impacted on a range of key market indicators.

We have to view NSW separately from the rest of Australia as the situation here is not the same as in other states and territories. There’s also the fact that Sydney is a large and diverse market comprised of several smaller localised markets.

So what do the experts say? The RP Data-Rismark national property values indices released in April showed Sydney house prices were up 2.39 percent overall to $565,928, and unit prices up 2.54 percent to $430,413.

But these findings were at variance with those of another prominent property analyst. Australian Property Monitors found that Sydney's median house price fell from $531,111 to $529,926 between December 2008 and March 2009, while the median unit price rose 1 percent from $364,314 to $367,751.

Let’s look ahead. Residex, another property analyst with a unique statistical model it applies to forecast price movements in the property market, said in its May report that Sydney houses are likely to have a higher rate of growth than is predicted for other cities.

“The Sydney prediction looks higher than intuitively seems reasonable, but given supply issues and history, it is a possible outcome. This would place the median value of a Sydney house in 2012 at something more than $700,000.”

Analysts do seem to agree on one thing. For those wanting to purchase a home Sydney is still a buyer’s market, except at the lower end of the scale – properties below around $450,000.

The extension of the Federal Government’s first home owners grant is one of the reasons for this situation. The package of government grants available to first home buyers created a surge in demand for this segment of the market and the number of properties on offer in this price range is decreasing as buyers rush to snap up what they perceive as the last of the bargains. Prices have risen accordingly.

It’s a different story at the top end of the market. A study by property analysts RP Data found that eight Sydney suburbs with a median home price of $1 million or above in February 2008 had dropped off the list of million-dollar suburbs a year later.

Macquarie Bank’s interest strategist Rory Robertson confirmed this, saying that the sharpest rates of price declines have been at the top end of the market. Cashed-up buyers in prestige areas have never had it so good!

In the mid-ground of the property sector sales results for homes priced between $500,000 and $1 million are mixed and largely dependent on their location. This is nothing new, and quality suburbs near the city have always outperformed those further from the CBD.

The point is here that there are properties within 10km of the CBD that commanded prices of more than $1 million just two years ago that are now available for much less. How long will this situation continue?

Property prices are becoming more affordable relative to income. Reserve Bank figures show that a typical Australian home is worth a little more than four times the average household's annual after-tax income, compared to almost six times five years ago.

RBA Governor Glenn Stevens said he believes that this means Australian house prices are not heading for the same kinds of dramatic price falls seen in the US, UK and other countries.

He told the Sydney Morning Herald: "In Australia's case, the ratio of the median dwelling price to average household income has declined quite noticeably since 2003, without a very large absolute decline in housing prices.” But property prices are, as always, just part of the picture.

The RBA concluded in its May meeting that further interest rate cuts weren’t needed as an economic stimulus. Their view, although not saying the worst is over, at least suggests the RBA feels that the downturn is nearing its bottom.

However, the rate of unemployment is a long way from its peak. In April there was a decline in the official unemployment figures, down to 5.4 percent from 5.7 percent in March. Analysts were in general agreement that this was only a statistical blip and that we’re still headed for a figure around 8 percent or above over the next twelve months.

Mortgage interest rates are now at their lowest since the 1960s. Not surprisingly, the RBA noted that personal loans and loans to businesses were still weak, but loans to property buyers continue to increase.

There was more good news for market watchers. Retail sales rose 2.2 percent in March as consumers responded to sales and spent $19.3 billion for the month. Australia’s trade surplus grew to $2.5 billion in March, reflecting a continuing strong demand for Australian resources despite the global economic slowdown.

The Australian share market followed the lead of its US counterpart where stocks surged to their highest levels in months. Australian shares have been bolstered by economic data from China that suggests a recovery in both raw materials purchasing and domestic consumption may be underway.

Which raises the bigger question: When will the world recover from the much talked about Global Financial Crisis? Let’s take a look at one US corporation that may give us an indication.

Cisco corporation makes computer networking equipment. Their leadership position in the global market makes them, in the words of Ken Dulaney, Cisco analyst at Gartner Consulting, "a good bellwether for the economy because they are so dominant in their space."

Cisco chief executive John Chambers said recently: "For the first time in many quarters, many of our global customers are describing business momentum and seeing stabilisation. We are going to be very aggressive this year to position ourselves for the eventual upturn."

How does this relate to real estate prices in Sydney? When the world’s economies recover Australian businesses will recover, manufacturing activity will increase and employment will rise. The return of prosperity will, as always, drive up the price of real estate.

US Federal Reserve head Dr. Ben Bernanke holds the view that 2009 will see the end of the Global Financial Crisis: "We continue to expect economic activity to bottom out, then to turn up later this year," he told a Congressional panel.

It’s still too early to blow the economic all-clear siren. As Gail Kelly, CEO of Westpac said recently, “When the recovery comes, it is likely to be slow." But it has to start somewhere.

As we said earlier, the signals are mixed. Some are positive and some are negative, and some are based on either hope or pessimism without much evidence to show they’re pointing toward a particular direction.

We remain confident that the recovery in the Sydney real estate market is already underway. The eventual termination of the Commonwealth’s ‘boost’ to the first home owners grant will naturally have an impact on sales, but it’s fulfilled its purpose and kept the market ticking over at a time when it would probably otherwise have stalled.

The share market is showing the beginnings of a recovery, although investors are justifiably cautious about trying to pick winners from among listed companies.

At this stage of the proceedings real estate prices remain affordable and interest rates remain low. There’s a good range of properties on offer for those wishing to acquire an investment or simply to upgrade their housing arrangements.

There are also good levels of demand out there for property that’s priced sensibly with regard to its location.

When the global economic recovery is fully underway property prices will respond by rising swiftly. Our recommendation: Now is the time to buy, before all the news is once again good news.

