By Michael Yardney

Well, here we are approaching the end of yet another very interesting year for property markets across the country. This year has been rather tumultuous for both owner occupiers and investors alike, who have been forced to ride an uncertain wave of ups and downs.

Should I invest? Should I wait? Where are the markets headed? Which direction are interest rates likely to take? How will affordability affect me? Will the upcoming election have an impact on housing?

These are just some of the questions investors and owner occupiers fire at me when I speak at seminars and workshops, and there’s no doubt that everyone’s feeling a little apprehensive about where residential real estate is heading…

I can tell you that now is as good a time as any to consider getting into property investment or increasing your portfolio. All industry bodies agree that supply and demand pressure is increasing across the board, with new housing construction decelerating whilst increasing migration continue to put pressure on already tightly held stock.

In their Australian Property Outlook, the ANZ bank reports that our economic conditions have never been better with unemployment levels at a 33 year low of 4.3%, and the expectation that our economy will continue to go from strength to strength with global growth, expanding resource investment and production and strong infrastructure spending.

They also predict that a chronic shortage of housing will “intensify pressure on rents and established house prices going forward.” Whilst this should encourage builders to get out there and start making up for the obvious shortfall in stock, the ANZ says that, “monetary policy and tight builder margins on greenfield development will continue to delay much needed recovery.”

This is not necessarily what tenants and would-be home owners want to hear, but of course for investors, this does spell some good news. We all know that limited supply and increasing demand means a continuation of rent rises driving stronger yields (which have been languishing behind very rapid price growth in recent times). Record low vacancy rates should also assist to increase investment cashflow as rental hikes become more commonplace.

From a capital gains perspective, less houses on the market means stronger competition in most instances. This is one of the reasons we have seen some capital city markets go “crazy” this year, with strong competition from buyers who are scared they’ll miss the boat entirely driving up prices substantially in some areas.

This activity has resulted in a much more delineated market than we’ve seen in the past. It is becoming increasingly clear that in many states, near city more affluent locations are far outweighing “mortgage belt” outer suburbs in the popularity and demand stakes from owner occupiers, investors and tenants alike. Because of this we are seeing many fringe areas languishing in terms of housing prices, whilst within 10 to 15 kilometres from most CBD’s prices continue to soar to record heights.

The ANZ outlook indicates that dwelling investment activity rose by a substantial 9.5% over the year to March 2007 and it’s expected that investors and developers will continue to focus their attention back to property as the housing crisis becomes ever more apparent.

Although the supply and demand equation is really stretching the budgets of renters and first home buyers, those investors who have already established themselves in sought after property markets are reaping the rewards.

The Real Estate Institute of Australia reports that, “The imbalance between demand and supply in the housing market has begun to drive prices up, with house prices increasing during the June quarter in Sydney, Melbourne, Canberra, Adelaide, Darwin and Hobart.”

It’s unlikely that this situation will be rectified in the short term at least. Although both the Federal Government and Opposition are talking policies to redress this imbalance and reconcile the affordability issue, many believe that their ideas will only serve to exacerbate the problem and drive prices upward.

The underlying concern is that the suggested policies will miss the mark, as they are all either directly or indirectly related to promoting demand for housing (eg. Land release, tax incentives, increase of FHOG, etc.), which will therefore increase pressure on prices.

If ever you were waiting for the right time to jump on board, I would suggest that the wait is over and now is the time to strike – before the iron gets too hot! – It is likely that the coming housing upturn will be both vigorous and sustained.
Of course you still have to be careful how and where you invest. In the current markets location is crucial when it comes to buying right. There is compelling evidence that the inner and more affluent suburbs will continue to outperform suburban fringe localities by a mile.

The trend of flattening house prices in outer areas shows little sign of abating, with land prices discouraging development in these suburban belts. Add to this rising fuel and infrastructure costs and an ongoing shift in “socially driven preferences” for inner city locations, and all indicators point to an increase in more well located medium to high rise developments and an ongoing upward price push for inner city areas.

