Why confidence is returning to the property market: Xavier Perronnet
The property market is cyclical, and buyers will only stay out of it for so long. Many are sitting on the sidelines watching proceedings from the safety of their non-committal mind set. However last week’s 25-basis-point cut to the cash rate is just one of a number of factors that suggest buyers will return sooner rather than later.
When we look at the broader financial indicators that drive consumer confidence in the property market I see a few clear signs that will entice buyers back to the market over the next 12 months.
Affordability – reports during the week suggest unemployment is on the way up, with some experts expecting it to top 6%. The RBA’s tool to combat rising unemployment is to cut the official cash rate in an attempt to entice business spending and job creation. While the banks will not pass on the entire rate cut they will pass on a large part of it, and those not caught up in the unemployment cycle will benefit from lower interest costs.
Buyers rushed back to the market in 2001 and 2009 due mainly to falling interest rates. The main difference this time around is it will not come packaged up with increased first-home buyer incentives. This means that first-home buyer markets may lag behind the broader market.
Capacity – According to the RBA household savings rates are at the highest levels since the mid-1980s. They have been trending up since the mid-2000s and now hover around 10% of disposable income.
Many borrowers have been making substantial excess principal repayments in recent years, and this has increased their equity and cashflow positions.
For many people, myself included, money begins to burn a hole in our pockets. The people who have been saving and have job stability, which is 95% of the population, will start to realize that the sky is not falling in and will begin to consider making their move.
Demand – Home ownership in Australia is very high, with around 70% of people living in a property with their name on the title. The needs of a home owner change over time, whether it be needing to upsize or downsize. Although many owners have put these plans on hold, the necessity to change will force them to eventually make their move. The lifestyle nature of residential property means that there is always a degree of underlying demand.
Further, property is a great Australian pastime, and this continues to be the case. Web statistics show that, although competition from buyers has been relatively soft in 2012, web browsing continues to be very high. Nielsen’s online analysis of real estate portals suggests more that 3 million Australian’s search for property each month. That means around 15% of the entire Australian population are actively looking at property at any one time.
This activity flows onto the physical market, with many agents reporting high numbers at open for inspections for good quality homes. Despite the level of interest, many people have had the mindset that 2012 has not been the right time to buy. It is only a matter of time until this mindset changes.
As a result of these factors, supply and demand for residential property will become more balanced over the next 12 months. The property market will begin to find its feet and move into a more sustainable growth pattern.
Xavier Perronnet is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.
