In the current round of Web Seminars we are offering, I highlight four key factors that are a MUST… if you expect to draw any credible conclusions.

1.    Record Population Growth
2.    Investors Have Fled The Market
3.    Home Ownership Unattractive
4.    New Construction Has Stalled Badly

1. RECORD POPULATION GROWTH

Australia is currently experiencing the fastest population growth in 200 years. Our population is predicted to grow by 350,000 this year for the first time in over 200 years. That represents approximately the combined total population of Geelong, Cairns & Bunbury; or the whole of Canberra.

The 1850′s Gold Rush years, Post World War 1 (1919 onwards) and post World War 2 (1946 onwards) saw our 3 previous population explosions. Today we see a similar pattern emerging; i.e. rapid and prolonged growth, too few workers and pro-immigration government policies.

Record population growth means a significantly stronger demand for new housing! Given our record numbers of new migrants will generally rent for a season, demand for rental properties will continue to strengthen.

2. INVESTORS HAVE FLED THE MARKET

Rising interest rates in recent years have squeezed rental yields making property look unaffordable. Add to the mix a booming stock market (averaged over 20% per year between 2004 and 2007) and one can see why property has not been the preferred investment vehicle of recent years.

Since becoming familiar with the term “subprime”, seeing the global credit crisis unfold… and hearing of property values in the US & UK falling by 30 & 40%, many would-be-investors have opted to stay on “strike”. It’s fair to say that since the highs of mid 2004 only the ‘brave’ have continued to invest in property.

Investor demand accounts for about 50% of all new housing starts and about 70% of unit starts. Therefore, that investors have fled the market means significant negative impact on the supply of new housing and increased demand on existing rental accommodation.

3. HOME OWNERSHIP HAS BEEN UNATTRACTIVE

As with investors. the housing affordability barrier, rising interest rates (& general living costs) and of course the US initiated subprime crisis has left many would-be home owners lacking the confidence to purchase.

Scared, priced out of the market, unable to secure funding or unable to service a loan? regardless of the reason why new home ownership has been unattractive; the result has been that many renters in recent years have simply continued to rent. This has placed further pressure on existing rental housing stock

4. NEW CONSTRUCTION HAS STALLED BADLY

Since 2005 the absolute number of completed residential properties has fallen and they are forecast to continue falling in 2009. The US subprime crisis cemented this downward trend in demand for new properties. Add to that, in recent years we have seen the high profile bankruptcy of some large developers along with massive financial pressure on many smaller developers. The cost of finance has skyrocketed for developers… i.e. if they can find a lender who will back them. Understandably, developers are very nervous… many have simply shelved their new projects until such time as they see clear evidence that investors have returned to the market.

Developers going broke, developers shelving projects and/or developers unable to secure funding means new construction has stalled badly and as a result greatly reduced the supply of new property further adding to pressures on existing housing stocks.

DISSECTING THE EVIDENCE

• FACT: We are experiencing the greatest housing shortage in 200 years
• FACT: Because of the new Federal Government’s immigration policy, we are experiencing the strongest population growth in 200 years
• FACT: Since about mid 2004, broadly speaking investors have fled the market
• FACT: Since about mid 2004, broadly speaking home ownership has remained unattractive and renters have continued renting
• FACT: Since about mid 2004 the construction of new dwellings has stalled badly
• FACT: In mid 2004, national rental vacancy levels were about 3.5%. This level is considered a balanced market. Rental vacancy levels have dropped to below 1.5% now and are expected to continue to drop to historical lows of between 0.5% and 1% in 2009. These levels represent a stressed market
• FACT: When the demand for rental housing grows at a faster pace than supply, increased demand can be offset by diminishing vacancy levels
• FACT: When vacancy levels reach just 1% it is said that we have NO VACANCY, as the 1% represents the few days between tenants moving and carpets being cleaned etc… prior to a new tenant moving in
• FACT: Therefore, once vacancy levels fall to 1%… there is no room left to offset increasing demand by diminishing vacancy levels
• FACT: When demand increases and supply decreases and vacancy levels are already stressed; i.e. no vacancy… market forces mean rents have to go up… and significantly where population growth is significant
• FACT: Interest rates are the lowest they have been in years and are expected to reach (near) record lows by mid 2009

Now you have the FACTS, rather than simply “opinions”; may I suggest you draw your own conclusions as to what might happen with Australian property in mid to late 2009?

• With the cost of renting about to soar and the cost of ownership dropping significantly (i.e. rental incomes up and interest charges down), what do you expect the market will do?
• With stock market volatility and uncertainty and interest earned on cash deposited dropping away, what do you expect the market will do?
• With serious increases to the first home owners grant, what do you expect this group to do?
• Given rental properties vacated by first home owners will not produce a glut… because vacancy levels are at an all time low (stressed market) and the population is growing by the size of Canberra each year, what do you think the market will do?

