Tide is turning for Australia's property markets

Now that we’re a quarter of the way through the year and our property markets have had a chance to show their hand, it’s probably a good time to do a whip around Australia and see how property is performing.

RP Data has reported their March quarter house price index results and the findings were encouraging.

Once again, the latest stats will disappoint the doomsayers who frequent the property forums and for the last four years have been predicting an apocalypse.

What the stats show

Overall Australian dwelling values were unchanged across the eight capital cities over the first three months of this year. In fact, RP Data-Rismark’s hedonic index data suggests that Australian dwelling values have not budged at all since the end of October 2011.

The tide is turning

Of course, there is not one property market in Australia, so while the market is flat in general there are markets within markets, each pulled by a multitude of influences and, as a result, sectors within sectors are performing at differing speeds.

Source: RP Data

Clearly our property markets have slumped over the last 12 months, as the following table shows, but the latest results suggest we are now in the consolidation phase of the property cycle.

Apartments outperformed houses

Units outperformed houses in Australia’s major capital cities by a wide margin during March. Capital city apartment prices increased by 0.9% during the month to a median of $400,000, while detached house prices increased by just 0.1% to a median of $464,500.

Let’s now look at some of our major property markets in a little more detail.

Sydney 

Sydney has been outperforming the rest of Australia, but the top end of the market is still suffering from an oversupply of property relative to the reduced demand.  However, affordable gentrified suburbs within close proximity to the city, transport, amenities and infrastructure are performing well. 

In particular, well located apartments in the inner western suburbs and Sydney’s eastern suburbs are being snapped up by investors and owner-occupiers at hotly contested auctions according to George Raptis, director of Metropole Property Strategists in Sydney. 

“I’d like some of the property doomsayers to come to one of these auctions and see how many genuine bidders are in the market for the small selection of good properties for sale,” says Raptis. 

“The market for well-located apartments is likely to remain strong throughout the year. Strong rental demand, a shortage of rental properties, tightening vacancies and rising rents means investors will vie for the same apartments as owner-occupiers, underpinning prices.” 

Melbourne 

Different segments of the Melbourne housing market are at different stages of the property cycle. 

There is still an oversupply of property at the top end relative to the reduced demand for luxury property. While there is more competition for properties in the middle end of the market, there is still an oversupply of properties relative to demand, even though recent auction clearance rates have been encouraging. 

Currently there are some good investment opportunities buying established apartments in Melbourne’s southern or eastern suburbs and adding value through renovations. 

But there are some segments of the Melbourne property market to avoid. 

According to Charles Marvelli, head of the Melbourne buyer’s agency division of Metropole Property Strategists, “Builders and developers have got ahead of themselves, and there is an oversupply of newly built house-and-land packages in Melbourne’s outer western suburbs such as Point Cook and Melton. Currently there is a flood of new properties, but buyers are showing a preference for two- to three-year-old homes which can be bought considerably cheaper than new stock.” 

“There is also an oversupply of inner-city CBD apartments, with more being completed in the next few years at a time when there is less demand from the tenant demographic that rents in the CBD,” adds Marvelli. 

“This will put downward pressure on prices and rentals. I expect there will be an oversupply of inner-CBD and near-CBD apartments in Melbourne for a few years, causing prices to fall slightly” he says. 

Brisbane

House prices in Brisbane have dropped for the last two years and are now 11% below their peak, but there are tentative signs of improvement in this market. 

However, Brisbane buyers are lacking the necessary confidence to re-enter the market, instead sitting on the sidelines waiting for signs that real estate has bottomed before they make a purchase. 

Vacancy rates have fallen to 2.2% in December 2011 from 3.7% 15 months earlier, suggesting that the market is working through an overhang in supply, and there is evidence that investors as well as owner-occupiers are slowly returning to the market. 

The prestige end of the Brisbane housing market is suffering, but more affordable homes within five to 10km of the CBD are likely to perform well when the upswing eventually takes place. 

One area of opportunity is the established apartment market around Auchenflower and Toowong, where you can find 1970s and 1980s apartments with good size rooms, close to amenities and within a brisk stroll to the CBD. 

Increasing confidence with a new state government and an upswing in economic conditions, along with improved affordability, suggest that prices should stabilize over the next six months before starting to edge upwards. 

However, there are a large number of off-the-plan apartments available in the Brisbane CBD and surrounding suburbs. Many of these remain unsold, and this oversupply of properties will put downward pressure on prices and rentals in these suburbs. 

Many of the apartments that have been sold off the plan are coming on stream in the next few years and have been purchased by investors. Some will have difficulty getting finance and settling their purchase. Others will be disappointed to see the end value of their properties is less than the original purchase price. 

Adelaide

The Adelaide property market has been flat for some time now. Prices fell a further 1.5% over the last three months and are likely to correct a little more before the market bottoms. 

ANZ Bank reports that, “While the SA housing market should remain subdued through the first half of 2012, the economic benefits from a number of large non-residential building redevelopments in Adelaide (Royal Adelaide Hospital, Adelaide Convention Centre and Adelaide Oval) and a positive outlook for regions benefitting from major mining and energy projects (including the proposed Clinton and Arckaringa Basin coal-to-liquid gas project and Olympic Dam) should drive an improved outlook into 2013. We expect rental vacancies will grind lower through 2012 and 2013, while house prices should trough around mid-2012.” 

Perth

While the WA economy continues to benefit from our resources boom, the Perth property market is still suffering a hangover from its pre-GFC boom. 

In the three years leading up to the 2008 peak in house prices, WA house prices increased 20% per annum on average, compared to a national average of 6% per annum. Since then, investors and homeowners have deserted the Perth residential property market, prices have fallen and are currently 8.2% below their March 2008 peak. 

However, there are signs of optimism creeping back and some areas of the Perth market are likely to turn around later this year or in 2013. 

What next?

We’re entering the stabilization phase of the property cycle, where buyers are returning and slowly taking up available stock, but not really pushing up prices yet.

This means our property markets are likely to remain soft this year, but should keep consolidating.

One encouraging sign is that first time buyers are back, applying for loans at levels not seen for two years. Remember, first time buyers are typically a good barometer for changes in affordability.

How soon things turn around will depend a lot on buyer confidence, and this will depend upon what’s happening overseas, how our local government performs and what happens with interest rates.

Does this mean you should put your money under the mattress or buy gold bullion rather than invest in property?

You already know what I’m going to say, don’t you? 

Property is more than just an investment – it is a fundamental human requirement. Everyone needs a roof over their head, whether they rent or own their own home. As a basic necessity, housing will always be in demand – it will always have value because we simply can’t live without it.

The long-term future is assured for those who invest in property.

At some stages in the economic cycle property values will rise strongly and at other times they will languish. When people can’t afford to buy property (when price growth slows because of decreased demand), people end up renting, so investors win by getting better returns. And that is currently happening as rents rise strongly.

Of course, this also means that buying any property and hoping it will make a good investment just won't work at this stage of the cycle.

You need to buy the right type of property. One that has a level of scarcity – meaning it will be in continuous strong demand by owner occupiers (to keep pushing up its value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long-term averages), at the right time in the property cycle (that would be now in many states) and for the right price.

Then hold it as a long-term investment and reap the rewards.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.