Where to from here?
Thu, 23 Apr 2009

The package of grants for first home owners has had a massive impact on the Sydney real estate market, not the least of which has been a contribution to higher house prices.

Back in 2007 before the Rudd government won the Federal election the ALP released a discussion paper that quoted the ANZ Bank’s Chief Economist, Saul Eslake. His statement was: "Anything which puts additional cash in the hands of buyers … results merely in more expensive houses."

Regardless of their pre-election positioning, after the election the Rudd Government increased its first home owners grant and the rest is history.

Last October, the Federal Government doubled the first home owners grant to $14,000 for existing homes and tripled the subsidy to $21,000 for newly built dwellings.

So, despite the worst economic crisis in our history, the lower end of the housing market displayed a Lazarus-like recovery well ahead of other segments of the economy.

As we know, supply and demand have a deeply meaningful relationship. As demand for properties increased – most noticeably for 1- and 2-bedroom units anywhere within cooee of the Sydney CBD, so did the prices people paid to acquire them.

But 2008 Sydney housing prices weren’t nearly as unhealthy as those in the US and UK where owners had seen 20 percent or more of their value slip away.

Across Australia the drop was only around 3 percent in 2008. Housing Industry Association figures since the start of 2009 have shown that Australia’s enjoyed a monthly increase in the sales of new housing; new home sales in New South Wales rose 11.17 percent in February.

The shortage of available homes, estimated at 70,000-80,000 by the HIA, ensures that the price of housing will remain relatively high compared to other markets where housing has been overbuilt and supply exceeds demand.

The Reserve Bank of Australia has weighed into the housing battle with its own economic stimulus of a series of lower interest rates, effectively reducing the costs of property ownership and making ownership of property even more desirable.

Doesn’t all this mean higher prices for real estate generally? To be blunt, not everyone thinks so. Associate Professor of Economics, Steve Keen from the University of Western Sydney has gone on record predicting a fall in housing prices of 20 percent.

Certainly some areas have been hard-hit by price falls, particularly those on the fringe of our capital cities. The Blue Mountains and the Central Coast are two markets that rode upwards on the coattails of the Sydney property boom and fell very quickly once the upward thrust began to weaken.

Even metropolitan area blue-ribbon suburbs have seen some properties that sold for several millions two or three years ago drop a half-million or even more. The first home owners grants don’t have much of an impact on the top end of the market, regardless of where a property’s located.

However, overall industry figures show that across Sydney the market for any well-located apartment selling for between $500,000 and $1 million is strong and getting stronger. Consequently, prices are rising and this trend will continue well into 2010.

In late April 2009 a study released by the Australian Property Institute showed that property professionals believed Sydney’s residential sector would be the first to rise above the recession, and that all categories of property across Australia will be rising in value by 2011.

The president of the API, Robert Hecek, indicated that he believed in Sydney at least we’re nearing the bottom of the downturn.

This ties in with the opinions of market analysts Residex which said in its April report: “The Australia wide trend is encouraging and appears to be presenting as if we have moved past the worst period of correction.”

Residex went on to say: “At last our markets look as if they are moving to moderate growth", pointing out that Sydney was “...further along the adjustment path than some other states.”

Concerns about rising unemployment linger, but there are several economic analysts worldwide who now say the global financial crisis will have less impact and be of a shorter duration than previously thought.

So although nobody’s yet quite brave enough to make a declaration that the Sydney housing market has reached the absolute bottom, it’s hard to find any other way to interpret the present set of economic indicators.

If this isn’t the bottom it’s just below us, and to us the future seems clear. Whether you want to acquire a property for the purposes of investment or to upgrade your present living arrangements, this is the time to start looking for it. Conditions for buyers have never been better.

We live in interesting times
Wed, 8 Apr 2009

One of the major developments this past month has been the release of figures from Housing NSW proving that it’s now cheaper on a monthly repayment basis to purchase a property rather than pay rent.

The investor’s favourite – a two bedroom unit, was used to compare sale prices and rentals, and while rents have risen 14.3 percent, prices have fallen by an average 7.2 percent.

NSW Housing Minister, David Borger, summed up the situation: “...21 of the 43 local government areas (LGAs) in Sydney recorded annual [rent] increases of 10 per cent or more, representing over half of the two-bedroom units available in the rental market in Sydney.”

As we’ve mentioned in previous articles, a shortage of rental properties is behind the increase in rental costs. A growing number of prospective tenants chasing a shrinking number of rental properties will always mean growth in rents.

Governments are doing what they can to encourage people to purchase a place of their own. State and federal concessions and grants provide first-home buyers with assistance worth up to $42,000 for a newly built home, and up to almost $32,000 for an established home.

$8 billion of new home loans were taken out in January this year, and at least $2 billion of this went to first-home buyers. However, despite the success of the scheme, the Rudd Government still says it intends to end its first-home buyer's grant when it’s due to expire on June 30.

While the demand for properties is surging, the replacement market isn’t responding quickly enough. Approvals for new homes have continued to drop and monthly building approvals haven’t increased since June, 2008.

January figures showed that new home building approvals were down 3.7 percent, seasonally adjusted, after a 1.9 percent decrease in December, according to the Australian Bureau of Statistics.

BIS Shrapnel figures show that the number of apartments and townhouses abandoned or deferred in Sydney between January and July 2008 was 4072.

More telling is that between August 2008 and January 2009 this figure accelerated to 5326, taking the total of deferred or abandoned apartments and townhouses to nearly 9400.

Incredibly, more homes will be built in Adelaide than in Sydney in 2009. The Daily Telegraph says that an estimated 7300 new dwellings will be built in Sydney this year which is about a third of the homes built in 2003.