Can I go out on a limb and tell you what I think; I may be wrong, but I don’t think I am?

1. I expect rents to soar in 2009
2. I expect interest rates to continue to drop next month and in 2009
3. I expect confidence to come back to the market, drawing back owners and renters alike
4. Given there is a lag of a few years from when developers decide to build again and new stock being ready to live in… I see no relief for the poor tenant for at least a few years
5. I also believe that the combination of all that I have just outlined will result in the next property price surge

So, in summary…

Those who have been building a property portfolio as their preferred vehicle for funding their retirements (NB: assuming they bought the right residential property in the right areas) are soon going to experience the property investors trifecta:

1. Rising incomes (rents)
2. Falling costs (interest)
3. Increasing equity (values)

I would love to address the subject “We are not the USA” and compare the FACTS relating to how we are different and why what happened there will not happen here; but I will save that for another day.

May I invite you to register your interest for either our next FREE Web Seminar this Wednesday evening… or if you let us know what other time(s) best work for you, we will run them according to demand CLICK HERE.

Happy Investing,

Nick Lockhart
mrd customer care program… because investing is personal

The national end of month property indices report released today by RP Data & Rismark International confirms that the supply and demand imbalance currently being experienced in the Australian property market has placed a floor under housing prices, resulting in minimal value falls.

Based on the analysis in the report, this is most evident in the metropolitan areas around the country where record population growth has not been accompanied by new dwellings to satisfy the housing demand.

According to RP Data National Research Director Tim Lawless the property market has proven to be remarkably resilient with national dwelling values remaining positive over the 12 months ending August 2008. Over the three months to August 2008 there was a modest decline with property values down by just 0.96 per cent over this period.

Mr Lawless said the recent figures should put to rest claims that Australia’s property market is headed for a crash. “In fact, values are holding relatively firm particularly when compared to the benchmark equities S&P/ASX 200 Index which dropped by 19 per cent between January and August,” he said.

The only capital city to record a material decline in property values was Perth where this market fell by 5.69 per cent over the August 2008 period. While this fall in values has caused some distress for home owners, Mr Lawless reminds owners that the results need to be placed into context where values increased by 13.9 per cent annually over the past five years..

One of the most interesting findings in the indices release today was the convergence of the capital city market dynamics over the past six months which revealed that all capital cities recorded slightly negative growth; no particular city was significantly out of step with the others.

According to Rismark International’s Dr Mathew Hardman “Clearly, the observable phenomenon of the two-tiered markets in Sydney and then in Melbourne and to a lesser extent in Brisbane and Perth has disappeared ”

“Market movements are now similar across all metro areas rather than value falls being isolated within the mortgage belts. This balancing can be attributed to the squeeze the more affluent markets are experiencing due to the turbulence in the financial and equities sector.

“Looking towards the next six months, strong excess demand in most capital cities is creating a floor under property values, making large falls unlikely,” Dr Hardman said.

According to RP Data, with population growth projected to remain high and interest rates falling, the demand/supply imbalance is expected to protect the market from any major falls in property values.

Rismark International’s Dr Hardman believes that unemployment is not a major factor driving property prices; affordability, excess demand and market momentum are far more significant he said.

“Although unemployment is rising, unless it grows rapidly to significantly greater levels, eg 6 or 7 per cent over the next couple of years, excess demand will eventually outweigh affordability constraints and begin to push property markets upwards again, probably by the second half of 2009.”

“Over the long term, home unit values tend to track GDP growth, while house prices exceed it by approximately 2 per cent. In Sydney, house and unit values relative to GDP have returned to their pre 2000 levels so affordability is slowly returning to the Sydney market,” Dr Hardman said.

Around the State

Sydney Property Market:

In 2005 – 07, we observed a two-tiered market in Sydney: the separate dynamics of the north, east and Sutherland shire rising or steady versus the west and south west falling. In 2008, this distinction has largely disappeared. The Sydney market as a whole has fallen by about 2 per cent over the past few months and this is true across all areas. We don’t believe large falls in any particular region are likely, but neither are rises. The market will likely show some volatility from quarter to quarter, but little overall direction for the rest of 2008 and into early 2009. Sydney house values are still the most expensive in the nation with a median value of $565,180. With rental rates increasing and property values showing a modest fall, rental yields have continued to improve. Houses are returning an average gross yield of 4.57 per cent and units are returning an average gross yield of 5.71 per cent.

