Barring catastrophe, the only way for property to go in 2012 and beyond is up
As we look back on 2011, Property Observer is republishing some of our most noteworthy stories of the year.
There is an incredible amount of concentration on the state of the world’s economic situation and what it bodes for the average mum and dad investor in our regional location. However, does anyone really understand all the implications of the data being both reported – and interpreted – by various journalists and economic commentators with pre-conceived ideas of their own?
Let me give you some idea of the range of opinions hitting the papers each week. A recent article in the UK Telegraph by Ambrose Evans-Pritchard – which circulated through Twitter at a rate of knots – suggested the US economy is not only rising, but “within five years or so” America will be well on its way to “self-sufficiency in fuel and energy”. The report makes plenty of other bullish assertions under the premise that the ”American phoenix “ is on the rise once again. “World power swings back to America” reads the title and indicates a return to prosperity that would no doubt hit the real estate sector (making purchasing US property now a very appealing prospect).
I love reading upbeat reports that offer a sense of certainty and future security – the repercussions have positive effects on the investment market as a whole and give a much-needed sense of hope that we can wave goodbye to the long-winded economic depression shadowing the world’s major players. However, if you care to investigate a little deeper and read the EIA’s Annual Energy Outlook 2011, you’ll see anything but a bullish review of America’s journey to “self-sufficiency”, with the disclaimer American “estimates of technically recoverable resources and well productivity remain highly uncertain” The report is long, however in short, the “predictions” outlined in Pritchard’s article are a long way from being set in stone and a close read of the “real” statistics in the report makes this woefully clear. I hope no one acted too fast on the misinformation it contained.
Closer to home we can also read two sides of the coin on the property market. Chief economist at Commsec Craig James came to the fore recently making the call that 2012 “should” be a year for housing market recovery – the view is widely held by others such as ANZ senior economist Ange Montalti, who claims economic growth will lift prices during the course of 2012. Figures have also been released from RP Data that show a slowing in the overall downward trend and have therefore been interpreted that we’ve started “to turn the corner”.
However, less bullish predictions come from Louis Christopher, managing director of SQM Research, who says should rates remain on hold, “by June 2012 home prices in Melbourne, Brisbane and Perth will be as much as 15% below their 2010 peaks”. He’s not alone in his pessimism – Harry Dent and Steven Keen have both warned we’re at the start of an impending crash – not to mention Prosper Australia’s continuous doom and gloom assertions.
So whom do you want to believe? Well if you have pre-conceived ideas of your own, you’ll take the side that backs your personal perspective. It’s natural to do so – it’s incredibly hard to be completely subjective about anything. As the saying goes ‘‘we see and understand things not as they are but as we are'’. It’s very difficult to lump a one-world outlook on any market and expect to hit the nail on the head like some modern day Nostradamus. Take China for example, where stringent government regulations have forced a fall in housing demand and subsequently prices. The issue has torn Chinese society in half. On the one side are the home owners who want to see prices continue to rise. On the other are the renters, who not only want house prices to drop – they want them to drop some 50%! Sounds like
No one’s been immune from the market malaise throughout 2011 – in fact on a par with other years, it’s been a very difficult atmosphere for industry professionals to muddle through. Turnover is down – In Victoria for example, Valuer-General data shows a drop of some 33% for the June quarter this year, compared with the same time last year. Buyers have sat on the sidelines perceiving prices may drop further and sellers have needed to meet the market and make some hard decisions. However, assuming the government doesn’t follow China’s example, I have only one outlook for the next year – and the subsequent 10 years following – and no doubt it will be brushed under the carpet by those who think I’m merely spruiking the party line. Providing we don’t have a catastrophe on monumental proportions (I’m talking earthquakes and tsunamis) – the only way for property to go in 2012 and beyond is up.
