Your 2010 Insight

This time last year we were being told that the world as we knew it was coming to an end. The world was in financial meltdown and certainly that's the way many people felt. The intensity of those concerns was enhanced considerably by the Government's rhetoric and the press.

A market review

First, let's look at what has happened in the past twelve months or so. The All Ordinaries index rose to over 6800 points then plummeted below 3600 and we were also being told that a property collapse of the same magnitude being experienced in the US and UK was inevitable. This created panic in the property market for newly completed and unsold properties, especially at the upper end of the market and in particular lifestyle properties, but we'll come back to that later.

The share market has since recovered to reach 4749 points at the close of business on the 4th March 2010. While this is a substantial rise from the lows of last year, it is still more than thirty per cent below its previous high.

So how has property performed through this volatile period? Well, not only has the general market for property not crashed as predicted by many of the so-called "experts", but it has actually risen in value. the Market is currently experiencing some of the biggest price rises in years in a complete contradiction to what was almost a general consensus that Australian properties were substantially over-priced.

Last year we said that despite the economic downturn, 2009 presented some positive buying signals. Anyone who has purchased a property in the last twelve months, probably with a great deal of trepidation will begin to see the rewards soon, if they have not seen some gains already. Much of Australia is experiencing low rental vacancies and the shortage of residential property is only going to get worse, especially if the latest population projections are even close to the mark.

ANZ Australian Property Outlook, December 20091

The December 2009 ANZ Property Outlook reaffirms its view that the Australian residential property market is set to experience strong gains and adds that "The remarkable rise in Australian house prices in 2009 has finally silenced the doomsayers".

While I am not sure about that, I have to agree with them when they go on and say that "Inadequate supply remains the single greatest issue facing the Australian housing sector. Unless significant action is taken to remove the structural impediments to home building, Australia will face an intractable shortage of housing that will drive deterioration in affordability (both purchase and rental) beyond anything we have ever seen".

They also report that "While house prices fell precipitously across the developed world (US -37%, UK -21%) Australian house prices barely moved (falling by just 2.7% peak to trough) and since have risen sharply. National median home prices rose by 10% in the first 10 months of 2009". Latest figures just published indicate that median house prices in Australia rose 12.1% during 2009.

The Reserve Bank of Australia2

Ric Battellino, Deputy Governor of the Reserve Bank of Australia, made the following statements with respect to housing in Australia: "There is a broad consensus that in recent years Australia has not built enough dwellings. A good indication of this is the very low vacancy rates in rental properties".

Mr Battellino also commented on the often used statistic, that relative to income, Australian house prices were unsustainably high, especially when compared to house prices relative to income in other countries such as the United States, He said that if that were the case, then housing stress in Australia would be much higher than in the US. He has also commented that this was clearly not the case, as arrears rates on housing loans in Australia are much lower than those in the US, despite the higher ratio of house price to income.

National Housing Supply Council - State of Supply Report3

The inaugural report "The State of Supply 2008" released by the National housing Supply council (NHSC) projects that Australia will require an additional 3,060,000 new residences between 2008 and 2028. The Council expects that we will have a shortage of 431,000 properties by 2028 and that after demolitions, we will produce just 138,500 net new properties per year right up until 2028.

The really worrisome part of this reports is that the figures were produced before the latest population projections, which predict that Australia's population is now expected to reach 36 million by mid century - well above the 28.5 million previously predicted. If we assume that the household formation during the period ahead is going to be 2.5 people per household (pph), about what it is now, then the new demand for housing will increase by an additional 3 million properties (7.5 million additional population (36 million - 28.5 million) divided by 2.5 (pph) = 3 million additional properties required).

Further when we divide these 3 million additional properties by the 40 years between now and 2050, we find we need another 75,000 properties each year over and above the current 138,500 that the NHSC say we will produce between now and 2028. And that's not even taking into account the 431,000 shortfall they say we will have in 2028!

If we fail to increase our rate of delivery of new property by 2028, less than 20 years from now, the shortfall of property could be more than 2.1 million homes. What this means is that we need to build 235,050 properties per year to meet this demand and to fulfil the shortage they say we are going to experience before the new population projections are taken into account. The NHSC say that we are projected to build just 138,500 properties per year until 2028 against a demand of what is likely to be more than 235,000 properties. Of course, neither the Government nor industry can allow this to happen and restrictions on development and constraints on available finance for development will need to be improved considerably.

What this means for investors and owner-occupiers alike is that a great opportunity exists to purchase the completed property currently in the market at well below what would be replacement cost. All future property prices must rise to reflect the true cost of the delivery of that new property - otherwise there will be no incentive to build the properties Australia will require in the future.

Retirement strategy

Back to why we believe that now is the best time in years to buy your future principal place of residence. Next year will be the year the first baby boomers will turn 65 and in many cases, they have more financial means than previous generations. A baby boomer is someone who was born between 1946 and 1964 and if you are one of these individuals, you will at least be beginning to consider your retirement options.

With the advances in health awareness and healthcare, most baby boomers are much healthier and much more active than their parents and grandparents were. This presents them with a whole range of attractive options their forebears could only dream of. When this is combined with the global environment in which we live today and the fact that many young people are travelling further afield to seek a broadening of employment opportunities, a different type of retirement property compared to the large house on a single block of land begins to look far more attractive.

By fluke of fortune the types of property many will begin to consider as ideal for their new found freedoms are exactly the properties that have been affected most by the crisis of confidence especially at the upper end of the property market. We believe that these upper end properties can be purchased today at prices substantially below the price you will pay if you delay your purchase until your actual retirement. As the crisis abates and the demand from the baby boomer generation increases for quality properties in inner city and other lifestyle locations the opportunity to purchase at below replacement cost will dissipate very quickly.

Opportunities this year

This year, because of the global financial crisis, Which Property has a far greater range of quality properties available that we believe are ideal as future principal places of residence. These properties are in fantastic locations and are of superior quality and are exactly the type of properties we believe will be highly desirable in the future, especially for the baby boomer generation. All signs point to a strong property market emerging and we suggest that you begin to consider what your options may be in the future. Your Which Property Business Development Manger is available now to help you to explore these opportunities.

For the strategy on purchasing your future place of residence visit the full article.

Sources:

1 ANZ Bank, Austrailian Property Outlook 2009

2 Reserve Bank of Australia: www.rba.gov.au

Austraian Government, National Housing Supply Council, State of Supply Report 2008

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 od Which Property? and the Author.