Is it the head or the heart that currently rules the market?

Is it the hip pocket (or if you like it, the head) or the heart that currently rules the residential property market?

While not always expressed in those exact words, I suggest that almost every time we plan a project or plan a marketing campaign this thought is always lurking in our thinking.

Marketing almost always involves a big dose of emotion – it’s the fuel of many an auction. We know that even the most hardened consumer will at times be in a sort of conundrum. Are they being ruled by their heart or by their heads? And when we have markets that are full of change, with limited opportunities (supply), does this lead to anxiety, or is this simply the excitement of the times?

Markets are tied up with many different emotions. It’s the stuff that fuels the constant media attention and chatter, and we are seeing this now almost everywhere. Buyers and vendors are anxious not to miss out on the best price, on that ideal home or block of land, or on a great investment. The mixture might be different, but it creates a very active atmosphere and I suggest this makes a good starting point to consider how we might best approach development, marketing and buying residential property in 2014.

So with the sway of both our hearts and heads in mind, let's look at the three familiar topics of infrastructure, investment and supply. If we do that, I think we can shine a light on some key aspects of the market and thus balance out some of the ‘emotions’ we see developing.

Infrastructure

No matter if we’re dealing with an inner-city apartment or a new housing estate – the need for infrastructure is a constant.  Developers can find their projects delayed or made less attractive, and buyers have always had infrstructure as their priority. Without the right services and facilities, they stay away or they look for big price incentives.

Infrastructure is also linked to employment opportunities and with possibly higher unemployment headed our way this entire area will be a big hot spot in 2014. We are also set to see the community turn from expectation and planning to a fervent desire to see real action, which in some areas is happening.

Almost without exception buyers are, along with much of the general community, looking for delivery, be that new light rail, improved motorways, more schools or even very big ticket items like a new airport for Sydney. These projects need to move into the build phase. While there might be some planning issues, private developers will then move to deliver their part of the agenda with new shops, offices and industrial facilities. Again we need to remind ourselves that the current Prime Minister has stated that he wants his government to be known as the ‘infrastructure government’.

However, given how important this topic is, there must be room for better and quicker funding, and this might be a fertile area for SMSF investments. In 1994 there were 70,000 such funds, while today it’s in excess of 510,000 worth $520 billion – so infrastructure bonds might be welcome. At the same time, this would help secure new development which is another key area of investment sought out by the SMSF sector.

From a buyer’s point of view, quality infrastructure has always been a constant need, no matter how far you go back in history buyers always want well located homes, close to shops, employment, schools and with transport access. In the city they might also want access to parks, bike lanes, child care and cafes – that’s only going to continue in 2014 and we all know that emotions run high when infrastructure is lacking or under pressure. Developers understand this reality but the lag between government responsibility and the delivery of private facilities needs to be closed.

Investment

In 2013 we saw a strong trend towards some parts of the residential market being dominated by investors, and at the same time there has been a big drop in the numbers of first time buyers in the market. Investors have also been active at a time when prices have also been on the increase, again this is not ideal for the FHB. Although a rise in consumer confidence over the past six months has in part been linked to higher house values, it is often said that Australian consumers are more content and happier to spend when home values are on the increase.

Some parts of the investment market have also been strongly influenced by off-shore buyers, and with recent falls in the Aussie dollar this is a trend that may even accelerate in 2014. The SMSF sector is also unlikely to have any less of an appetite for real estate in 2014, although there are some concerns being raised about over-lending to such funds. However as Sydney in particular retains its spot as the third most unaffordable city in the world, after Hong Kong and Vancouver our residential market remains an attractive investment. Here, the key question is this: will population growth and demand remain strong enough to absorb supply, both as owner-occupiers and of course with enough people to rent investment stock?

In 2014, the flow-on impact of a robust housing market with improved levels of construction will be a key economic imperative as we move from reliance on the mining sector, which any tax review will almost certainly take into account.

Supply

There is no doubt at all that in 2014, we will be dealing with a demand led environment in almost every market. In some markets, like Sydney, the lag in supply may take a decade or longer to re-balance and that will be captive to a great extent to what happens with infrastructure and investment. We have also yet to consider how climate change may soon start to impact future supply, extreme summers and more bushfires might place increased cost pressures on development and this may in fact further hinder supply.

Demographics will also have a very big impact on supply, the delays with changes to planning laws in NSW are in part a demonstration of how sweeping changes to demographics are clashing. Established areas are going to have to adjust to the realistic demands of a growing city. An argument about more apartments in established areas, or more homes on the outskirts of the city is partly being sustained by a shift in demographics.

In any community we can see how different waves of immigration are in part leading to greater acceptance of apartment living. In 2011 apartments accounted for 25.6% of where we live, but currently approvals are running at 75% in favour of apartments and so within 20 years 50% of us may well be living in apartments.

If the need for more housing is to be satisfied, no matter where people want to live, then despite the hurdles involved government planning has to respond and developers in turn need to deliver a quality of product to meet demand and thus help to create valued communities.

In 2014, there will also continue to be huge demand for new land releases. In June 2013 land sales reached an eleven-year high, partly reflecting that fact that supply has been running at about 20% per annum below the level of demand and there is also no retreat from the strong desire for detached homes alongside more demand for apartments. It’s simply the varied requirements and aspirations of the demographics involved.

The outlook for 2014 is complex, but given the nature and size of the market that is not unusual or unexpected. Interest rates, the fate of the Aussie dollar, rising unemployment, the Federal Tax Review and Budget and China’s growth prospects are big picture issues.

Planning and infrastructure delivery are also big issues, while demand will continue to out-strip supply. However, if robust demand pushes prices ever higher then investors, who are usually more flexible with their buying options, will start to look at all options across the country.

Any of the points discussed are major topics in themselves, however, developers need to ensure that new product meets the changes in demand that are always taking place with shifting market demographics, while committed buyers are sure to remain fully engaged with their market and should seek a good relationship with local real estate agents and keep both head and heart in balance.

Peter Chittenden is managing director for residential of Colliers International.