July 2008 Finding the silver lining in this housing cloud David Potts - July 20, 2008 So much for property taking off when the sharemarket drops. Even in 1994 when they both went down together it was the sharemarket that was first to take off again. This time the best that can be said for home prices is that they're going nowhere. Just as no two properties are ever identical, some areas will do better than others. Mind you, it might be hard to tell the difference since the key forecasters are tipping price movements of only 1 to 5 per cent. That's plus or minus, depending on where you're talking about. Considering the devastation visited upon the prices of listed property trusts which is getting a bit too close to, er, home, that's probably more a relief than a disappointment. Dugald Higgins, associate director of Property Investment Research, says: "Only really high unemployment would hit real estate values. This isn't like 1991." Although unemployment is expected to rise, a natural floor is the huge boost to the economy from the resources boom.Yet even real estate prices in the resource boom states are struggling. Prices in Perth are drifting down, after a huge and apparently unsustainable run- up, it should be noted. In Brisbane, a state budget cut in stamp duty for first home buyers from September will give a modest boost to the lower end of the market but that's about it. HITTING THE CEILING Yet in all the capital cities there's a shortage of housing, resulting in rocketing rents. Michael McNamara, general manager of Australian Property Monitors, says: "A high gross rental yield attracts investors and also pushes renters into buying homes." Only neither has budged. Not even record immigration has been able to boost construction of new homes or push up prices, although it may well have prevented a more precipitous fall as interest rates climbed. Economists estimate there is under-building of about 30,000 dwellings a year. Compounding the supply squeeze is the difficulty for developers of getting bank finance thanks to the credit crunch, not to mention the fact that building costs are soaring. If they can get labourers in the first place, that is. CRACK IN THE WALL One reason prices aren't going anywhere is that, by world standards, they were awfully high to begin with. Shane Oliver, head of investment strategy and chief economist of AMP Capital Investors, says: "On our estimates on a range of indicators, Australian housing is about 30 per cent overvalued. "Australian housing is among the most expensive in the world." Fortunately, he whittles the expected price drop over the next year from 30 to 5 per cent, and you can thank an acute housing shortage and the boost to national income from the resources boom for that. Just as the credit crunch has shown how globalised markets have become, it's worth bearing in mind that house prices are falling as we speak in all the major Western economies. Then there are mortgage rates, which have risen 20 per cent in a year. Rod Cornish, head of property research at Macquarie, argues the property downturn began in 2003. "You have to look at the swiftness of the rate rise, not just the amount. "The flow-on from these rate rises will mean more softness in the next 12 months. "There'll be modest price drops in the next six to 12 months, especially in the outer areas of Sydney and Melbourne." At the same time he predicts "some growth in rents but not at the same rate". "Migration has to have an impact. With high interest rates it'll be on the rental market," he adds. Even this presupposes the economy does not fall in a heap. Then again, as Rob Mellor of property forecasters BIS Shrapnel points out, a softer economy would bring a rate cut anyway, so what's the problem? He says it will take a rate cut or two "to set demand off". "Prices won't go through the roof but would very quickly support the market." LOAN SWEET LOAN There's no doubt that it will take a rate cut to release all that pent-up demand. The trouble is that would seem to rule out a pick-up in prices this side of Christmas. The Commonwealth Bank says the banks are still two rate rises behind in making up for the increase in their cost of funds caused by the global credit squeeze. For its part, the Reserve Bank will be loath to loosen the strings while inflation is threatening and oil prices are so high. Don't expect it to be bullied into cutting rates prematurely either by a chorus of whingers over the state of the economy. The reason the economy has slowed is because the Reserve wanted it to. Get used to it. Next year, things will be different. The global slowdown will be really biting, and we might even look back on an inflationary threat with fond memories. Or perhaps not. Still, remember the Reserve cuts faster on the way down than it lifts on the way up. "I expect more of the same in the next 12 months," says Mellor. "Prices could go up 1 or 2 per cent and some places could drop back 1 or 2 per cent. In 2009-10, they'll improve, strengthening to 7 or 8 per cent growth." RISING DAMP Still, you probably gathered there are no real estate hot spots coming up in the capitals. There aren't even lukewarm spots, more your thawed-out cold spots. But the inner-city areas of Melbourne and especially Sydney, where rents are already soaring, are the places to be. Er, buy. Tim Lawless, national research director at RP Data, says: "The best inner-city rental yield in mainland Australia is currently found in Darlington in Sydney, where the average gross rental yield for a unit currently sits at 8.6 per cent." By the same token, the best capital gains have been well outside the big cities - RP Data says prices are booming in Broken