An economist quoted in the newspaper said that Sydney rents could rise a further 12 percent in 2009, on top of last year's rise of 8 percent. This will place additional upwards pressure on property values.

Although the Reserve Bank kept interest rates unchanged in its March meeting, many economists are predicting a further cut of at least half a percent in April that will specifically attempt to stimulate the construction sector.

Analyst Anthony Thompson from Westpac Economics expressed a degree of optimism in his bank’s newsletter: "Overall, we still expect approvals to recover over the course of 2009 in response to the RBA's aggressive interest rate cuts and fiscal policy initiatives.”

He then added a note of caution: "But the extent of the continued weakness points to a bigger hole in dwelling construction over the immediate short term and downside risks to the 2009 outlook."

Sydney’s property auction clearance rates have continued strong since the RBA’s last interest rate cut gave investors a signal to buy, although the number of properties sold is significantly lower than at this time a year ago.

Take a look at real estate auctions in Sydney and you’ll see where buyers are focusing their interest. The competition is fierce and results above reserve prices are common.

Investors have the advantage of tax-deductible interest and other outgoings, while private buyers are encouraged by first home buyer’s grants and the state of the rental market. The action at most property auctions is fast and furious when it comes to the 1-bedroom and 2-bedroom units on offer.

But unlike the rest of Australia, New South Wales showed a decrease of 5.8 percent in sales of detached homes. Investors, who have so far been the winners at recent property auctions, prefer units and it shows.

Real estate analysts Residex say that Sydney: “...presents as being the market which is further along the correction phase than others and is definitely trending to positive growth. Our predictive models suggest it has the best potential in the medium term.”

The guarded confidence expressed by Residex is supported by the current mini-boom in property prices in Sydney’s West. Suburbs like Campbelltown and Fairfield have recently attracted so much buyer interest that prices have risen 20 percent in the first three months of 2009 when compared to the same three months in 2008.

You don’t have to go West to find examples of a recovery in the property market. The top price paid in Mosman so far this year has been $13.5 million for ‘Curraweena’, a residence in Clifton Gardens. Nine prestige house sales above $3 million have already taken place in Mosman since the beginning of 2009.

This isn’t to say it’s all roses at the prestige end of the garden. Figures from Australian Property Monitors figures show there are fewer new houses and apartments coming onto the market, particularly at the top end of the price scale.

To understand the present demand we need to look at the players competing in Sydney’s current property market. First, we have the seasoned property investors who always look for quality properties with good rental returns.

Next, we have the more generalised investors who’ve sold out of the tumbling share market and are also chasing something that gives them a return on their investment capital. Property beats wondering whether a dividend of any sort will be paid in 2009.

And increasingly joining the investors are the current tenants, including legions of first-home buyers with thousands of dollars in government grants, who want to escape the rent trap and acquire a home of their own.

First-home buyers, tenants and investors are mainly interested in properties that are priced below the $600,000 level. Properties over $1 million aren’t yet attracting a great deal of interest.

There’s another factor to consider - the spectre of unemployment. Now at a rate of 5.8 percent in NSW, the official outlook is for unemployment to increase to around 8 percent within 12 months.

Economists from investment bank JPMorgan have even forecast the unemployment rate to rise as high as 9 percent by the end of 2010. And in the second week of March the ANZ survey of combined print and online job ads dropped 10.4 percent, the biggest drop on record.

Unemployment, and shorter hours of work in general, will affect the ability of many people to participate in the real estate market. It will force sales of properties and reduce upwards pressure on rental rates.

In earlier times this would’ve been a more significant factor in determining whether the Sydney property market would recover or remain in the doldrums. But these are not like earlier times. They are times we’ve never seen before.

Real estate of all types has acquired a widespread level of desirability we’ve never experienced, for investors, tenants and owner-occupiers. Property affordability is high, while interest rates have reached historic lows.

Market activity is beginning to spread upwards from the lower end of the market into the middle price ranges. We believe that property will be the first sector of the Australian economy to recover from the global economic crisis, and as we see it, the beginnings of this recovery are already happening.

The end or the beginning?
Thu, 26 Feb 2009

We’ve been bullish on Sydney property for several months, forecasting an investor-driven recovery that would see funds move from the sharemarket into the real estate market and have a positive impact on property values.

There are already encouraging signs that the predicted recovery is beginning, although only in certain segments of the market. Whether this is a signal that the bottom of the market has been reached is yet to be determined.

Nevertheless there are indications that Sydney property is about to begin a new upwards move in its historical cycle.

First, a bit of background. The total adjustment of 3.75 percent in Reserve Bank interest rates over the past five months represents a reduction of nearly 50 percent from the peak rate of 7.25 percent in March 2008.

Investors who function on borrowed money naturally respond to interest rate cuts as lower interest rates mean a better return on investment. But wait, as the man said on TV; there’s more.

Investors traditionally look for rental properties in the lower price range where capital growth can be achieved at the same time as consistent rental income. They look for low-maintenance properties in established areas served by public transport and other amenities including shops and schools.

Suddenly there’s a competing force out there, looking for exactly the same thing. First home buyers, inspired by lowering interest rates and government grants that can mean up to $21,000 off the cost of their property, are flooding onto the market.

Australian Bureau of Statistics figures show that first-home buyer activity has increased significantly. 14,154 contracts were signed in December, up 21.3 percent on November and showing the highest number since December 2001.

Young couples, with no children but possibly intending to have them in a few years, want to buy a home of their own and get out of paying rent. They aren’t looking for their ‘dream home’ just yet but realise that getting a foot into the property market now is a good way to build up some equity for their next purchase when they move up to something larger.

Auction clearance rates, languishing well below 50 percent in recent months, have skyrocketed upwards, hitting nearly 70 percent in mid-February. The majority of properties that have sold quickly (and at better than reserve prices) have been the objects of spirited bidding from both investors and first home buyers.