Across the nation

Residex www.residex.com.au summarises the latest house growth figures as follows:

These figures indicate that house prices increased in all capital cities over the year to August 2007. What they don’t show is how within each state there is a two tier market with some suburbs far outperforming others.

Although affordability continues to be a “four letter word”, bandied about as the villain that will bring the national housing market to a grinding halt, both owner occupier and investor finance rose significantly between June 2006 and June 2007 quarters. This would suggest that purchaser demand remains strong across the board and the Great Australian Dream of home ownership is still alive and well.

Pamela Yardney, Director of Metropole Property Management in Melbourne and Brisbane www.metropole.com.au explains that “Rents have increased strongly all over Australia in the last year. In particular Perth, Darwin, and to a lesser extent, Canberra, Melbourne and Brisbane, have seen sizeable rental increases, with typical rents for two bedroom apartments in Darwin increasing by over 35%.

“Darwin has now overtaken Canberra with the highest median rent for three bedroom houses at $395 per week. Canberra and Sydney share the top spot for two bedroom apartments with a median weekly rent of $330. Adelaide remains the cheapest location to rent, with a three bedroom median house rent of $250 per week, and a median weekly rent of $200 for two apartment”

REIA President Graham Joyce observes, “Increases in prices and rents are hitting the pockets of both homebuyers and renters hard. While rent increases offer the prospect of improved yields for investors, thus attracting more investors back into the housing market, the price increases will continue to put pressure on rents.”

Joyce says, “Affordability has fallen by 8.3% over the past year, with every State and Territory suffering a deterioration. While the Australian Capital Territory and the Northern Territory are in an overall better position than the States, the ACT experienced the largest decline in the June quarter (-6.2%), while Western Australia experienced the largest decline over the year to June 2007 (-13.5%).

“New South Wales is the least affordable location, resuming the bottom spot after a brief reprieve in the March quarter when Queensland was the least affordable location,” says Joyce.

The REIA is predicting that investors will continue to turn their back on a less than healthy share market and return to property, “particularly in an environment of record low unemployment, increasing wages and a growing population.

“Braking factors will however be the August 2007 rise in interest rates and the impact on credit availability of problems in the US subprime market. To that extent, while prices and rents are likely to continue to grow through the remainder of 2007, the growth in house prices is likely to be moderate, despite the demand supply imbalance. The slowdown in Perth prices will continue, at least in the short term, after the massive increases of the past two years.”

State of play

New South Wales

After enduring a ‘technical recession’ since the end of 2005, the state economy is now starting to show signs of a tentative rebound, although Sydney’s housing market continues to languish. Overall Sydney’s median house price fell by 7.3% between December 2003 and March 2007 and, according to data from the REIA, a decrease in median house prices of 0.3% occurred between June 2006 and June 2007.

The ANZ Outlook reported that home sales plummeted, especially in the investor market late last year and early this year, with the majority of market weakness concentrated in the western and outer suburbs. REIA figures indicate a drop in sales volumes of 12.2% for houses over the year to June 2007 and 16% for “other dwellings” (apartments, units, etc).

However, as has been the case in many capital cities this year, the top end market showed solid growth with double digit price gains in Vaucluse, Queens Park, Palm Beach, Longueville and Darling Point over from March 2006 to March 2007 and Sydney’s overall median jumped encouragingly between the March and June quarter (by 0.9% according to the REIA).

The REIA June 2007 Market Facts reveals the five most expensive Local Government Areas (LGAs) for houses in Sydney were Mosman, Woollahra, Manly, Hunter’s Hill and Waverley. For other dwellings, the five most expensive were Manly, Woollahra, Ku-ring-gai, Sydney- Inner and North Sydney.

The five least expensive LGAs for houses in Sydney were Penrith, Blacktown - South-East, Wyong, Campbelltown and Blacktown - South-West. For other dwellings the least expensive five were Fairfield, Campbelltown, Blacktown (South West), Penrith and Blacktown (South East).

