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Up, Down and All Around

In the current changing market, depending on which day of the week it is and who you talk with, you’ll get a different story on what’s ‘really’ happening in the property arena. Needless to say it’s quite confusing, particularly for those of us who are at the whim of the varied reports fed to us by the media.While we can’t touch on absolutely every aspect and factor at play, we have focused on the major topics that will influence our market both in 2011 and moving forward in the longer term.
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Property supply

The Australian property market is currently undersupplied and for a number of reasons it is believed that this situation won’t improve for some time to come. While other countries experienced a dramatic drop in property prices during the global financial crisis, for a number of reasons Australia faired relatively  well. Our market maintained stability largely due to the simple equation of supply and demand – there simply aren’t enough properties to house the population.


The National Housing Supply Council has reported that we are currently undersupplied by at least 178,400 properties Australia-wide and this figure is projected to increase.1 This undersupply will continue to underpin what happens in the property market moving forward. In the current market, taking into account a number of other factors, if there are not enough properties, prices should remain relatively stable.


Building approvals across Australia are also still weak in real terms exacerbating the undersupply and placing greater pressure on affordability. The Australian Bureau of Statistics has reported that in the year to November 2010, building approvals were down 9.9 per cent on the previous 12 months. Without a significant improvement in Australia’s building approvals, the supply crisis will deteriorate further.


The other factor to consider, is the number of serious natural disasters we have experienced in the first half of 2011 - with floods sweeping through Queensland and Victoria and a major cyclone affecting north Queensland. What we do know from these natural disasters is that thousands of properties have been destroyed setting us back yet again and further fuelling the property supply crisis.


Queensland Premier, Anna Bligh, has said that 28,000 homes in Queensland need to be completely rebuilt as a result of the floods alone, while many other homes are uninhabitable and will remain so for months or even years. During 2009/2010 only 33,700 homes were built, indicating that the reconstruction effort alone will be the equivalent to a year of home building. With this in mind, the supply crisis has actually worsened since the beginning of 2011 compounding the problem. There aren’t many certainties in the current market, but one, and that is that we will not see an improvement in the property supply across Australia in the short to medium term.


Population growth

Population growth across Australia remains steady fuelling the supply crisis. While we have heard some alarmist media reports that the population growth across Australia is ‘plunging’, this is definitely not the case. What we are experiencing is a softening in the Australian population rate, which has adjusted from 2.2 per cent in 2009 to 1.7 per cent in 2010. This can be contributed to a dramatic decline in net overseas migration, which in the June quarter of 2010 was 44.3 per cent lower than the June quarter of 2009.


In the long term, Australia’s population will remain strong with the Commonwealth Treasury projecting that we will grow to be a country of 36 million by 2050. There are strong growth rates across Australia, particularly in our major centres close to key infrastructure. Western Australia continued to record the fastest population growth rate of 2.2 per cent, followed by Queensland (2.0 per cent ), Victoria and the Australian Capital Territory (both 1.8 per cent ), New South Wales and the Northern Territory (both 1.5 per cent ), South Australia (1.2 per cent ) and Tasmania (0.9 per cent).


Despite this slower growth rate, Australia still remains one of the top population performers in the world. In 2010, Australia’s population growth was ranked in the top five of all OECD nations, outperforming giants such as America, United Kingdom and China. Despite what the media may be touting, Australia’s population growth rate has merely softened rather than ‘plunged’ and the growth rate is still considered strong in comparative terms, supporting the property market moving forward in the long term.


Now to the big question on every one’s mind  – what will interest rates do in 2011?  With so many mixed messages, it’s becoming hard to say. One thing for certain is that Australian families are starting to feel the pressure of six interest rate rises, from 3 per cent to 4.75 per cent  (as at 20th March 2011). Many commentators correctly predicted that for the first part of 2011 we would have a slight reprieve from rate rises. Weak consumer spending has so far deterred the Reserve from increasing rates further.