Statistics show a market that’s on the move upwards. There are some important factors that could still derail, or at least delay, the speed of this movement and in the interests of realistic analysis must be incorporated into any real estate strategy.

The first is the reluctance being demonstrated by Australia’s big four banks to release loan funds despite having been effectively bailed out of multi-billion dollar holes created by their own lax lending policies during the previous five or so years.

Until the institutional taps open up, the flow of funds to the market will be inadequate to sustain a widespread property market recovery.

The second area of concern is the anticipated rise in unemployment. Official figures estimate an additional 300,000 Australians will lose their jobs, meaning unemployment will rise above 7 percent for the first time in decades.

This will diminish the ability of many workers to pay rent, and remove a high percentage of them from the lists of homeowners as they sell properties to make ends meet.

However, rental rates are already stabilising and there is an ongoing strong demand for rental property of all types thanks to a massive reduction in new home construction over the past three years that shows no signs of ending.

The government is pressuring the banks to be more flexible in their lending practices, and in fact the big banks know that unless they respond to a demand for loan funds their own returns will suffer.

The middle and upper segments of the Sydney market are noticeably not yet participating in the current trend upwards. The multi-million dollar properties at the top of the market, from Palm Beach to the Eastern Suburbs, are being especially heavily discounted from their peak of a few years ago.

Houses in parts of Sydney’s western suburbs that were overbuilt without regard for transport infrastructure are also slow in recovering to anywhere near their temporarily high peak price levels, and this condition is likely to persist for some time.

Despite high auction clearance rates, the total number of properties sold since the start of 2009 is less than half the total sold in the same period of 2008. The market has some way to go before the crucial middle-market properties begin changing hands in large numbers.

Nevertheless, history shows that cycles generally begin at one end of the market and spread outwards to other segments. For investors there’s not much of an option to property.

The sharemarket has continued its downwards trend that began in 2007 and shows no signs of bottoming out. New lows are reached each week and the best the Australian market can do is to follow the leads from Wall Street as share prices flounder in a morass of uncertainty.

As for profits, the reporting season has brought only downgrades and greatly lowered expectations for most of Australia’s blue chips, with a staggering number of formerly ‘big names’ in the hands of administrators or receivers. Or in some cases, sold off to overseas investors at highly discounted rates.

For all the above reasons, Sydney property – in the right areas, retains our recommendation as the best place to place your investment funds.

There is an historic relationship between share values and Sydney property prices. The Sydney property market enjoyed an annual growth rate of nearly 20 percent for the two years following the share market slumps in 1987 and 2000 as investors shifted their funds into property.

As always, successful real estate investing is a matter of geography and timing. But as every student of the Sydney market knows, a recovery has to begin somewhere and it is not usually across the entire market.

Those investors who pick the beginning of the recovery are first in and get the best outcomes. It’s worth taking a serious look at the current market and making up your own mind.

Is this the end of the slump? Probably not yet. But is this the beginning of a new cycle? We’d be very surprised if it isn’t.

Conditions favour investors in today's market
Thu, 5 Feb 2009

In previous articles we’ve spoken about the real estate market becoming more favourable for investors. These conditions have continued into the start of 2009.

Australian Property Monitors report that weekly rental prices for Sydney houses rose 16.9 percent in the twelve months to December 2008, and now average $450 per week. APM also noted that weekly rentals for home units had levelled out at $400 per week for the third consecutive quarter.

There are indications that the market is nearing rental price stability, largely as the result of deteriorating economic conditions and the probability of rising unemployment.

However, rental homes within 10 kilometres of the CBD are in short supply with fewer available now than there were three months previously, according to the Real Estate Institute of NSW.

The underlying factors of high demand for rental accommodation coupled with a severe downturn in building activity now serve to make real estate a much more attractive investment than options such as shares.

“Buy low; sell high” is always good in principle, but determining the “low” time in real estate isn’t always easy. However, consider this: Overall, Sydney house prices fell 4.2 percent in the past year. APM figures show the rate of fall slowed to just 0.7 per cent in the December quarter.

Some of the biggest price declines have understandably been in areas that enjoyed the highest rates of growth in the boom times, including the Lower North Shore and the Eastern Suburbs. At current prices the “low” of the cycle can’t be far away!

There is an interesting historic relationship between share values and Sydney property prices that supports this viewpoint. In recent times shares have twice experienced a sharp decline in value – in 1987 and 2000.

After each of these declines in share prices the Sydney property market enjoyed an annual growth rate of nearly 20 percent for the following two years. Investors considered their experiences in the share market, analysed their risks and returned to property for predictable returns and capital growth.

Over the past five years we’ve seen the Sydney market underperforming its long-term average rate of growth by a fairly large margin. There’s every reason to expect that when the next real estate price breakout happens Sydney property will surge.

When will the next surge begin? Interest rates have continued to fall and the Reserve Bank is forecast to reduce the prime rate further in the near future.

The reduced cost of servicing a property investment makes it increasingly attractive and stimulates demand. With stable market conditions, the timing to position yourself for the next surge couldn’t be better.

Choosing the right investment property for your own individual circumstances is a complex decision. Even at this early stage it pays to seek competent, professional advice on what you can afford to invest. Once you have a target acquisition price you can begin to consider properties on offer in the current marketplace.

One of the biggest questions investors face when looking at buying an investment property is: "Where should I buy?" There are no geographic restrictions on the location of an investment property, although many investors prefer to own something in an area with which they’re familiar.

Look at historical data for each location and consider the pattern of capital growth over the previous ten years. You’re seeking long-term capital growth that will add value to your investment over time.