Melbourne:

Melbourne is also down about 2 per cent over the last few months and again, the falls are generally consistent across the entire city, with the outer eastern and south eastern suburbs falling on average by a little more (3 – 5 per cent). Melbourne house values have fallen by 0.14 per cent over the August quarter and are now recording a median value of $448,271. Unit values have increased by 0.68per cent over the three months to August to reach $362,771.

Brisbane:

Brisbane has actually fallen more than Sydney & Melbourne over autumn & winter: on average by 3 – 5 per cent. The median house value is now $455,146 and the median unit value is now $326,606.
South East Queensland continues to be the strongest population growth region in Australia. Such strong demand for dwellings will continue to place upwards pressure on values over the medium to long term.

Adelaide:

Adelaide has also lost about 2 per cent over the past quarter, with the southern and eastern suburbs falling by slightly more than average: up to 4 or 5 per cent in some cases. On an annual basis Adelaide is still well in the black with property values up by 10.28 per cent over the twelve months to August.

Perth:

Perth has been remarkably resilient, considering the combined influences of the stock market decline and the rapid property price rises of 2003 – 07 and their effect on affordability. On average, the market is only down about 2 per cent over autumn and winter. The August indicative figures showing 5 – 6 per cent falls should be read with caution as they are based on a small sample of sales.

Canberra:

The Canberra market has also recently trended down: houses by approx 2 per cent and units by 5 per cent.

Darwin:

The Darwin market has trended down about 1 – 2 per cent over the past few months; however market confidence is expected to rise along with increased demand on the back of large investments such as the Inpex gas deal.

NOTE:

*RP Data and Rismark recommends that caution be used when interpreting property indices results as these results can vary depending on the methodology used and sample size.

In all RP Data and Rismark published indices, methodology is clearly indicated. More information on the RP Data‐Rismark indices can be found here: http://www.rpdata.net.au/indices/

IT HAS been a bad week for property. It’s now confirmed what’s been widely forecast: prices are falling. And the doomsayers are predicting we will follow the United States and United Kingdom into a broad-based and prolonged housing slump.

Here’s why I don’t think that’s true.

For starters, the figures responsible for all the gloom and doom headlines – the official ones from the Australian Bureau of Statistics – were not actually that bad. While a survey of analysts by Bloomberg had forecast a 1.3 per cent national drop for the quarter, the dip came in at only 0.3 per cent. This meant the market shed just a skerrick of the 1.1 per cent it gained in the first three months of the year.

What’s more, for the year prices rose 8.2 per cent – almost exactly the long-term average annual property growth and a far cry from the 10 per cent-plus plunge some pundits have been bandying about.

On a capital-by-capital level, Perth fared the worst, dropping 2.4 per cent over the quarter and 0.9 per cent over the year.

All other cities to experience three-month falls – Hobart with 2 per cent, Canberra with 1.4 per cent and Melbourne with 0.3 per cent – actually recorded positive annual figures (3 per cent, 7.2 per cent and 14.1 per cent, respectively).

Elsewhere on the eastern seaboard the news was much better with Brisbane continuing to chalk up gains – 0.6 per cent to take the annual growth rate to 14 per cent – and even Sydney putting on 0.3 per cent, bringing the yearly figure to 4.4 per cent.

Protecting us from significantly nastier future figures, first of all, is record population growth – underpinned by migration – at the very time there is a housing shortage. We have net immigration of about 190,000 people a year but each year are building just over 100,000 new dwellings.

Quite simply, these people will need somewhere to live, which will create a natural floor under prices.

Then there’s the exodus of investors from the property market, thanks to 12 successive rate rises since 2002. The shortage of rental properties has pushed vacancy rates down and rents up to record levels.

As a result, the rental yields on investment properties are the best they have been for decades and the sharp drop in mortgage lending stats out last week implies this will be the case for a while to come.

Finally, all those rate rises mean the RBA has room to move to stimulate the economy and property market. Very few countries are in this cosy position, having already been forced to slash rates to ward off the credit-crunch-induced economic slowdown. (Cheers to our resources boom for this one.)

Almost half of the economists recently surveyed for The Australian Financial Review’s quarterly economic snapshot expect that within six months the official cash rate will be up to 0.5 of a percentage point lower than it is today.

In the meantime, the high rates are forcing some people who have overextended themselves into fire sales, which coupled with negative property sentiment, mean there are great bargains available. Desperate sellers and a dearth of buyers equal low prices.

All in all, it could be the time to move back into property. With rents and yields showing no sign of easing in the short term, and interest rates expected to come back, your servicing costs could be lower than you think. And once the rate cuts begin, you could find yourself sitting on some tidy capital gains, too.

