July 2008 Finding the silver lining in this housing cloud David

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July 2008 Finding the silver lining in this housing cloud David Powered By Docstoc
					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

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

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.


Yet in all the capital cities there's a shortage of housing, resulting in rocketing
Michael McNamara, general manager of Australian Property Monitors, says: "A
high gross rental yield attracts investors and also pushes renters into buying

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

If they can get labourers in the first place, that is.


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
"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."


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

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

"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."


Still, you probably gathered there are no real estate hot spots coming up in the

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

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

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

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


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