The next question to answer is: “What should I buy?” Houses are a possible answer, although they generally deliver lower rates of return after expenses than apartments. Buying a newer apartment can also be advantageous to your taxation position because of depreciation entitlements.

Look at other properties in the area, consider the amenities available such as shopping and restaurants, and make sure that services including public transport and schools are accessible to the property.

Another question you’ll need to answer once you’ve purchased the property is: “How should it be managed?” You may choose to be your own property manager, in which case you’ll need to know how the professionals do it. Or, you can appoint a professional to look after the management for you.

All decisions regarding an investment property must be made unemotionally and based solely on the facts relating to it as an investment. Get the best advice, purchase the right property for you and you’ll discover what thousands of other property investors have learned – it’s the most dependable long-term investment you will ever make.

Renovate and appreciate in 2009
Wed, 21 Jan 2009

If you’ve been thinking about doing some home renovations, this is going to be a great year to have them done. Interest rates are low and likely to get lower, while the general decline in homebuilding activity means there’s a lot more tradespeople available to do the work.

Even better is that the decline in fuel costs has flowed onto the costs of building materials including bricks, concrete and steel, so the raw ingredients for your renovations are likely to cost less than they would have a year ago.

Renovations let you get more enjoyment out of the home you know and love. If you renovate with some forward planning in mind you can even recover some or all of the costs when you eventually sell your home in a few years time.

One big danger associated with home renovations is the possibility of overcapitalizing your piece of real estate. Quite simply, if you spend too much on renovations you may never get it back.

The worst house on the best street in town could add value from renovation, while renovating the best house on the worst street will definitely risk overcapitalizing the property.

It’s not just tradespeople that have time on their hands either. If you want the services of an architect to design your renovation, they’re a lot more available (and affordable) than they were not long ago. It’s a buyer’s market and you’re in charge!

An architect can give you a ‘master plan’ that you can work to in stages, until you eventually have just the home you want without having to make a huge commitment all at one time.

Renovating can be as inclusive as you like. Think about your home and what you’ve always enjoyed about it. Start with the positives and be aware that you want to retain the features you like most. Now, you can think about what you want to change.

The great outdoors is a good place to start. Modern architecture trends towards a blending of outdoor and indoor areas. Buyers see the outdoor areas when they view a home for the first time, and first impressions really do count.

A complete garden makeover can update your whole house, and using Australian natives creates a beautiful garden that’s also drought-resistant and beautiful all year round. Landscape gardeners won’t have as much on their plate in 2009 so you may well be pleasantly surprised at how little it costs to renovate your own bit of outdoor Australia.

Extra bedrooms are another proven way to add value to a home. Modern homes have more and bigger bedrooms than those of twenty or thirty years ago. This means choosing between extra rooms on ground level or adding an extra level, which is a decision an architect can help you make.

According to renovation specialists Archicentre, these are the’ Top 10’ improvements, other than the garden, that you can do to your home:

Adding a deck
An ensuite bathroom
Walk-in wardrobes
Replacing kitchen cupboards with drawers
Frameless shower screens in bathrooms
More garage storage
A large island bench in the kitchen
Adding a storeroom
Building a built-in barbecue
A pergola

This is in no particular order, but it’s a good ‘shopping list’ to think about while you’re outlining your renovation project.

There’s also things like an attic conversion that adds usable space to the home without the need to build an extension. Pull-down step ladders give access to space that’s currently unused, and they don’t take up any floor space when they’re retracted.

The most important consideration of all is your lifestyle. Make your home even more enjoyable for you and your family. If you place yourself in the position of a prospective purchaser, you’ll also have a more realistic guide to the renovations that give you pleasure while adding buyer appeal to the property.

A big rule is to not go overboard on anything. Whether it’s the colour of the paint or the style of the light fittings, avoid eccentricities. Stick to the basics, or be prepared to change them when the time arrives to put your home on the market.

Work to a plan. Don’t do a bit here and a bit there. Have an integrated design for your renovated home and work towards it. You may not be able to do everything at once, but have a plan for what you’re going to wind up with.

If you’re not ready to downsize, this is the ideal time to renovate your home. It’s the best way to improve your lifestyle while ensuring you get your money back when you sell the property.

Buy now? Sell now? Why not?
Wed, 17 Dec 2008

As 2008 draws to a close, who could have imagined the breadth and depth of the economic disaster now upon the world?

Who would be game to predict the after effects of some of the world’s major financial institutions collapsing, ‘trusted’ funds suddenly finding that billions of dollars have gone missing, and the value of commodities like copper and zinc finding lows not seen in decades?

It’s taken us all by surprise and we must accept that it’s not over yet. 2009 will be a challenging year, with rising unemployment and a decreasing GNP for Australia. And of course, we’re just part of a world in which everyone is facing the same decline in their economic indicators.

The first thing to say is that property is not immune. The Real Estate Institute of Australia’s September quarter median prices showed a downturn in demand on residential property in all Australian capital cities.

It is however interesting to note that Sydney continues to have the most expensive residential property, with a median price of $529,000.

Is the downturn nearing an end? Probably not but there are encouraging signs of an upturn in the making. One is the Reserve Bank’s recent lowering of the cash rate to 4.25 %, and analysts agree it could go even lower early in the new year.

Figures from Australia’s largest mortgage broker, AFG, showed that NSW first home buyers are returning to the market. November's loan approvals were up 113% on August. In the October quarter Sydney house prices gained 0.51 per cent; not a huge rise but at least a step in the right direction.

"The property market has moved through the bottom of its cycle," said RP Data's head of research, Tim Lawless.

Rory Robertson of Macquarie Group said: "Most households are more influenced by mortgage rates than by equity prices, which is the big trauma at the moment." Mortgage rates are dropping and property prices are at least stabilising, but that doesn’t mean the property market’s pain is all over.