RP Data national research director Tim Lawless said Perth was the only capital city where house values fell over the period. Brisbane, Adelaide, Darwin and Canberra all notched up increases, and Melbourne and Sydney were neutral.

But it’s not all good news. While values have held up, market activity has slowed down, with houses taking longer to sell.

A housing shortage is likely to underpin the market and keep demand strong. Rismark International’s head of research Matthew Hardman says high construction costs provide a natural floor under property prices in major centres.

Explanations of the situation often assume that we have a relatively short-term problem. They boil down to economic factors: too much demand and too little supply. Some people suggest that housing markets will ultimately self-correct through declining house prices and, however unpalatable this may be to those who already own a house, this will help people wanting to buy and deal with affordability problems.

But the lessons from overseas are that this, in itself, may not fix the problem, and may in fact worsen it. In places such as Japan and Hong Kong, where housing prices have fallen markedly in recent times, these declines triggered a lack of confidence in housing markets and the rate of home ownership fell significantly.

Recent research by Associate Professor Judith Yates and Dr Vivienne Milligan for the Australian Housing and Research Institute suggests we do not have a short-term cyclical problem – we have a more fundamental structural problem that began about 1970. Yates and Milligan show that the “deposit gap” for full-time workers on average earnings buying a median-priced house has been trending upwards for almost four decades, notwithstanding cyclical changes in real estate prices.

Some of the reasons for this long-term trend can be found outside the housing market. For example, changes in labour markets since the 1970s mean that many people no longer have the secure and predicable income needed to repay a housing loan over a long period. We have seen tremendous changes in investment patterns, with prolonged investment in residential property, with investors sometimes vying with conventional buyers for properties. Our cities have been reshaped by intense demand to live in inner-urban areas. A consequence is that more people are renting, some for long periods.

Research has demonstrated unequivocally that renters are more likely to experience housing stress and that this stress can be intense, defined in terms of how much of their income goes on rent.

If we have a long-term problem and not a cyclical one, what sort of solutions should we be looking at? How can we go beyond some of the measures offered by Canberra, such as release of government land, funding for infrastructure to encourage new supply, and a scheme to attract institutional investment in affordable rental housing?

Let’s start with tax. Many people have made sizeable capital gains on their homes which they did nothing to earn, apart from being in the right place at the right time, and it is untaxed. If introducing at least part taxation of capital gains from home ownership is taboo, let’s think about turning stamp duty into something more sensible. Stamp duty at current levels is not really a tax on a real estate purchase transaction anyway. Why not levy it on sale when it could operate as a de facto capital gains tax and work out a sensible graduated rate.

Then let’s have a look at negative gearing, which is essentially applied to turnover of existing housing and arguably has added to competition among house buyers and helped inflate prices. This could be restructured to send signals about additions to supply with preferential rates for those prepared to invest in new housing.

Urban and regional policies could also make a difference. While measures to speed up the supply of housing on the urban fringe may meet some of the demand, they will not end the problem of intensity of demand in inner-urban areas with better transport and amenities because cities such as Melbourne have only one centre. Moving to a multi-centre city might be part of the answer. This would mean perhaps two or three other nodes in Melbourne, which are the focus of concentrated investment in employment, transport and amenities and which will attract residents. The same argument could apply to some regional centres.

More radically, perhaps, we might accept that many people will rent long-term, as in other large cities around the world. This might work if we were able to break down some of the distinctions between owning and renting in which only owners get the major breaks, such as security, privacy, the capacity to personalise their homes, and to plan if and when they want to move.

The housing affordability crisis is part of longer-term and structural changes in Australia’s economy and society. Solutions will require radical rethinking about the “Great Australian Dream”.

Associate Professor Kath Hulse and Professor Terry Burke are attached to the Institute of Social Research at Swinburne University of Technology.

As many as half of Australia’s baby boomers will run out of money in retirement, an expert says.

Professor Sol Encel, in Adelaide to address the Australian Association of Gerontology’s national conference on ageing, said that between a quarter and a half of people now aged 48-61 will be reliant on the old-age pension.

Professor Encel said latest figures from the Centre for Economic Modelling in Canberra showed that the top 25 per cent of baby boomer savers had put away about $1 million each, but that the bottom 25 per cent averaged savings of only $300,000.

“Finance experts will tell you (this amount) isn’t going to last 25 years, which is the expected lifespan for 60-year-olds,” Professor Encel said.
He said that boomers have already been defined by class, income and education and that these differences would be sharpened by loss of income and large differences in superannuation benefits.

“There are enormous variations in income, education, occupation, health and housing in the boomer population,” he said.

“They are as diverse as any previous generation, as they age, their social situation will be dominated by class differences; it’s absurd to lump boomers together as some homogenous block.”

Source: News.com.au