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Is 2008 the right time to invest in property?
By Michael Yardney
January 2008 - Issue 1
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If you haven't given yourself a new year's resolution, here's one for you. Stick to well located residential property investments in major capital cities and you won't go wrong in the long term.
The good news is that Santa has brought us one of the presents at the top of our wish list - confirmation that all is well in the property markets of Australia. I see 5 green lights to selectively invest in now:
1. A stable Australian economy
The Australian economy’s vital signs are healthy and over the next few years major tax cuts promised by the ALP should inject a further flood of money into the economy. Ultimately it is indicators like strong employment levels, wage and productivity growth and manageable inflation that drive prosperity and the demand for goods including property.
But watch out - every year there is one “X factor”, one unknown that pops up and surprises us and the economy. The one to watch out for in 2008 could be the effect of the American sub-prime crisis which is still causing turmoil and uncertainty in world financial markets.
2. Increased Demand but a Lack of Supply of Dwellings
Remarkable growth in immigration levels (178,000 over the year to June 2007) has boosted demand for housing.
Despite a shortage of dwellings around Australia (the ANZ Bank projects a record housing shortage of nearly 200,000 dwellings by 2010) builders are just not constructing enough new homes and developers are not producing enough new apartments or townhouses to meet demand. The problem is that for most new medium and high-density development projects to become financially viable the end value of the units or townhouses will need to rise by 20% or more than current market prices.
Putting all this together, a shortage of supply and continuing demand plus the increasing cost of development (including higher land costs, infrastructure costs and building costs) means that the value of new dwellings will have to rise substantially. This will of course have a positive impact on established property prices.
3. Rents will strengthen in 2008
Rents increased strongly in all our capital cities over the last year with demand for rental properties outstripping supply. Record low vacancy rates, fewer investors bringing new properties onto the market and low housing starts all mean residential rents will rise even further over the next few years. The rental boom has only just begun.
4. Demographics
Our population is fragmenting and more people are living alone; we are living longer and immigration is strong and likely to increase over the next few years. All of this means that more people will be seeking more accommodation both as tenants and owner occupiers.
5. Predictable Interest Rates
Last year saw three interest rate rises and even though it is likely that there will be a further interest rate rise or two this year, we still have relatively low rates compared to long term trends.
Currently the 90 day bill rate is 7.25%, the five year rate is 7.25% and ten year bills are 6.88%. The market is telling us it thinks we’re at or near the peak of the interest rate cycle and while we can expect a small further interest rate rise in the short term, this may be followed by a flat period or a fall in interest rates.
All this makes 2008 a great time to buy properties as there are now great opportunities to create long term capital growth as our markets are primed for some special results in select markets.
But you have to be careful because not all properties will perform well. Our property markets are fragmented and patchy. Some suburbs will out perform while others will under perform. Some houses within those suburbs will increase in value and some will be duds.
Affordability will be one of the key issues that limits property price growth in some suburbs in 2008.
Affordability has fallen 10% over the last year and is at a low point with the average first homebuyer needing more than 37% of their after tax income to service the minimum monthly payments on a median priced home. This has risen form 22% in 1997.
On the other hand those who own properties in the more affluent suburbs of our capital cities, which have exhibited strong capital growth over the last few years, are sitting on a heap of equity and are not really worried about affordability.
These inner and middle ring suburbs are likely to keep performing well in 2008 and this is likley to lead to a three tiered market especially in Melbourne and Brisbane; and eventually Sydney later this year.
The more affluent suburbs near the city and the water will become even more expensive and strongly outperform the averages as a large group of owner occupiers and astute investors chase the small numbers of properties coming onto the market in these suburbs.
The middle ring suburbs will increase in value, but not to the same extent as the inner ring of suburbs. As more and more home buyers and investors find they are priced out of the inner ring and will start looking for affordable properties in neighbouring suburbs.
The outer suburbs are usually where home owners are more interest rate sensitive with many currently struggling to meet their mortgage payments. With the possibility of further interest rate rises in 2008, property values in these suburbs are likely to languish.
So while the news is not the best for first home owners and renters, the current property markets offer good opportunities for investors who buy selectively
With that general overview, let’s now look at our major property markets in more detail:
Sydney
The Sydney residential housing market has suffered over the last four years and the three interest rate increases in 2007 only delayed the general market recovery. But they didn’t stop Sydney’s more affluent suburbs taking off with owner occupiers pushing up property values. Residex reports an increase in Sydney’s median house price of over 8% in the year to October 2007.
“Like other states, Sydney’s housing market has been fragmented,” explains Pino Tedecso, director of Metropole Property Investment Strategists in Sydney and a registered property valuer. “The more affluent suburbs have recorded the highest annual growth in the median house prices and the overall averages don’t reflect the strength in these markets.”
“Owner occupiers have returned to the Sydney property market as have astute investors. We can expect the prices of well located homes and apartments to increase further in 2008” said Tedesco. “In fact the divide in the two-tier housing market is likely to widen.”
“The good news for investors, but bad news for tenants, is that Sydney’s vacancy rate decreased to record lows and rents are likely to increase strongly over the next few years due the strong tenant demand and very limited supply of rental housing. I see more property investors returning to Sydney in 2008 attracted by rising property values and increasing yields.”