But the value of all capital items is falling, from shares to property to structured investment funds. You want security; you want capital gains. Where do you put your money in times like these?

Property prices have generally declined. This is to be expected, even in desirable areas like the lower north shore. "Suburbs that have risen the most (in value) have the most to fall," says Liam O'Hara, senior economist at Australian Property Monitors. "If the economy starts to tank it's the wealthy areas . . . where homeowners are going to take the biggest hit."

But Australian property values fell just 0.8% over the year to October, 2008. In the same period the drop in the value of the typical superannuation fund is something like 39%.

Median Sydney house values have only dropped 2.7% in the past 12 months, while the share market has dropped 40%.

It’s also an interesting time at the real estate auctions. There’s always a fall off of interest at the end of the year, but this year is producing decreased clearance percentage figures, probably because there is a fairly large number of properties on the market while the buyers are holding back for further price drops.

While supply is greater than demand it’s always a good time to buy. It’s also a good time for realistic vendors to sell their property because the buyers in market are serious and not just tyre-kickers.

Prices could drop another 5% or a bit more overall, but choice properties are already being snapped up and investors are actively looking for properties that will provide them with good returns. In fact, a property on the market that doesn’t drop its price for a quick sale could be the best one to consider.

There are some other pieces of good news. ABS statistics showed that the number of home loans for owner-occupied housing rose 1.3% in October, which was the highest level all year.

We must now return to a few basics. In the greater Sydney area sufficient new housing isn’t being constructed to meet the demand caused by immigration and population growth. Buyers are also returning to the market which will increase the demand for housing.

Our investment choices are becoming restricted. Promises of high interest and big returns from hedge funds and other structured investment vehicles have proved illusory. The value of shares listed on the ASX has declined 40% in the last year and their recovery to previous values may take years, if they can acquire the capital they need to survive.

There are several properties now on the market – quality properties with the most desirable features, which are being sold because their owners are financially stressed. The cashed-up prospects attracted to this market are seeking value and genuinely want to make a purchase.

We believe this is one of the best opportunities to buy or sell a quality property. This is a selective market, not a mass market.

There are those who believe economic conditions have never been better. Interest rates are low, property prices are affordable, rental rates are strong, and real estate offers investors an unequalled opportunity to place their funds with low risk and good returns.

Rare times indeed. But no better time to be a vendor or purchaser in these market conditions that we’ve never seen before.

Forecasting without fear - almost
Sat, 15 Nov 2008

There’s probably never been a more difficult time to produce an economic forecast. With variables that include the Reserve Bank’s future interest rates, the price of petrol and the financial performance of companies listed on the Australian Stock Exchange – let alone the murky depths of global financial markets, accurate forecasting would appear impossible.

Nevertheless, it’s worth giving it a try. Those who correctly anticipate and act on fiscal developments in the coming months will benefit from unparalleled investment opportunities that exist right now, even if they’re difficult to spot in all the clutter.

Prices of Sydney real estate have become more affordable. The median house price is now 6.5 per cent below its March 2004 peak of $568,500. One indication that the bottom is rapidly approaching is that the decline in Sydney’s troubled west and south-west was less than the overall Sydney decline of 3.1 per cent in the past twelve months.

First home buyers are receiving even more incentives to purchase real estate. The NSW Government recently increased its first home owner's grant for those buying new dwellings by $3000, bringing the total of grants for eligible first home buyers to $24,000. At the very least, first home buyers receive $14,000 from the Commonwealth Government for an existing home after the grant level was doubled in October.

Interest rates are falling and there’s an expectation of a further reduction in the RBA’s official rate when the bank’s board meets on December 2. Investors whose fingers were burnt by rapid rises in interest rates in the previous three years now have the option of fixing their interest rates at relatively lower levels, thus removing the concerns caused by unexpected increases.

To quantify the relief property owners have already received, since September the interest cost of a $350,000 variable rate investment loan has been reduced by nearly $550 per month. This reduction could become even greater if the RBA cuts its rates by another 0.75 points, bringing the cash rate down to a historic low of around 4% next year.

A continuing situation of growth in demand for housing and lack of a corresponding growth in supply will inevitably drive prices upwards. Craig James, a financial analyst with Commonwealth Securities Ltd., cautioned that the real estate market could turn around very quickly. "Not only is population growth the fastest in 20 years”, he said, “but the rental market is super-tight and there's an under-supply of new homes."

There are always countervailing factors that could inhibit such a turnaround. Australia’s growth rates are linked with those of our overseas trading partners, especially China’s. As this regional powerhouse economy slows it will certainly have an effect on our own.

If Australia’s economic growth continues to decline and this translates into higher unemployment it will impact upon the demand for property but the Commonwealth Government appears committed to providing whatever fiscal stimulus and monetary policies are needed to stave off recessionary conditions.

Most real estate analysts agree that the Sydney property market is still over-inflated. However, there is no general expectation that prices will experience any further significant reductions. Because supply of new housing stock continues to fail to meet demand, a ‘floor’ has developed that seems likely to represent the new level in the graph of historically-rising real estate prices over decades.

Our view of Sydney real estate is that prices will continue to stabilise over the next six months, perhaps with further modest decreases but with no dramatic declines. Interest rates will continue to fall and demand for rental accommodation will remain at high levels.

Investment options including shares and financial products will remain volatile for at least the next twelve months due to continuing uncertain economic conditions, and investors will return to property where they can generate capital gains and rental income with renewed confidence.

Spring projects around your house
Thu, 16 Oct 2008

Ah, spring! The days get longer and the weather gets warmer. This spring do more than just a tidy-up. Here are some projects that every homeowner should do once a year but often doesn’t, and when you’ve finished this list your home will be a much more enjoyable, livable place.