According to economic research firm BIS Shrapnel, the softening in the population rate is actually not bad news for property owners and investors as it may just take the pressure off interest rates. In 2010 BIS Shrapnel’s Senior Economist, Jason Anderson, projected that the population growth rate would weaken throughout 2010/2011 and this would see a reduction in household spending and some alleviation of inflationary pressures from what is usually stronger demand. “In terms of the housing sector, shortages will remain and there will be less upward pressure on interest rates” says Jason.


While many economists previously predicted a rate increase between February and May, we are now hearing a different story as inflation is proving to be lower than anticipated. JP Morgan economist, Helen Kevans, has said she expects inflation will need to be addressed in mid 2011, leading to a cash rate of 5.5 per cent by the end of the calendar year. With this in mind, the November 2010 rate rise shocked the nation and saw property prices fall almost immediately by some 0.2 per cent. It is almost impossible to predict exactly how the market will move forward and how the Reserve will react to key market indicators. Therefore given the continued and current market volatility, the best way forward is conservatively.


Affordability

Affordability is a growing concern in the Australian market place and listening to the media’s view on a daily basis can be quite confusing. One of the biggest debates raging amongst property commentators still surrounds the affordability of Australian property. While Australian property prices have flattened in the last 2 years, they haven’t deflated 25-30 per cent  which  many commentators were predicting after a strong period of growth. There is however, continued talk of a ‘property bubble’ in Australia, which means that the cost of property has reached unsustainable levels relative to income and subsequently property prices must fall.


It has been reported by the Seventh Annual Demographia International Housing Affordability Survey published in 2010, that Australia has the most unaffordable housing market in comparison to the United States, United Kingdom, Canada and Ireland. However, this needs to be put in perspective. While, Australia has experienced a relatively flat property market, we haven’t experienced the economic fallout that many of these countries have had to endure. Key factors such as property undersupply, solid population growth and a developing and stable resource sector, has seen our property prices hold their ground during this volatile period.


BIS Shrapnel’s Managing Director, Robert Mellor, believes that "we aren't in for a period of phenomenal growth, but we're certainly not in for a 20 per cent drop either." Mr Mellor  noted in October 2010 that Australia’s housing situation is quite unlike the United States, as we haven’t experienced the same continuous growth and, in fact, property prices are up to 15 per cent below the peaks experienced in 2003.


Economic commentator, Alan Kohler, agrees with this notion stating that “in the US, easy money and lax lending practices fuelled dramatic house price rises that peaked in mid-2006. Then the house of cards collapsed, triggering the global financial crisis.” The Australian property market fundamentals are quite different with low unemployment, relatively stable property prices and a strong economy.


The affordability of our market hinges largely on the course of interest rates. Over the coming 12 months, our market is in many ways completely at the whim of the Reserve Bank of Australia. Given current market indicators and projections, the Australian property market will most certainly experience some adjustments in line with interest rates, but the possibility of a bubble bursting is highly unlikely.


Drawing a conclusion

So what conclusions can we draw from this information? In our opinion there is one certainty for investors, and that is, now is not the time to sell investment properties. We are currently at the lower end of our property cycle, which in our opinion is still finding its feet after the global financial crisis, several interest rate rises and an anomaly of other factors. It is definitely a buyer’s market, making it difficult to achieve what you may consider a ‘good’ resale on an investment property.


With this in mind, expanding or starting your portfolio now actually presents some good opportunities. We are most certainly at the lower end of our property cycle making it a good time to capitalise on the weaker market conditions. However, it is important to show due diligence and to follow the key buying rules, ensuring that whichever properties you purchase are in suitable locations close to key infrastructure. We are still seeing price reductions and incentivised packages on many developments, and this presents some good opportunities for the savvy purchaser. As always, holding Australian property for the long term will see you reap the greatest rewards on your investment.


Sources

The National Housing Supply Council, 2nd State of Supply Report 2010
Australian Bureau of Statistics, January 2011
Australian Bureau of Statistics, Australia's population growth rate lowest since March 2007, 3101.0 - Australian Demographic Statistics, June 2010
OECD Factbook 2010: Economic, Environmental and Social Statistics - ISBN 92-64-08356-1 - OECD 2010

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent of Which Property? and the Author.

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