mrd

As with any free market, the Australian housing market is governed by the forces of supply and demand.  Think of it as a pendulum that constantly swings from a position of excess supply to one of excess demand. The centre (or vertical) position of the pendulum is that point where the two forces are balanced.  This is Market Equilibrium.  The pendulum will never rest in this position… but rather continue to swing to each extremity. 

These extremities are caused largely by “the herd mentality”. Let me explain…

• People, inspired by others making money from rising property prices, decide to do likewise
• Demand increases, thus pushing prices higher
• Higher prices mean reduced rental returns (rental yields are determined as a percentage of the purchase price)
• This downward influence on rental returns decreases demand (the number of able and/or willing buyers diminishes)
• The decreasing demand takes the heat out of the market
• As supply slows, demand for existing rental property steadily increases
• Rental returns improve, buyers are attracted back to the market (and the cycle continues)

Those who ignorantly rush into an overheated market, without much planning or assistance, may find themselves overextended.  These ‘sensational’ stories sell… and so are quickly taken up by our media.

The one overriding factor that makes residential real estate such a great investment class (stable and predictable) is this:

No matter what the state of the economy… (rent or buy) everybody has to live somewhere! They cannot leave the market, as with the stock market or even the commercial property market.  This rock that residential property investing is built upon provides a level of certainty that other asset classes do not (in my opinion).

Market forces will always prevail. Economic conditions may alter… but that will either result in an increase in values or rents. Either way, things always return to the centre point or Market Equilibrium… and we win!

Property investing ought to be seen as a long term strategy. It’s important to keep your eyes on the end result and not be spooked by events that happen along the way (anything that does happen between now and then is just “market noise”). Keep your support team close, continue to educate yourself and be sure to have your finances structured correctly. With a long term mind set, doing these things will act like suspension against any bumps in the road… and you will come to agree that the destination is well worth the journey.

Happy Investing,

Nick Lockhart

DESPITE rising rents and a shortage of rental properties, Australian tenants are way better off than counterparts in Hong Kong, who fork out almost three times as much in average rent.

A global survey of 92 cities ranked Sydney as the 32nd most expensive city in the world to rent a three-bedroom apartment. The second most expensive Australian city was Perth with a ranking of 49, followed by Melbourne at 71 and Adelaide at 78.

Hong Kong topped the list with an average monthly rent of $US9700 ($10,340). This compared to the average Sydney rent of $US3015, and Perth at $US2515. The global average was $US2950.

Where Australian cities ranked:

• 32 Sydney
• 49 Perth
• 71 Melbourne
• 78 Adelaide

Source: ECA International

The Weekend Bulletin (19/04/08) quotes Mortgage Choice as saying that home buyers are turning away from fixed rate loans as economists forecast interest rate cuts early next year.

The National Australia banks chief economist said that rates could be cut in the first half of next year as inflation fell back into the Reserve banks comfort zone of 2-3%.

Source: The Weekend Bulletin

Gold Coast Bulletin 18/04/08

A booming tourism industry and a barrage of new developments will see Hervey Bay’s population double within the next 12 years, experts forecast.

Property and social analyst Bernard Salt’s latest KPMG report on growth trends reveals that Hervey Bay is the fastest growing city in Australia after recording a 6.5% increase in 2005-2006.

Redevelopment of the airport costing $13 million, 20,000 sq mt of retail space with another 60,000 sq mt in development applications as well as a $100 million industrial estate are set to inject another 1000 jobs into the town.

What is a property really worth?  With respect to  a market valuation, it depends on how much you want a property and how motivated the vendor is for a sale. Please don’t confuse a market valuation with a mortgage valuations; we will look at the differences below.

The correct definition of a property’s value would be the price at which a willing, informed seller would freely dispose of the property and the price at which a willing, informed buyer would freely pay for the property.  If those two parties were to agree then that would be a genuine measure of a property’s worth.

Unfortunately it is very difficult to accurately predict what that figure is.  By comparison it is very easy to value shares.  One AMP share is identical to another AMP share, is priced identically and the prices the buyers and sellers agree on are openly published.  With property no two properties are exactly alike.  Even identical units standing side by side will be different.  They may have a different facing, one may be closer to a noisy road than the other, one may be facing the pool and the other not. They are never exactly alike so it is difficult to do a direct price comparison.

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A real life example of how investing has worked for us and can for you too…

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The Gold Coast Bulletin today quoted comments by Andrew Bell, CEO of Ray White Surfers Paradise. He said that the recent flattening of the local market was a “pause” in property price escalation that already shows signs of ending. He commented that in his opinion we are at the top of the interest rate cycle and that the minute interest rates start to the the bulk of investors would return to the market driving prices even higher.

The fundamentals are all really strong with a shortage of supply and increasing population. “It all comes down to supply and demand (heard that before??? – Martin) He says that rising rents mean that investors returning to the market will enjoy the best rental yields in 5 years. “When the investors return, the volume of properties that are currently on the market will not be there and this will lead to further price growth and fewer opportunities for buyers to get in”.

It has been recently reported that rents in major cities will rise by 50 per cent over the next four years due to the shortage of housing stock.

Most major cities have seen double-digit percentage rises in house rents over the past year as advertised listings dropped to a five-year low, Australian Property Monitors said in its March quarter rental series.

APM general manager Michael McNamara said rental supply was as tight as a drum with house rents in Sydney up by 11 per cent over the 12 months to March, and up by more than 10 per cent in Brisbane and Melbourne.”

As Gen Y leaves home and strong migration patterns take effect, our construction sector struggles to keep up the supply of well-located, affordable property to accommodate a growing population of renters.” he said.

Mr McNamara said given the time lag from approval to completion in building construction, the flow-on effects were likely to continue throughout the rest of this decade and beyond.

Brisbane is a market where there has been a long extended growth in rentals and what we have seen there has been a substantial increase in investor demand.

The slowdown in economic activity might mean that interest rates in Australia will start coming down, maybe even later this year.

Interest rates may drop back to 6 per cent by late next year, as the latest economic data shows a significant slowing in the economy. NAB chief economist Alan Oster said there was a 30 per cent chance the Reserve Bank would begin cutting rates this year as economic growth deteriorated.

As the Reserve Bank looks to have won another round in its fight against inflation, Mr Oster is forecasting interest rates will fall steeply in 2009 from its 13-year high of 7.25 per cent back to 6 per cent.”

An interest rate cut this year is a possibility, but there may not be enough of a slowdown,” he said. “But we think that by the late 2009 they will be down to about 6 per cent.”

Reserve Bank Governor Glenn Stevens recently fronted a Parliamentary hearing into the state of the economy, saying that there were now signs the economy was beginning to cool off.

BIS Shrapnel, through their Senior Economist, Jason Anderson says, “household income growth in Queensland has been significantly higher than NSW or Victoria over the past 3 years, which, together with an extended phase in rents and reduced vacancies, translates to a positive outlook for good positive growth for Queensland apartments. It adds up to still being a very strong fundamental environment in terms of property price growth over the course of this year and into 2009″.

Accordingly to BIS Shrapnel forecasts, Brisbane is projected to show the best growth over the next 3 year and, by 2010 will be the leading long-term growth average of Australian capital cities.

Terry Ryder from the Hotspotting website says, “Queensland remains the property market of choice for investors across the country – particularly those with a long-term view”.

“Queensland is driven by the pistons of strong state economy and nation-leading population growth. The major markets of south-east Queensland are well into a recover phase and locations beyond SE Queensland continue to show life, especially those impacted by the resources boom”.

Source: Domain