Supply and demand are important factors in the performance of our property markets and currently we have subdued demand and an oversupply of properties.
BY MICHAEL YARDNEY
This means that our property markets are likely to remain flat for much of 2012.
Recently RP Data reported that based on the current rate of sales and total number of homes being advertised for sale, the Australian residential market has 7.4 months of effective housing supply overhanging it.
What does this mean?
I know some commentators are suggesting we have a shortage of properties, but I don’t necessarily agree.
You see, there are two ways to measure supply in the residential market place – ‘core supply’ and ‘effective supply’.
RP Data explains that ‘core supply’ is the difference between base level demand (i.e. population growth) and base level supply (i.e. new dwelling construction). And this is what many commentators are measuring.
‘Effective supply’, which measures the number of months it would take to sell all the properties listed for sale, based on the current rate of sales, seems a better way of measuring what’s really going on.
So what’s really going on?
Across our nation’s capital cities, the effective supply of properties is currently recorded at 5.8 months and at a national level there is 7.4 months of supply on the market. In other words there’s an even bigger oversupply in regional areas.
Digging deeper into the numbers shows sales volumes are at similar levels to those recorded 12 months ago, which means that supply levels are being driven higher by a greater amount of stock available for sale rather than fewer people buying properties.
How does this compare to the past?
Not surprisingly things are worse than they were a year ago when our combined capital cities had an effective supply of 4.5 months of stock and nationally there was 5.6 months of effective supply.
These results suggest that current effective supply levels are well above average.
Since the beginning of 2007 the effective supply level across the capital city markets has averaged at 3.9 months and reached a high point of 6.5 months in January of this year.
Record number of listings
Currently the total number of homes for sale is at near record high levels. There are 26.4 per cent more houses for sale this year than there was at the same time last year, and it’s not because more people are putting their homes up for sale.
They’re not. The increase in listings is almost entirely being driven by rising levels of relistings, which is indicative of slowing market conditions and the longer length of time it’s taking to sell a home.
Around the nation
As expected the oversupply situation varies across the country.
In each capital city and state except for Perth and Western Australia the months of supply figure is currently higher than it was at the same time last year.
Canberra has the lowest current effective supply at 3.6 months while Brisbane has the greatest effective supply recorded at 8.8 months.
Melbourne has 5.3 months supply, Sydney 5.1 months, Adelaide 6.4, Perth 6.1 and Darwin 6.3 months supply of properties on the market.
This extra supply of properties available at a time when buyers are standing on the sidelines waiting to see how matters pan out suggests our property markets are likely to languish, at least in the first half of 2012.
The Melbourne Cup Day drop in interest rates has boosted consumer confidence a little, but not enough to move our property markets.
Not with all the uncertainty about how the problems in Europe will affect us.
For property prices to start rising, consumer confidence is going to have to increase and the oversupply of properties is going to have to be taken up.
Of course we don’t have ‘one’ property market in Australia and there are still some areas where prices are moving up slightly, but they are far outnumbered by suburbs where prices are stagnant or falling.
No property collapse in sight
But don’t misunderstand me – there’s no suggestion our property markets are going to collapse. The underlying fundamentals will underpin our property markets.
Think about it:
1. Interest rates are likely to drop once or twice more next year;
2. Vacancy rates are low and rents are rising;
3. Unemployment is falling and wages are rising;
4. Consumer confidence is slowly returning and the possibility of a number of interest rate rises that we expected earlier in the year has disappeared.
The bottom line is that there’s still a large demand for housing – people are still getting married, having babies, getting divorced and coming from overseas. And if they can’t afford to buy their homes they’re going to rent and this will force rentals up.
Over the next six months we’ll move into the stabilisation phase of the property cycle where values may only grow a few per cent higher than inflation for a few years, but it’s a time when investors will be compensated by higher rents.
Of course the current buyers’ market will mean that informed homebuyers and investors will be able to pick up a great properties below their intrinsic value if they do their research properly and negotiate wisely.
This is also a great time to buy properties to which you can add value through renovations and manufacture some capital growth.
And when they look back in a few years time they’ll wonder why they didn’t buy more properties while others were waiting for the bubble to burst.
Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog