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Invest I strategy

What's really happening with Australia's property markets? comm entators such as Jerem y Grantham and the Ecollomist th at weighed into the deba te and stirred thin gs up.

Paul Braddick

Australia's leading property experts weigh in and explain why they remain optimistic about the market's prospects Why is the sentiment so poor at t he moment? Rob Mellor I th ink the pessimism is overd one. Yes dem and is relatively wea k, the volume of real esta te transacti ons is soft but are prices fa lling through th e fl oor? No, there's been som e modest decline of a few pe rce ntages here and there, maybe 4-5% over the co urse of six m onth s in som e m arkets, but is thi s the start of the m aj or co rrecti on in prices of 1O-20%? I think unlikely. I think there is a significa nt shortage of housin g out

th ere. I'd look at it from the point of view of underly in g dem and , w hat the popul ation grow th is, w hat the am ount of house form atio n is and the am ount of houses we're constructin g, and lo ok at the vaca ncy rates. The bottom line is we're not b uildin g enough and there is signifi cant shortage out there, particul arly in Sydn ey.

Tim Lawless When you find th e m ed ia and th e more bearish commentators ge t ai r time and a lot of headlin es, it does gather m om entum and that's w hat's happenin g now. Of course there's a lot Charles Tarbey o f speculatio n now th at ChaIrman. Century 21 the property m arket is slowi ng - how fas t and how far will it slow. So I think it's a natural Rob Mellor Managing director. phenomenon as you SIS Shrapnel go through each cycle. There have also been a lot of internatio nal

r-- ---------------------, The experts Paul Braddick Head of property and fi nancial system research. ANZ

Tim Lawless Research direclOr, RP Data

WWw.yipmag.com.au

The GFC has really impac ted on the psyche of a lot of '-=~ people and I think particul arly people in the o lder age bracket w ho are sitting on a signifi ca nt su pe r holdin gs and perhaps approachin g retirem ent and sudaenly see their nes t eggs halved. W hen compared to the v iew that people had leadin g to the GFC that we are in a boom and it ca n go on forever, the shock th at th e GF C has created in people's mind s has just increased conservati ve ness w ith th eir retail spending and w hat they're w illin g to spend in the housin g sec tor at the m om ent. I thin k th e ho usin g secto r is particul arly vuln erabl e to th e mind set that m any countri es saw a collapse in ho use p ri ces, and so the commentators are say in g thi s is th e inev itableAustralia followin g the res t of the world; it is not necessarily convi ncin g som e people but it is starting to bite and people are startin g to worry abom th at fac tor eve n though we 've po inted o ut m any t imes before that the fundamental s of the m arket and the economy are very di ffe rent here and just because we saw a co ll apse in th e U S, in Ireland and Spain, etc, doesn't m ea n th at we could exp ect to see that here. But given th e prevailing sense o f unce rtainty in th e market, perh aps it's not surprisin g th at the m ore bea ri sh commentary is starting to get a run again.

What would turn sentiment around? Rob Mellor I think if cash rates won't move this m onth and next month , then thi s w ill crea te a positive se ntiment. I think by the time we reach the June qu arter 19


Invest I strategy

Invest I strategy

fairly comfortab le absorbing one or two rate rises. After that you're getting into interest rates that are approaching the heights 0[2008 ... it probably won't, but it would provide further dampening in the market.

Charles Tarhey

)~

Australia's economic strength and projected population grow.th will drive demand for housing

next year and see that prices stab ilise and people realise that, that would encourage investors especially given the strength of the rental market.

Tim Lawless Some certainty as co where interest rates are going would certain ly boost se ntiment. At the moment it's hard to get certa inty around interest rates.

What worries you about the property market? Paul Braddick

[iJ .

Over the next 12 months my main concern wou ld . be on the RBA and on how aggressive they would be on monetary policy and interest rate. Th ere is a lot of talk in the market at the moment that affordability is difficult bm if we see another 100 bps ti gh tening over th e next 15 months , then affordabili ty is go in g to be very d ifficult and it will create hi gher risks for the market than what we're seeing at the moment. C learly there are other risks that people talk about in the international arena li ke Greece fa llin g over and a China slowdown, but I don 't think they are a high enough probability to see them as a major risk. I think the bigger risk for housing in Australia is affordability and what happens to interest rates in the next couple of years.