Developer sentiment has remained low with fresh supply falling well short of demand and it’s expected that this trend will continue for a number of years. This has caused a significant tightening of the housing market, with vacancy rates down to 1.4% in June according to REIA figures. Chronic rental shortages are expected over the coming years and rents are starting to accelerate at a rate of 5.7% for 3 bed houses and 10% for 2 bed dwellings. This trend, along with record low vacancies and improved returns should act as a catalyst for renewed investor and developer interest in 2008, according to the ANZ Outlook.

Victoria

Victoria’s property market and economy are the polar opposites to New South Wales at present. The state economy is strong and home sales market improved markedly in 2007 with clearance rates, sales volumes and prices all well above those of 2006.
According to the REIA, the June 2007 quarter saw the strongest growth in the residential market since 2000 with a 10.2% increase in the median price. Price growth was concentrated in the inner city suburbs where the median grew by 14%, compared with the middle suburbs where prices grew by 5.9% and outer city suburbs which grew by 0.8%. This resulted in the median price for houses in the inner city reaching $650,000, the middle suburbs $391,750 and outer suburbs, $302,500.

The latest REIV figures show a few inner city suburbs with price gains over 30% in the last 12 months, namely Middle Park (48.2%), Mont Albert (46.4%), Armadale (38.1%), Carlton (33.8%) and Hawthorn (30.8%).

Owner occupiers and investors continue to compete for prime inner city stock, with finance for both groups up by 15% and 25% respectively this year.

Pamela Yardney explains that the Melbourne rental market continues to tighten with vacancy rates at a 25 year low of 1.1% for June 2007 in the inner city and 1.6% for both middle and outer suburbs.

Although demand is on the rise, with Melbourne experiencing a larger overall share of migrant intake in recent years than any other state, building approvals continue to languish and should ensure rents and house prices continue to rise in highly sought after locations.

Although outer suburbs are under-performing in Victoria, a few key regional centres seem to be on the up and up. The REIA suggests that, “Solid demand is evident for property in many of Victoria’s regional centres. Geelong had the most expensive median price of $310,000 and growth of 5.3% in the quarter. Ballarat’s median price reached $227,500 increasing by 7.1% over the quarter. Bendigo’s median reached $232,500 increasing by 1.1%.”

Metropole Property Investment Strategist’s director and Melbourne based buyer’s advocate Jack Henderson www.metropole.com.au gives his thoughts on the local market:

“The very strong competition between both owner occupiers and investors continues to push prices up. Intense competition from committed bidders has kept auction clearance rates hovering around the 85% mark and some Sunday results have seen clearances of 100%.

“For those people who are involved with the property market, as a buyer, seller or even as an interested bystander, analysis of the data for the most recent cycle will help explain what is happening and where. The rapid appreciation that has been reported is concentrated in the inner city and bayside areas. If one takes a suburb by suburb view, price growth is not occurring across the board.”

The REIV figures show that Melbourne’s overall median price rose by over 11% to $420,000 for houses and $350,000 for units over the last year. This was largely driven by growth in the inner suburbs. The June quarter results show that median prices for the inner suburbs of Melbourne, those within 15 km of the CBD, increased in value at a far greater rate than the middle and outer suburbs.

Understanding this distinction between the inner, middle and outer rings is critical to understanding the Melbourne property market. Buyers in the inner city and bayside areas of Melbourne are prepared to pay a premium for property in these more desirable suburbs. The REIV note that there are now more than 14 inner suburbs with median prices over $1 million.

The June quarter saw the inner city median increase by 14% to reach $650,000. Of course the main reason for this is scarcity of land. The constrained amount of housing in the inner city (supply), coupled with all the amenities and features that people desire (demand), continue to push prices up exponentially.

The middle suburbs, between 10 to 20km from the CBD grew at 5.9% to reach a median of $391,750. The outer suburbs increased at a reasonably flat rate of 0.8% to $302,500, reflecting the much greater supply of land and the propensity for supply and demand to be at equilibrium.

The property market in Melbourne is highly segmented, with the inner city less likely to be affected by minor changes in the general economic climate, however the outer suburbs will be heavily affected by increases in the cost of living, especially interest rate rises.