Melbourne
Melbourne’s property markets performed strongly over the last year supported by a solid economy and an increasing number of international migrants. Its median property value increasing by almost 18%,. Further high migration levels will maintain Melbourne’s population growth and underpin its property markets in the year ahead.
Melbourne’s market could be fairly described as booming and is currently performing in three tiers.
The more highly sought after and affluent suburbs as well as those close to the water showed strong increases in value. Many increased by over 20% and some had an increase in their median price of over 30%. People buying in these suburbs were basing their decisions more on lifestyle choices than financial factors
As a result of the strong growth in values in Melbourne’s inner suburbs, home buyers and investors have pushed up prices in neighbouring middle ring suburbs, but not to the same extent.
However gains in Melbourne’s outer suburbs have generally been more subdued as families find it increasingly difficult to make ends meet.
And this divide is likely to increase further in 2008.
“It’s not only the owner occupiers - we are seeing strong investment interest in the inner suburbs and south eastern suburbs from smart investors who are back in the market” said Jack Henderson, Melbourne director of Metropole Property Investment Strategists “They seem to see the long term opportunity the market now offers and realize that vacancies are low, rents are rising and their yields will increase."
“Overall, Melbourne presents a safe opportunity for property investors” said Henderson. “We have strong population growth; the state’s economy is solid and now is a good time to take advantage of the opportunities presented by Melbourne’s strong property market. But not all properties will perform well. I suggest investors look for suburbs that have a long history of strong capital growth and then look for properties in those suburbs to which they can add value – maybe through renovation - creating even more capital growth.
“Vacancy rates in Melbourne are at a 25 year low with a critical shortage of rental properties in some suburbs” explained Pamela Yardney, director of Metropole Property Management.
“One and two bedroom apartments are experiencing acute levels of demand by tenants who are queuing up to lease available rental properties pushing up rentals. Strong tenant demand and a severe undersupply of rental properties should see some rents increasing by up to 10% in the next year” said Yardney.
Brisbane
The Brisbane property market is also booming, underpinned by a strong economy and net interstate migration. Overall property values grew by over 18% in the last year.
“Home owners and investors have pushed up property values in selected Brisbane suburbs with the inner suburbs outperforming over the last year” explained George Kafantaris Brisbane director of Metropole Property Investment Strategists.
“To maximise capital growth over the next few years investors will need to buy selectively. The more affluent inner suburban locations should perform well in 2008 as should riverside suburbs. I also recommend that investors look for properties with upside potential where they can create some capital growth through renovation or for properties that will benefit from improved infrastructure in their vicinity.
Low vacancy rates are causing a crisis for the additional 1,200 people coming to Queensland from interstate or overseas each week. “There are simply not enough houses to accommodate everyone” said Kafantaris.
Perth
To put is simply – Perth property prices are too expensive.
Even many experienced locals agree that Perth is too expensive in relation to opportunities in other property markets around Australia and the median price of a property in Perth only increased by around 3% last year. This is not entirely unexpected considering the close to 50% growth seen in the previous year.
However the median price of a Perth apartment ($396,500) is now more expensive than a similar apartment in Sydney ($392,000) according to Residex.
With new apartments in some residential development selling for over $14,000 per square meter - this is around double the price of a similar project for comparable suburbs in Melbourne, Brisbane and much, much higher than even Sydney.
It is reasonable to expect the Western Australia economy and population growth will be underpinned by the need for its resources for the next few years and consequently its property markets should perform well.
But this doesn’t mean that WA property values can just keep increasing like they have in the past. WA properties will only keep increasing in price as long as they do not become substantially out of balance with other Australian property markets. Property owners in WA should be prepared for a slower market over the next few years.
I know from our experience at Metropole that there are many investors from Western Australia taking their equity out of Perth and buying property investments in Melbourne and Brisbane, where they see more upside potential.
A.C.T.
Canberra property prices grew by over 11% last year fuelled by a strong economy and population growth. Low vacancy rates and strong rental demand forced up rentals by around 15% and rental growth is likely to continue over the next year.
Despite the relatively high property values in Canberra, low unemployment and high disposable incomes mean the markets should perform well in the future
South Australia
Adelaide’s housing market performed remarkably well in 2007 with house prices growing by over 10%.
Low vacancy rates, increasing rentals and a lower entry price have enticed many investors into the SA property market.
Some are speculating that there will be a mini resources boom in SA. This has not happened yet and until it does, that’s all it is - speculation.
Hobart
Tasmania’s improving economy has underpinned its property markets with values increasing by around 12% over the last year.
At the same time residential vacancy rates have remained around 2% and consequently rents have risen by about 5% over the last year.
Darwin’s property market has been driven by the commodities boom with median house prices doubling over the last 5 years. Property values increased a further 9% over 2007 and are likely to perform well in the coming year.
My concern with both these markets as a place to invest is their smaller population base respectively. They will be more volatile and respond both positively and negatively to economic and other changes more rapidly than our major capital cities.
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蝈蝈厨房之--Less is more(无肉 不喜勿进) (2010-10-8) t_guoguo 
楼主:propertysyd
发表于 2008-10-3 14:22
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