Tim Lawless It's going to be how the market is going to react to higher interest rates . I think it's a given [hat tr,;:,gan we'll see another rate rise this year. The RBA had a d elicate task of balancing the market and inflation with low consumer demand because they are saving and not spending. Th e RBA wants to stimulate spending but it doesn 't want prices to go higher. I think the market is

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Interest rate uncertainty may continue to discourage buyers from entering the market. Given projected population growth and current housing construction estimates, hou sing demand w ill likel y continue to outwe igh supply over the next decade, putting upward pressure on housing prices over the lon ger term. There appears to be a lack of government strategy or action to address the long-term housing supply and affordabi lity issues tiut affect residential property. There are increasing reports of mortgage holders falling behind on their repayments, which could indicate that people are buying without wisely budgeting for changing market condi tion s - eg, rising interest rates. Th e speculation and debate arou nd the issue of a housing bubble continues to remain a focus of the media. This commentary may worry prospective property investors, dampen ing thei r des ire to make a purchase.

Give us your top reasons to be optimistic about the residential property market Charles Tarhey • Rental vacancy rates are historically low, allowing investors to maintain consistent tenancy and lI1comes. • Australia's economic strength and projected population growth will continue to drive demand for housing, which makes the prospect of a large downturn unlikely. The federal government has started to invest in regional infrastructure, which shou ld help to develop regional residential centres and lessen the demand on o ur capita l cities, casing affordabili ty pressures and driving up prices in regional areas. Interest rates continu e to remain at a reasona ble level, despite a series of increases over the past year-and -a-half Competition is increasing in the m ortgage market with the emergence of smaller lenders, whic h could make it eas ier for inves tors to both refinance and achieve lower rates.

Roh Mellor • Australia sti ll has a fairly robu st finance sector. Even though banks are not lending as freely as they once did, the level of mortgage default is still fairly low. Which is a very good sign despite the recent rate rises. The fact that we're not building as many properties, so underlying supp ly is severely constrained . Yields are growing. H ousehold income is rising almost double of the CPT so that 's goi n g to improve the affordability ratio in Australia and eventually provide confidence for people to venture back into the property market. www.yipmag.com.au

Paul Braddick • The strength of the underlying economy is the biggest reason to be optimistic. The fact that we '-""~ expect the mining boom is going to drive above average economic growth for the next 4-5 years in Australia. That means household income wi ll continue to grow. Th e underlying fundamenta ls of the property market being so ti ght is going to play out in rising rent, improvi ng investor yield, and that will eventually provide imp etus for the next shift upwards in prices.

How do you see the residential property markets performing over the near to medium term? Paul Braddick Prices would be capped in the near term because of affordab ility but during that time household ' -t='---J income would rise and given the tightness in the rental market, rems would sh ift upwa rds again as we go through 2012. In some cities, Syd ney in particular, we expect a rapid acceleratio n of rent next year and the year after. It's th at increase in rental and yield that will start to get investors back into the m arket and start to see prices move upwards in 201 3 onwards again. We're not talking about big increases but more in line w ith inco m e growth ove r the next five years. After that flat pe riod in 2011 and 2012, we expect to see things to start to recover in 2013; it's all bui lding from the underlyi ng pressure we see from the rental side. Our near-term view over 12-18 months is that prices will j ust move sideways. We've seen reasonable falls in median prices in both Brisbane and Perth and it wou ld not su rpri se us to see further falls in va lues over the next six months. But both of these markets shou ld eve ntually bottom out and recover. Queensland and WA are goi ng to lead the growth that we're go in g to experience over the next couple of years so that shou ld provide some protection on the downside as soon as it starts to show up in the general economy.

Tim Lawless Markets like Sydney would be the better performe rs and as you move through 2012, you'd be getting growth of 6-7%. I think Melbourne w ill struggle to get a maximum of2-3% growth per annum over the near term because of its recent strong run. I think Melbourne p roperties are fully valued now and there won't be any significant increase over the next three years, maybe even pe rhaps over the next five years.

Roh Mellor Sydney probably has the best chance for getting over 5% pa over the next three years, but it won't do that in the next 12 months. I don't think there's going to be a boom but I don't think we're heading through a bust either because we haven't got the conditions for a bust - unemployment is still too low. If things start to reverse and economic growth heads back to 2%, then interest rates won't go up and if you have a lower interest rate with pent-up demand, that would ultimately create a support for house prices whether it would be among investors or owner-occupiers .• wwwyipmag.com.a u

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What's really happening with Australia's property markets?  

Australia's leading property experts weigh in and explain why they remain optimistic about the market's prospects.

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