Market Review – Winter 2012
The market is somewhat inconsistent as overseas economic factors continue to weigh heavily on people’s minds. The European issue coupled with lacking business confidence at home and political instability at the federal level is causing consumers to hold off on making major financial decisions.
The market under $1M in most metro areas is strong but activity weakens the further up the price scale you go. A lot of cash is sitting on the sidelines. People deleveraged during the GFC and adopted a ‘wait and see’ approach that continues today.
Buyer enquiry is up. In March, the country’s largest mortgage broker, AFG, had its second biggest month ever in NSW since their index commenced in 2004 with $842M in new lodgements. While this clearly indicates more buyers are out there, they remain very price sensitive.
Reserve Bank interest rate cuts will no longer have the effect we’re used to given the banks’ reluctance to pass on the full amount. The official cash rate is now at its lowest since November 2009 when the economy was recovering from the initial impact of the GFC. While this might result in more sales activity in Winter, it won’t push prices higher because buyers are still worried about Europe and are wary of protecting themselves financially as we enter a new era of aversion to debt.
Overall, the market is not in a bad state but people continue to wait for positive signs. This has been a protracted and agonising period of uncertainty. The constant flow of good and bad news both at home and overseas continues to undermine confidence.
Once we see some positive and sustained economic change overseas, I believe our property market will begin a long and slowish recovery over a three to five year timeframe.
The flipside to a market downturn is the exceptional opportunity it presents to buyers. Affordability has grown significantly with the recently-released HIA-Commonwealth Bank Affordability Index showing an improvement across the capital cities for the fifth consecutive quarter in March. The best time to buy is when others aren’t. Markets have a herd mentality and following the crowd gives people a much needed sense of security especially in this time of economic volatility. Buyers need to be brave – this is exactly the type of market they will look back on and say ‘I wish I’d bought in 2012.’
The first quarter was reasonably strong with property prices stabilising nationwide and Sydney the stand-out performer up 1.1%. Since then, things have slowed down with recent interest rate cuts not having the usual impact.
The lion’s share of sales activity is occurring at the more affordable end of the market under $1M. While there is some new interest up to $2M as well as a few sales in the $5M range, the top end market remains soft and offers the best buying opportunities of all. RP Data reports a 5.7% decline in property values in the most expensive 20% of capital city suburbs compared with a 2.3% fall in the most affordable 20% of suburbs in the year to March.
Home loan rates are very competitive and while the margin between fixed and variable is tight, 1 in 5 borrowers are choosing to fix for certainty with repayments, according to AFG.
Investors make up a huge proportion of the market – 44.4% in NSW (highest in the country) and 35.2% nationally according to AFG. Buying through self managed super funds continues to be a growing trend as more people get used to the idea. It’s only been in the past few years that people have been able borrow on residential property through their SMSF, so it is still a relatively new strategy for wealth.
Rental yields are as strong as we have seen them for a very long time, particularly in Sydney but other capitals are replicating. RP Data reports house rents in the capitals up 4.1% over the year to April 2012 and up 3.7% for apartments.
Generally, a vacancy rate of 3-3.5% is a balanced market. Sydney is at 1.5% (nationally 1.8% according to SQM Research). It’s an investors’ paradise – you can now buy for better than what you could a few years ago, in some suburbs by 10-30%, and tenants are lining up for quality homes with rents continually rising.
The July 1 cessation of stamp duty relief for buyers of new properties under $600,000 is likely to result in more off-the-plan sales in June.
Australia has a significant housing shortage and new building approvals remain low. Funding issues for developers and the red tape of planning approvals is adding to the housing shortage for a population that will inevitably continue to grow.
The Brisbane market is trending upwards. There is a new State Government, the financial benefits of the resource boom are filtering through to the commercial sector and the impact of the GFC and floods is fading. The past few years have been tough but we’re now seeing a recovery. QLD property prices have improved for the first time in 18 months according to new REIQ figures, with sales activity up across the state and Brisbane’s median house price rising 1.2% over the quarter.
The weakening Australian dollar will encourage expat activity among those who want to get their money out of Europe and take advantage of excellent buying opportunities here at home.
John McGrath’s Top Sydney Metro Picks – Best Buying Opportunities
There are signs of new confidence but buyers are not competing above what they see as fair value. A significant new trend is city investors looking to regional areas for value and strong yields. Some markets are seeing investor activity for the first time in many months. There are more buyers out there and more sales occurring even in markets hit hardest by the GFC, such as Byron Bay.
The bulk of sales activity is occurring at the lower end under $500,000. We’re seeing occasional bursts of activity in higher price brackets but this is the exception rather than the rule.
Local and city investors are active in areas such as Newcastle, Warners Bay, the Central Coast, the
Gold Coast, Port Macquarie and the Blue Mountains. Yields of 6-8% (much higher in mining towns) are now common in Australia’s regional areas and better transport links are enabling city investors to explore more affordable markets relatively close to home.
Once considered a retirees’ town, Port Macquarie is attracting more young families seeking seachange as well as city investors. The airport and cheap daily flights to capital cities is a significant drawcard for new buyers. A shift in confidence has occurred over the past few months and competition is increasing as supply reduces.
Byron Bay was one of the hardest hit markets during the GFC but things appear to be turning around. Affordability across the Northern Rivers region is excellent and locals are finally taking advantage of it, with multiple offers being received on correctly priced properties.
The Central Coast is showing signs of new strength with both local and Sydney investors returning to take advantage of significant increases in yields over the past two years. The market under $500,000 is continually improving while the top end remains stagnant, offering exceptional buying opportunities for astute purchasers.
Newcastle continues to attract Sydney business owners looking to set up shop in a promising local economy. These buyers are very impressed with the exceptional value available on family homes in premium suburbs and are buying willingly. Investors see great potential in this market particularly around the $400,000 mark.
Green shoots are appearing on the Gold Coast, with clearance rates on the rise and homes selling prior to auction for the first time in two years. Buyers are feeling some urgency as they realise we must be at or close to the bottom. As a result, the chronic oversupply is now reducing. Investors are back, particularly in the $500,000 to $1.5M bracket where value and rental returns are exceptional. A 40% increase** in local infrastructure spending will undoubtedly help the market, with new projects including the Pacific Motorway upgrade, the new Rapid Transit system and the new University Hospital. Winning the bid to host the Commonwealth Games in 2018 is also likely to prompt more investment and job creation.
**Colliers International research
John McGrath’s Top Regional Picks – Best Buying Opportunities
Bowral (Southern Highlands)
Katoomba (Blue Mountains)
Key points and predictions
> Market is inconsistent with buyers holding off on decisions due to concerns about overseas economic factors, lacking business confidence at home and federal political instability.
> The market under $1M in most metro areas is strong, weaker activity in higher price brackets.
> Buyer enquiry is up but purchasers are very price sensitive and hesitant to commit.
> Positive and sustained economic change overseas will prompt a 3-5 year recovery.
> Low interest rates might result in more sales this Winter but won’t push prices up.
> Affordability has improved significantly – the main benefit of a downturn with vast opportunity available for buyers willing to act today.
> NSW investors represent 44% of the market, as softer prices and strong yields lure many investors away from shares and into property either directly or through their SMSF.
> City investors are increasingly looking to regional areas for value and strong yields There are positive signs in blue chip regional markets hit hardest by the GFC.
Published: Wednesday, June 13, 2012blog comments powered by Disqus