Clean those ceiling light fittings

Look up and count the dead insects in those ceiling fittings, not to mention the dust that collects in them too. For this job you’ll need a sturdy stepladder and a good sense of balance. Take all the glass elements down and wash them before replacing them. Wipe down all the metal components with a soft damp cloth. While you’re doing this, replace any burnt-out globes or fluorescent tubes. Your home will be brighter and look a lot better.

Clean the air conditioning intake filters

Often overlooked, the filters on the air intakes of ducted air conditioning systems can become so clogged with airborne dust they cause the unit to shut down. Most filters can be easily removed and taken outside for a thorough cleaning with a garden hose. Dry them thoroughly before replacing them and using the system again.

The great battery changeover

Go through your home and make a list of everything that has a battery, together with the battery sizes and quantities. You’ll be surprised at how many there are. For starters there’s the doorbell, TV remotes, wall clocks, smoke alarms, backup batteries in alarm clocks, torches and lanterns. Unless you know you’ve just changed a battery in the past six months, replace it.

Clean out the gutters

It’s never fun but it’s best to beat the bushfire season. Clear all your gutters of debris and check for any corrosion or loose fasteners. Use the garden hose to flush out downspouts. Be careful when clearing birds nests or wasp nests; the former can house bird lice and the latter can be very painful.

Clean the kitchen exhaust hood and filter

Most kitchens have a ventilation hood over the stove, and these can trap so much cooking grease that the fan’s efficiency is affected. Remove the filters and wash them thoroughly in a grease-cutting detergent. While you’re there, inspect the light globes and replace any that have burned out.

Check your water heater

Operate the relief valve for at least ten seconds to flush out anything that’s built up in there. Check around the base of the heater for corrosion or leaks. Whether gas or electric, every water heater has a label that tells you the date it was manufactured. If your heater is more than seven years old chances are it needs to have its protective anode replaced, which is a job for your plumber.

Open every window in your home

Most homes have windows that are never opened, and others that aren’t opened except at certain times of the year. Over time these can become stiff or even impossible to open. Go thorough your home, open every window and clean thoroughly around the frame. Oil any hinges and ensure handles turn freely. Vacuum dirt and dead insects from all slides and drainage channels, and while you’re doing this you might as well clean the glass too.

Residential property is still a great investment
Mon, 25 Aug 2008
We're now two months into a new financial year and hearing quite a range of opinions about where to invest one’s savings. Many advisors have of late been spruiking cash because they’ve seen the share market plummet and some of the heat go out of the property market.

However, residential property in good locations has always been a more secure buffer against the volatility of the share market than keeping wealth in cash, as well as being a much safer investment than speculating in risky structured investment vehicles like Contracts for Difference or trading futures or currencies.

If prices have softened somewhat, and we can assure you that in places such as the lower North Shore, the Inner West and the Eastern Suburbs there aren’t many properties on the market that will bring less than they did two or three years ago, it only means that we’ve entered a period of stability which presents buying opportunities that weren’t as easy to discern in 2006-2007.

A recent study by property market experts RP Data & Rismark International concluded that Australia’s residential property values had actually held steady during the first five months of 2008. During the same period they point out that the S&P/ASX 200 fell by 10.8%.

Interest rates now appear to have peaked and the Reserve Bank’s sending signals that indicate at least one rate cut before the end of the year. The minutes from their meeting August 5 state: "Less restrictive conditions could soon be called for - otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate."

Even more reassuring for both investors and owner-occupiers considering a property acquisition was the response from the National Australia Bank that it would reduce interest rates by one-quarter percent if the RBA led the way. The ANZ followed suit a couple of days later.

Speaking of investors, they’ll look back on 2008-2009 as the year in which Australia’s immigration reached record levels above 190,000 while according to the ANZ Bank the shortage of housing stock neared 200,000 dwellings. No wonder rental vacancy rates were just 1.5% in capital cities, and that meant landlords had the ability to source quality tenants at good rent levels.

They’ll also remember 2008-2009 as the year petrol prices hit record highs then fell back a little. Not back to where they were a year ago, but certainly a solid retracement from a graph that had indicated $2 a litre by Christmas.

The forces that drive the prices of everything from housing to petrol in one direction can turn just as quickly in the opposite direction, and it’s those who catch the first wave of the change that benefit most.

So, how long will this period of opportunity last? Economist Dr Alex Joiner, of ANZ Economics and Markets Research, quoted on August 9 in the Sydney Morning Herald, said: “We see the next six to 12 months as a period of softness in Sydney - and nationally - but the overall fundamentals will continue to tighten."

As we see it the fundamentals of a strengthening property market are already in place. Price growth will follow from an irresistible combination of growing demand, assisted by lowering interest rates, and restricted supply of housing stock.

Property - a look ahead
Mon, 28 Jul 2008

Forecasting the future in uncertain times is never easy, but because property values are a response to a number of identifiable economic and demographic factors it’s possible to make an educated guess about what’s likely to happen in the Sydney property market in 2008-09.

In its July meeting the Reserve Bank of Australia held rates steady at 7.25 percent, noting that the higher cost of fuel had acted as a restraint on domestic demand. Some analysts are even talking about an interest rate reduction by Christmas.

At the same time, Australian Bureau of Statistics figures show that new apartment approvals have fallen 4.2 per cent over the past 12 months and new house approvals are down 1.7 per cent over the year.

Construction costs have risen dramatically over the past year. Refined petrol products, one of the key inputs of the costs of building construction, rose by 8.2 per cent in the June quarter, and overall building construction costs were 1.6 per cent higher than during the previous quarter.

Demand for housing continues to outpace supply, particularly in suburbs that are within 10km of our big cities. Rents have risen accordingly and rental property owners are now enjoying better returns on their investments than they have for years.