Queensland

As with Victoria, the Queensland economy is robust, continuing to reap the benefits of the resource boom and enjoying solid employment growth and an increase in household disposable income causing house prices to increase sharply.

Unlike other states, building approvals were up by almost 17% over the 18 months to June 2007 in Queensland.

The REIA June 2007 Market Facts reports that, “From Cairns and Townsville to Brisbane and the Gold Coast, the health of the Queensland property market continues to be reflective of the State’s robust economic position. “North Queensland continues to be one of the standout performers of (the) residential property market. Since the June quarter 2006, Townsville has recorded an increase of 33.7% in its median house price to $374,250, as well as price growth of 12.6% to $269,000 for other dwellings.
The Cairns market also experienced very good growth of 20.0% and 18.7% for houses and other dwellings respectively over the same period.

“There has been strong growth in the Brisbane market during the last 12 months. Continuing a recent trend, inner Brisbane recorded very healthy growth of 20.2% to $590,000 for houses and 11.0% to $388,500 for other dwellings. Across the southeast, agents are reporting strong demand and low levels of stock, particularly in the affordable price range.”

According to Pamela Yardney, historically low vacancy rates are not expected to improve in the near future due to continued migration and affordability issues keeping would-be first home buyers locked in the rental cycle. Hence rents are likely to continue to rise.

Metropole Director and Queensland based buyer‘s advocate, George Kafantaris www.metropole.com.au provides his thoughts on the current state of play;

“While the official REIQ figures show that medium house prices have risen by 9.5% in the year to June, the Brisbane market, like most property markets around Australia, is running at two speeds. Some suburbs, particularly those in the more affluent lifestyle regions or suburbs going through transition are out performing. While those suburbs that are traditionally where younger families or first home buyers live are languishing, as these areas are more affected by interest rates and petrol prices.

“There are a handful of suburbs that had growth in excess of 20% and some in excess of 30% over the last twelve months and these are the ones we are targeting for our clients” said Kafantaris.

“For example, Manly has had growth of 25.7%, Mt Gravatt has had 20% growth over the last year, Ash Grove (24.1%), Greenslopes (20%), Kelvin Grove (20.4%) and Belmont (32%) and Auchenflower (29.7%). On the other hand there are many suburbs that have under performed with growth of 2%, 3% or 4% in the same time period.”

“Currently owner occupiers and astute investors are all vying for the same small group of quality properties as they come onto the market and many are paying considerably above the asking price within days of the property becoming available.”

REIQ Institute Chairman, Peter McGrath, explains that home prices continue to soar throughout Queensland, driven in part by house hunting migrants attracted to the State’s jobs boom. “Population growth, low unemployment, a strong economy and increasing infrastructure are all combined to make Queensland the place to live”,

“Around Queensland, Brisbane’s annual increase was matched or surpassed by many regional areas, especially in the State’s resource based regions.

“Leading the way was Mt Isa where the median house price sky-rocketed 47.1% from $187K to $275K over the year. Strong growth in Rockhampton continued with the medium price up 33% from $200K to $266K over the last six months. These increases are occurring primarily from the increased workforce and limited accommodation in a relatively smaller property market.

Interstate investors are now kick-starting these regional markets but I see this as a concern. When prices rise by up to 47% in selected suburbs over a 12 month period this is not sustainable, especially when it is on the back of one or two industries that are currently performing strongly.

While investors who put their money in properties in our main capital cities may not reap the benefit of the huge booms currently experienced by some of the resource towns, these investors are likely to receive a strong steady increase in property values over time, whilst investors in regional areas are more likely to experience fluctuations in value in line with the performance of these narrow based economies.

Western Australia

Although many commentators predicted a marked correction for Perth’s housing market, we have witnessed more of a soft landing this year. Economic indicators remain positive for the state, with demand for resources continuing to grow particularly from the international market.

There was a strong surge in first home buyer activity in the June 2007 quarter, as a result of further stamp duty cuts, which provided a positive stimulus to the market.

