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Tide turning as property wave prepares to break
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IF YOU'RE one of the many Melbourne investors disappointed in the performance of your residential portfolio over the past few years, you can hardly be blamed for wondering when your luck will turn for the better.
According to figures from the Real Estate Institute of Victoria, the local market grew by an average of just 2.9 per cent a year between 2003 and 2006 — not exactly something to shout about.
However, a deeper analysis of the institute's figures reveals a more accurate and positive scenario.
From 1980 to 2000, the Melbourne residential property market rose by an average of 9.4 per cent per annum. To test this over a more useful time frame (10 years, which is usually the maximum length of a property cycle) we looked at several 10-year periods between 1980 and 2006. No matter which time frame, the average annual growth was always 7 to 10 per cent.
Even in the period 1985 to 1995, during which the nation's economy took a battering in the "recession
we had to have", the average growth for Melbourne residential property was still 7 per cent per year.
In the decade from 1996 to 2006, the market's average annual increase was 8.7 per cent. As previously mentioned, the increase was just 2.9 per cent per year for four of those years (2003 to 2006). During the latter period, the average compound increase underperformed the 10-year average by more than half.
If the residential property market is to remain true to its historical performance and retain its 7 to 10 per cent annual increase for the 10 years from 2003 to 2013 — and we don't see any reason why it wouldn't — compound growth over the next six years must beat the 10-year average by 4 to 7 per cent per year. This means total growth of 11 to 17 per cent per annum.
Can the market deliver? We believe it can.
The residential market is a bit like a rubber band — the longer and more firmly you hold the band back, the further and faster it will move forward when you release the restraint.
In historical terms, four years is a relatively long lay-off time for Melbourne's residential market. We are now seeing signs the market has been held down as far as it can go, and is beginning to rebound.
Melbourne's inner suburbs, where auctions predominate, are a good barometer of market trends. Auctions depend on competition, so the higher the clearance rate, the greater the level of competition.
During February, auction clearance rates were more than 80 per cent; substantially higher than the 60 to 65 per cent in the same month last year.
If this trend continues, it is only a matter of time before the increased competition fuels price rises.
Who is driving this activity? We believe it is two distinct groups — baby boomers downsizing from large family homes, and generation Y DINKS (double income/no kids) focusing on establishing careers and sowing the seeds of financial security before they start their families.
The intriguing thing about the increased competition is that, on the demand side, the Melbourne market is still only flying at half-mast. While second and subsequent home buyers such as the boomers and gen Y are very active, investors are yet to come back into the fray on a large scale.
Once these investors begin to move — most likely in the second half of 2007 and into 2008 — the market will return to full strength and the level of competition will move up another gear.
In this scenario, it's quite feasible that our predictions of 11 to 17 per cent average annual growth will come to pass; generating long-anticipated equity for investors and complementing other asset classes in their portfolio.
Mark Armstrong and David Johnston are directors of Property Planning Australia, which advises on property and finance strategies.
http://www.theage.com.au/news/bu ... /1174597889124.html |
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