Our property market is based on a simple formula – supply vs demand. Australia is a mere teenager compared with Europe, and we’re growing at a dramatic, unstoppable pace. Our population growth is higher than that even of
Much of this growth comes from Australia’s immigration program aimed at attracting people of working age with the needed skills to benefit our economy. The simple equation is the bigger the population, the bigger the economy. Whether this has a major effect on our wealth as individuals is arguable and indeed doubtful, but what cannot be argued is the overall effect the population boom will have on the housing industry. Most are trying to squash into areas that are already straining at the seams (our capital metropolitan regions), and the best seats are taken. No wonder the property market in Australia swings between unsustainable booms followed by periods of negative growth and sharp market corrections – for decades no one has planned effectively for the growth and we’re some 20 years behind the eight ball.
Unlike areas in Europe and the US where first-home buyers are able to move out of the capital cities and feasibly live in locations with a lower median while taking advantage of reliable public transport systems and the decentralisation of jobs, Australia has ensured the bulk of its population and jobs remain confined to inner-urban regions. Therefore, when the market’s not growing, rents are rising and an increasing number of first homebuyers find they’re unable to build up a sufficient deposit to get a foothold into real estate.
This year alone, rents have increased up to (and in some cases beyond) 10.1% in Perth and a more modest 5.9% in Sydney (R P Data). Affordability is constrained and the market may well experience only marginal growth throughout the course of 2012 – especially if confidence remains on a knife edge due to factors largely out of our control (both at home and abroad.) However, if interest rates drop further (and the banks pass them on) – logic alone assumes we’ll see a revival of those desiring to pay their own mortgage and not someone else’s!
We’re already hearing from various mortgage brokers that pre-approvals have increased dramatically. AFG – Australia’s largest mortgage broker – has recorded a whopping 18% rise in approvals throughout November (mostly from investors and first-home buyers.) This isn’t surprising when you see how hard the banks are working to get business. ING and City Bank have dropped their one- and three-year fixed rates, and Westpac and CBA are not far behind. It’s hard to assess at this point how many of those pre-approvals will turn into transactions – and we’re not out the doldrums yet. However, it’s reasonable to assume once the starting gun fires an air of confidence and certainty into the atmosphere, we’ll see upward pressure on house prices across the board. The only question is how fast those rises will be throughout 2012.
There may be a good proportion of our population who are suffering, but equally so are a large proportion of our population reaping the rewards of a booming economy. This doesn’t mean by any stretch that you can’t lose money through property investment, it simply means that the right property, in the right location, for the right price, will continue to grow as demand grows – if you don’t believe me get a newspaper from 10, 20 or 30 years ago and look at the prices.
It’s true growth in Australian property has to some extent been fuelled by investor speculation along with easier lending conditions; however that speculation is backed by pretty sound fundamentals. Take away the speculators, and long term you’d still be looking at home buyer demand outpacing supply in the metro regions. This is why property is such a widely accepted model for long term investment.
As time progresses – like Europe - we’ll see a greater split between those who can afford to purchase and those who can’t. We’ll see a growing number of young adults move into the rental market, or wait until their late 30s and 40s before they purchase. I also suspect we’ll see a change in demographics, with more joint purchases and a greater number of people sharing property as family’s pool funds to ‘afford the dream’. Less will own their home outright and more will hold the burden of a mortgage. It’s already started to happen.
As for 2012 – if you’ve been thinking of taking the plunge don’t expect the market to stay this way perpetually. Pondering whether our housing market will crash is an ongoing debate that will do the rounds for years to come. The only way to reduce risk when investing in property is to invest in those areas which have the best potential to maintain consistent solid demand. At the moment there is little to suggest that our population will diminish or demand for property decrease, so the more time you spend worrying about tomorrow is time away taking advantage of today.
Catherine Cashmore is senior buyer advocate for Elite Buyer Advocates. With extensive experience in all matters regarding real estate, Elite Buyer Advocates purchases and negotiates more than $100 million worth of property each year for its clients.