All Is Not As It Appears
Market Update from John Edwards, CEO Residex
While I remain optimistic about the potential returns from the housing markets, changing circumstances mean that we need to be well-researched before we make our purchases and we need to take particular care about our level of debt.
We are entering a period where we must be in control of our long term decision making process. It is clear to me that if we buy correctly and in the right area we are going to do very well indeed but probably not in the traditionally accepted good investment areas.
If you pick up any newspaper today you could be forgiven for believing that a housing “boom” is taking place. We have TV programmes being taken out of “old boxes” and given life again based on this positive view. On the surface when looking at aggregate numbers it does look as if we are in the midst of a very strong market growth phase and some areas are certainly doing well.
Many of our newspaper reporters and property “expert” commentators have not previously reported on or seen a market where auction clearance rates and aggregate capital growth numbers are as strong as they are now. This naturally, will lead them to be particularly optimistic.
Yet there are sections of this market which are losing value or doing very poorly. High auction clearance rates do not tell us (with the exception of Victoria) what the total market activity is. We should not read too much into them and remember that in most markets less than 20% of all sales go to auction and the lower cost properties have a very low tendency to be auctioned. Further, clearance rates in the 70% range are not reflective of anything other than a normal market. A “boom” market will see consistent clearance rates of better than 85%.
I am left wondering if the Reserve Bank had in its possession all the information that I have, whether it would be so aggressively moving interest rates up. This is occurring also at a time when our Banks are lifting their lending margins due to their increasing cost of funds. The margin has not been as high for about 15 years. The net result is that our home loan interest rate is quickly placing home borrowers in a highly stressed situation and this is having an impact. Yes, there was a need for the RBA to adjust rates but I fear the magnitude and speed of increase has been too large and too rapid.
While all capital cities other than Brisbane generally presented home owners with an increase in wealth based on the median value, yet there are suburbs falling in value in every capital city except Melbourne. Some cities are in fact doing quite poorly. For example, in Brisbane in the March Quarter, more than 53% of all suburbs lost value, while in Sydney more than 20% again lost value.
These falls are occurring in first home buyer suburbs with young families suffering. Interest rate increases and the reduction of the First Home Owners Grant are having an impact but the activity in the middle segment of the market is clouding the picture. For example, from the 53% of Brisbane’s suburbs that lost value, 83% have a lower median value than the overall for Brisbane. That is to say, in a more general way, that growth is only being experienced in areas where people are better off than Mr and Mrs Average.
The very bright spot in the market is the unit market.
It is this segment that will see the highest level of activity. Sales figures have picked up indicating that investors also are active. Capital growth rates for the last quarter were higher across Australia than for the house and land markets. There is an ongoing potential for this to be the case as it is this market which is most affordable and producing the best rental returns.
This market is also less at risk as interest rates increase as it is the domain of the investor and these people are going to be less stressed by interest rate movements. A large percentage is “baby boomers” and this group most often are cash rich “empty nesters”.
Affordability issues are going to make units more popular and hence we are going to see higher levels of demand. This will in turn lead to continued growth in this segment but we need to be mindful of the relative cost to a house and the location of the unit.
1. Prices in the first home buyer markets will be more attractive to buyers later this year.
2. Darwin has become expensive so be very selective if you want to buy in that market.
3. The time has come to go “bargain hunting” in Brisbane.
4. Sydney units which are well-positioned (close to transport hubs) and more than a decade old look if they are going to see the best growth.
5. Melbourne’s unit market still has good opportunities, although the growth in Melbourne units in the last 12 months has been higher than in any capital city other than Darwin.
Wishing you a successful search for your next home,
John Edwards
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