It seems that just a couple of months ago we were reading headlines outlining the possibilities of a US style crash in Australian real estate. It was the most common question I got asked throughout the course of last year – “should I wait to buy – is the market going to drop further?”
BY CATHERINE CASHMORE
I never have to field such questions during the boom phase of a property cycle. During these periods, despite cautioning the opposite, buyers are too busy following the herd mentality to take a step back and read the signs.
Now, after the barrage of media gloom, we’re under a new influx of subtle conditioning with headlines such as ‘Don’t bet on a property crash’, ‘Property crash just a myth’ and ‘First taste of a housing recovery’ working their magic.
It doesn’t take Einstein’s mentality to work out we’re all – to some extent – puppets of the media. As the author Nicholas Johnson once said about television (and equally relevant to other forms of publishing), “All television is educational television. The question is: what is it teaching?” It’s a loaded query and one of which we should take note, because for most people, the only education they get on market movements is via mainstream broadcasts.
Furthermore, the stories involve us emotionally, using personal examples and photos as illustration, and affect us on a very ‘human’ level.
I have contact with a wide range of people involved in the real estate industry and often get asked to provide case studies for media stories. Throughout 2011 the requests were for individuals undergoing rental stress, or those experiencing negative equity. So far this year, the demands have been specifically for those who have made considerable dollars from property investment – usually over a short period of time. I guess ‘normal’ stories of success through long-term investment simply don’t sell as well. It’ll be interesting to see how the year progresses in this regard and I’m sure many investors will be left with little concept of who or what to believe.
Even more confusing is that the statistics used in news stories are based on methods that differ considerably depending on the index provider used. Due to space requirements, these methods generally remain unexplained in the main body of text. It might be the simplest method of correlation used, which is picking out the middle number of all recorded sales results published on a quarterly basis. Meanwhile, others attempt to employ more accurate assessments by breaking results down to reflect individual property attributes (number of bedrooms etc.). This system is known as a ’hedonic index’. Then there’s the ‘repeat sale’ methodology, which limits samples to properties previously sold.
Others only use detached dwellings, thereby ignoring anything ‘attached’, and the preliminary ‘real time data’ each provider releases is only as good as the number and accuracy of results recorded from individual sales agents. More confusing still, certain index providers assess capital city medians based on grouped suburb data – taking the 50th percentile from the correlated information to produce numbers that can differ quite remarkably in the short term to other research databases. Regardless, whichever is employed, it’s somewhat dangerous for investors to base their knowledge on one set of figures alone without a full understanding of the various instruments involved.
Having said this, to get a feel for overall ‘trends’ in the market, median movements can be useful. When affordability is constrained during a downward phase of the property cycle, a higher volume of lower-end sales will be reflected in the data. However, they’re certainly not an accurate indication of an individual property’s value. For example, it’s possible for the overall median to drop, and yet an individual property price to rise. A well-educated buyer will understand the fundamentals of this, but many will be left with more questions than answers.
It’s all but impossible to make blanket assumptions about the Australian real estate market without a thorough understanding of the fragmented elements affecting each state and suburb. Furthermore, Australia’s median movements are generally so marginal they don’t deserve the sensationalist headlines they create. However, I don’t underestimate the importance of the data in scrutiny of overall economic health, especially when other indicators weigh in to show the trend could be reflective of more serious concerns.
Now we’ve moved passed Australia Day, market activity is about to begin once again. Weekend clearance rates will be published, poured over, and analysed, and investment advice will be spruiked from every corner. Affordability has certainly eased with last year’s interest rate drops being ‘generously’ passed on by the banks, albeit caution still holds strong in the investment sector. Those states benefiting from the two-speed economy have already turned the wheel on our downward trend with Perth and areas of Sydney showing tightening vacancy rates and a marked reduction in stock. For both these states the bottom of the property cycle may have already passed, however in others – Victoria for example – opportunity is still ripe (for the time being).
The global picture doesn’t need comment at this stage, except to say it increases insecurity and will bear significant influence on the Reserve Bank of Australia’s decisions to further reduce interest rates – maybe more so than domestic matters. Therefore, even though nationally we’ve seen a rise in the number of home loans, we’ve yet to see how many will be drawn down.
Indicators across all capitals show real estate around and below the state median is likely to be the strongest performer, with top end sales still struggling.
However for vendors who have weathered through a complete seven-to-10-year property cycle, profitability in all states can’t be disputed – they’ve come out winning regardless of our current conditions. Even Brisbane, which has taken the largest hit in its median value over 2011 (tumbling some seven per cent), compound capital growth still shows rises in excess of seven per cent per annum when analysed over a 10-year property cycle. This news won’t make headlines, but once again the long-term stability of wise property investment is demonstrated.
It’s in the current malaise and overall confusion that the greatest care should be taken when purchasing. Only quality real estate is going perform well as we progress through 2012, and without plenty of due diligence purchasers could find themselves making expensive errors. However if buyers can pull themselves away from the headlines and seek out more qualified opinions based on their own individual circumstance, opportunities to win in a gloomy atmosphere are in abundance.
Catherine Cashmore is senior buyer advocate, property manager and Market analyst for Elite Buyer Advocates and Channel Ten’s property expert on ‘The Circle’. Elite Buyer Advocates successfully purchases and negotiates more than $100 million worth of property each year for their clients. www.elitebuyeradvocates.com.au