Rising immigration figures clearly indicate that demand for property of all types will continue to grow, primarily in Sydney where the majority of migrants choose to settle. Population growth rates are at their highest levels in eighteen years.

The Housing Industry Association believes that a million new houses need to be built over the next five years to meet the growing demand across Australia. According to the HIA, there'll be a shortfall of at least 175,000 houses if the current low rate of new housing construction continues.

Nowhere else is the need for new housing as critical as it is in Sydney. However, Sydney real estate values continue to fall. AMP Capital Investors chief economist, Shane Oliver, says that Sydney property is about 20-30 per cent overvalued and that he expects further falls over the next twelve months.

Buyers appear to be holding off making any purchase decisions until housing prices finish their drop. Data from brokers Australian Finance Group showed that in the year to June the number of mortgages taken out in Australia fell 22 per cent.

Just like would-be homeowners, property developers too are finding money harder – and more expensive, to get. Another factor curtailing new housing construction in NSW is a lack of tradespeople, with many lured away to big incomes in mining activity in Western Australia and Queensland.

Michael Workman, senior economist at the Commonwealth Bank, said he believes that interest rates will have to start falling and buyers would have to believe prices were rising before they would come back into the housing market.

Yet when buyers do return the rise in prices can rapidly accelerate. The ANZ Bank's senior economist Paul Braddick says that house prices are set to explode due to the housing shortage and the inability of the building industry to keep up with demand.

Most Australians alive today haven’t seen conditions like these before now. Demand for housing is strong and getting stronger, while house prices are falling and rates of new construction are at historic lows. Interest rates are beginning to stabilise, yet the uptake of new mortgages is low and so is housing affordability.

As the song lyrics written by Johnny Mercer back in 1954 suggest, “Something’s gotta give”. In times like these we have to look at history to guide us, and for more than fifty years nothing has been more important to the real estate market than the law of supply and demand.

Housing supply is short and demand for housing of all types is strong. There is a lag of at least two years before supply can begin to catch up with demand, and in the meantime prices of existing housing will level out and inevitably rise.

Property is always best viewed as a long-term investment, and the best gains are made by purchasing when the market is ‘down’. Taking into account all the factors that affect the price of real estate, there may well never be a better time to acquire property than now.

House prices slow as rates steady
Sat, 7 Jun 2008

As the Reserve Bank finally realises that its 12 consecutive interest rate rises have slowed economic growth, house prices are beginning to show the effects.

Across Australia the price of houses rose around 14% in the 12 months to March, but growth slowed dramatically in the first three months of 2008.

The Australian Bureau of Statistics house price index that bases its calculations on prices in the eight capital cities rose a meagre 1.1% in the March 2008 quarter. However, even that wasn’t a uniform rise.

Melbourne houses rose 25% in the 12 months to March, and kept on rising with a 4% jump in the first three months of 2008. In contrast, Sydney posted a 7% rise in the 12 months to March, but went backwards by 1.5% in the March 2008 quarter.

It was the same story elsewhere, with gains in the most recent quarter a lot less than over the past 12 months.

The Reserve Bank decided in its May meeting to leave the official cash rate at 7.25%. Inflation is under control for now, providing Federal Government spending doesn’t allow the hibernating beast out of its cave.

One thing that could surely affect inflation is the retail banks increasing interest rates on mortgages independent of the RBA. It remains to be seen if Treasurer Wayne Swan has any real mechanism to enable those with mortgages to change their loan provider without paying the banks’ exorbitant penalties.

This leaves us wondering about what’s going to happen to the price of houses. Stagnating prices across all sectors are a sound indication that no further rate rises are needed, but it isn’t good news for those of us who’ve grown accustomed to steady growth in what for most of us is our biggest asset.

Most analysts agree that Sydney real estate overall will show little or no increase in the current quarter, and that this trend will continue at least to the end of 2008.

Meanwhile, new home construction is at ten year lows while both housing loan and building development applications show no signs of recovering to the levels of just two years ago.

The cost of the average dwelling takes a lot bigger chunk out of weekly earnings than ever before. The size and quality of housing has risen dramatically in the past ten years. The 3-bedroom single-storey brick veneer cottage has given way to the 5-bedroom ‘McMansion’ with two or three garages and two-and-a-half bathrooms.

Another factor has been the growth in ‘secondary’ properties. The holiday home, the investment home – usually purchased with borrowed money and often negatively geared, became drivers of the construction industry.

Private debt (as compared to the debts owed by governments) rose dramatically in the past thirty years as relatively easy credit allowed prices to rise steadily. Now, credit’s not so easy to get, nor are borrowers as keen to make long-term commitments.

It’s true that housing affordability has reached crisis point, but there are still good reasons to pursue the Australian dream of owning your own home, providing it can be financed at reasonable rates.

In the short term as usual there will continue to be pockets of high demand just as there will be areas of overbuilding and distressed sales. Curiously, the underlying statistics of Sydney housing support the view that prices should still be rising.

Sydney continues to grow and remains the preferred destination for the rising numbers of immigrants. Rental accommodation is in short supply and rental rates are at an all time high and still rising.

And finally, there’s always history to fall back on. Sydney real estate has consistently outperformed most other forms of investment in the long-term. There will always be boom times as there will be periods of slow or even negative growth, but the graph has always eventually turned upwards.

Taking the fundamentals into account, demand for Sydney real estate will continue to grow. The tipping point that will end the current slowdown will be when confidence returns to borrowers so they will once again take the plunge into acquiring both a mortgage and a home.

Experienced eyes will look at the current situation and see reflections of past ‘crises’ that are now only statistical blips in an otherwise reliable pattern of growth. A steadying of house prices together with consistent interest rates will bring both lenders and buyers back into the market.

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