There have been some remarkable world events on the back of the global recession, among them unprecedented regulatory changes to major banking systems and presidential world firsts. But what does the future hold for the Australian property market?
BY CATHERINE CASHMORE
If we take our eyes off other parts of the world and zoom in on Australia, we can see a country outshining its rivals in wealth, growth and resources. Even the recent election dramas did little to affect us on a national or global scale. Our concerns must look rather piddling to countries still facing dark clouded forecasts of laboured recovery after the 2008 recession. Yet it doesn’t stop ‘experts’ wagging their finger and cautioning ‘it’s only a matter of time’ before we suffer the same fate.
It’s somewhat redundant to make these assertions; historically all great economies run the cycle of expansion and contraction. Crudely put, what goes up can also come down and a lot of time and money is invested in future forecasting to buffer the catastrophic effects which can result. Becoming ‘Wayne the worrier’, gathering our possessions and locking the door until the storm passes isn’t an option we’re gifted unfortunately. Life goes on.
There are a great many economists trying to answer the question of “where is the market going?” Those endorsing residential investment underpin their arguments with the great population debate focusing on supply and demand. Australia’s predicted surge of 35 million by 2050 – eight million in Melbourne alone – suggest at the current level of growth, Australia is falling short of 40,000 homes a year. In truth it’s not the amount of homes constructed that’s the issue, but the areas they’re located in. New housing is largely concentrated in outer lying suburbs – classic ‘mortgage belt’ neighbourhoods. These areas are subject to affordability attracting first homebuyers and low-income families. As such, demand fluctuates depending on economic factors such as the first homebuyer’s grant which is geared towards regional development and new home projects. Demand for new homes is low not just because of the costs involved in building, but because of the negative aspects of living in suburbs with poor infrastructure and limited employment opportunities.
However inner-city demand for housing is significant and rising, as anyone working at the coalface will tell you. Earlier this year 50 lots of rezoned residential land were auctioned in Melbourne’s Bentleigh East. Demand exceeded supply and all 50 blocks – hotly contested – sold under the hammer. Similar scenarios have played out in Sydney and Canberra, as our cities struggle to adapt to a never-ending stream of expansion.
Recently two well-known economists entered the fray and declared our real estate market is akin to a ticking time bomb. Co-founder of global investment management firm GMO, Jeremy Grantham, stated that ‘it’s only a matter of time’ before the UK and Australian markets collapse.
More recently Gerard Minack, head of global developed market strategy at Morgan Stanley, used a list of rather long-winded facts and figures to hypostasize that houses are ‘unsustainably’ priced. He asserts that Australian real estate is among the most expensive in the world.
However, when pondering ‘what will prick the bubble’ he can produce only two scenarios. One is broad-based job losses which – as he freely admits – look unlikely, at least in the short term. The second – an exodus of middle-class landlords selling en masse; something I can only envisage as a roll-on effect from the first. His arguments touch upon negative gearing – the tax incentives offered by the government which have enabled mum and dad investors to purchase. If the current policy were to be withdrawn or degraded it could have significant effects on house price and demand, as the Hawke/Keating Government found out in 1985. However, despite the Henry Tax Review suggesting an alteration in the system, both major political parties have vehemently stated – more than once – there are no future plans for change.
So as we walk the rocky road into 2011 what should we expect? Short term, things look set to continue on a gradual upward trend and I can’t see anything significant ‘looming’ to reverse the wheel. The steep rise in the market during the first quarter of 2010 was corrected mid-year due to rate rises and increased stock.
The big banks are borrowing large amounts of cash from offshore markets to fund a growing demand for credit. As the cost of borrowing increases, the probability of interest rate rises independent of the Reserve Bank look likely. Other factors to consider are the large number of high-rise inner-city developments planned over the next two years. Any increase in supply reduces demand and multiple smaller sales will produce a drop in median house price data.
All in all the path ahead may be a cautious one, but there’s nothing to suggest substantial drops any time soon.
Will we crash? Not in the foreseeable future and not if you follow a few basic rules. The key in 2011 will be knowing what to invest in and where. Not all locations and not all properties will perform the same or have the same growth potential. However concentrating on suburbs with limited supply and choosing properties that will stand up in soft and hot markets will reduce risk exposure and ensure capital growth.
Catherine Cashmore is a senior property adviser and buyer advocate for JPP Buyer Advocates – the largest dedicated buyer advocacy in Melbourne. With extensive experience in all matters regarding real estate, JPP successfully purchases and negotiates over $100m worth of property each year for clients. http://www.jpp.com.au