Hill, Whyalla, although from a low base, as well as Queensland's Sunshine Coast and Broome in Western Australia. Within the capitals, the best suburbs are Melbourne inner-city Mont Albert, Melbourne's Glen Huntly, Sydney's Castlecrag and Adelaide's Underdale. McNamara predicts Sydney inner-city apartments will be the vanguard of the eventual property recovery. "They haven't moved a jot in five years." He says anything "close to the city with a good gross yield" would be a good investment. Inner-city Pyrmont, which is becoming something of a media hub, and to a lesser extent North Sydney and Melbourne's Docklands, are likely to be the earliest to pick up. Soaring rents and easing credit to spur price growth- Your Mortgage June issue Australia's major property markets are poised for double-digit growth in the next three years as rents escalate and the credit market stabilises, according to a leading economic forecaster. BIS Shrapnel noted in its report that with national population growth of 1.5% expected in 2008/09 - the highest since the late 1980s - Australia is experiencing record net overseas migration inflows, which is underpinning what is already strong, underlying demand for housing. "With construction of new dwellings below previous peak levels, a rising deficiency of dwellings is also evident in the extremely low vacancy rates and will drive strong rental growth in most cities," the report said. Senior project manager with BIS Shrapnel and Residential Property Prospects, 2008 to 2011 report author Angie Zigomanis said rising rents and improving credit conditions will be the key to the next upturn in prices in most capital cities. "As credit conditions recover over the course of 2009, we expect banks will gradually pass on lower borrowing rates to customers. This easing will enable house price growth to pick up in many centres during 2009/10 and 2010/11," Zigomanis said. BIS Shrapnel said it expects Sydney's median house price to grow by 18% to $650,000 over the three years to June 2011, with the strongest growth coming through at the end of the period. Melbourne's median house price is expected to climb by a total of 16% over the same period to $530,000. Despite fears of low affordability and threats of oversupply in the unit sector, BIS Shrapnel forecasted Darwin's house prices to jump by 21% to $515,000. Investors in Brisbane are set for a windfall, with house prices expected to surge by 22% to $515,000. Adelaide is forecast to grow by 16% to $425,000 and Canberra by 15% to $530,000. While BIS Shrapnel forecasted another interest rate rise in September quarter 2008, it said the average cost of renting is set to rise much more than the cost of buying in 2009 and 2010, due to the undersupply of new housing. Property investors return to the market A recent lull in interest rate hikes from the RBA has spurred property investors to return to the market, according to the latest report from CommSec. CommSec's latest Economic Insights report highlights that while the value of overall housing finance commitments fell by 3% in April, the total value of investment loans increased by 1.4% over the same period. "Housing finance may have fallen over the latest month, but on a positive note it was encouraging to see a marginal pick-up in investor housing loans," wrote CommSec Equities economist Savanth Sebastian. "In recent months the rate hikes have ensured that the housing sector remains the least favoured asset class. However, with increased speculation that the Reserve Bank may have retired to the interest rate sidelines for at least a few months, investors may begin crawling back to the housing market." CommSec believed that stagnant interest rates will only encourage property investors to show increased interest in the housing market. "The rental market remains extremely tight and with vacancy rates at record lows, any speculation that the rates are on hold will increase investor focus on housing," wrote Sebastian. The notion that interest rate rises may have stopped for the time being also seems to have affected the number of homebuyers opting for fixed rate mortgages, with the fixed loan market seeing its overall proportion of all dwelling finance drop to 17.5% in April - its lowest proportion since August last year, according to the report. "The growing sentiment that rates may have peaked or [are] at least close to the top of the cycle is also being priced in by borrowers, with the proportion of fixed rate loans to all loans falling to their lowest level in nine months," wrote Sebastian. Interestingly, CommSec's statistics show that while the total value of housing finance commitments fell during April, the total value of home loans approved but not advanced reached a record high of $39bn. This was a 21.4% increase on the previous year's figure. The average housing loan was also up on the previous year's figure, rising by 4.1% to $236,900. Loans for house building were also up in April, rising by 1.8%, suggesting that the construction industry believes that the need for housing in Australia will continue despite some difficult market conditions. "The compelling fundamentals suggest property will be very much in focus in 2009 despite the headwinds of higher interest rates. Population is growing at the fastest rate in 18 years but supply of homes isn't keeping up, resulting in soaring rents and property prices," wrote Sebastian. Do-It-Yourself Design Guide for Home Renovator - Archicentre FREE RENO COST GUIDE http://www.archicentre.com.au/2008JAN_Fullcostguide.pdf Disclaimer: The information on this newsletter is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser. 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