The REIA says, “The abolition of the tenant’s contribution to letting fees by the State Government in April 2007 and sensationalised media reporting suggesting rents in Perth could increase by $100 or 38% in 2007 contributed to the strongest rise in overall rents (7.4%) since September 2005 (7.7%).

“The solid increase in rents was accompanied by the seasonal softening of the vacancy rate. The strong rent increases may have also contributed to the considerable improvement in the vacancy rate from 0.8% to 2.1% as households rearranged their housing options. Equally, the rush of first home buyers may have also played a part with some agencies reporting local vacancy rates exceeding 3% by June.”

Finance commentators and Director of Perth based company Aspire, Craig Turnbull says;

“The Perth market slipped into negative territory during the June quarter, according to REIWA, with the median price for houses falling around 4% to $446,500. Although this was a negative result for the quarter, over the past 12 months the market still registered a strong 13% growth.

“It is worth noting that, different segments of the market are performing at very different levels - the $300,000 - $350,000 bracket is being strongly pursued by first home buyers who have been encouraged by the reduction to nil in stamp duty - this is about the limit of their affordability level. The $450,000 - $550,000 bracket remains quiet. Premium property in the $million plus mark remains sought after with most listings selling well - plenty of stock market, resources and business profits to be spent here!

“Overall selling times for houses have also increased to 61 days - a marked difference to this time last year when it only took 31 days to sell on average” said Turnbull

“The unit market held steady with the median recorded at $360,000. One of the most concerning figures is for land, which stabilized at $265,000, up by over 26% for the year. There have been some media reports of new uniform development taxes to be levied on land developments by local councils, which will inevitably drive prices up further. Extra taxes means higher prices for the end user. The State government’s position is that the development industry will just absorb these costs - goes to show how economically naive they are in their thinking. When will government learn? The strongest section of the market is still the rental market, with median rents moving up to $290 per week, even though the vacancy rate eased out to 2.1%, probably due to winter when many people choose not to move.

Turnbull explains: “What this means for the market is, that it is taking a much needed break from the rampant growth over the last 2-3 years. Many commentators are predicting a big slide in prices, but those who do are dismissing the fundamental strength of the WA economy and the hundreds of people who arrive every week in WA seeking high paying jobs (WA now has the highest average annual income in the country and the lowest unemployment figures at 2.9% in May 2007). These people all need to be housed and where before many would buy due to our relatively cheap prices, a lot are now renting, forcing up rental prices.

“WA has 10% of our nation’s population and produces over 30% of our exports - economically very strong. This will serve to put a floor under the overall market, as it gathers new momentum. The next few years are likely to see much more gentle & measured growth. Those in the know and with a little more education are selectively buying in top locations at much reduced prices, ready for the next move when it arrives.”

Northern Territory

Not unlike WA, the Darwin property market has seen some excellent price growth in recent times due to the resources boom primarily, which is driving a robust economy and solid migration. Employment was up by 4.7% to June 2007 and population growth by 1.8% in 2006, adding to an increased underlying demand for housing.

House prices here have doubled in the last five years and Darwin’s median is now higher than Melbourne and Brisbane. Investor finance has continued to strengthen supported by attractive rental yields and strong capital appreciation.

Residex reports the Darwin median price as $389,000 up 13.8% from last year and the median prices for units rose by 15.9% for the year.

The REIA reports that “House vacancy rates…remained at 1.2% in June (and) the median weekly rent for a three bedroom house increased to $395 per week over the quarter, representing a 16.2% increase. The median weekly rent for houses in inner Darwin grew significantly for the quarter, especially for four bedroom houses. The Northern Suburbs median weekly rent for three and four bedroom houses remained steady over the quarter.”

Unit and apartment rents increased substantially in Inner Darwin, with the overall median weekly rent for the June quarter increasing across the board in the NT.

Michael Yardney is Director of Metropole – Property Investment Strategists and a leading property commentator. He is author of How to Grow a Multi Million Dollar Property Portfolio - in your spare time, co author of All You Need to Know About Buying and Selling Your Home and publisher of Property Investment Update. Subscribe for free at www.PropertyUpdate.com.au