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December 7, 2012

2012: the year the property market turned


Australia has had a boom and gloom economy over the past year. On the one hand, our economy still grew – unlike many others around the world –underpinned by a resources boom. But on the other, consumers and businesses were gloomy.

BY MICHAEL YARDNEY

It was much the same with property. Some areas fared well through the year, but many didn’t. Looking back, I think 2012 will be remembered as the year the property market turned.

It didn’t crash like many property pessimists predicted. It might’ve stalled in some areas, dropped a little in others and seen significant price slides in a few spots, but in the middle of the year things slowly started to change.

Our property markets started the year in a tug of war, caught between falling interest rates and market uncertainty.

There were concerns of a melt down in Europe that could bring financial systems to their knees, as well as worries about the US economy. The European economy is still a basket case and will remain so for years, however the major risks seem to have been averted and the situation in the US has improved, albeit slowly.

We have something new to worry about – the health of our resources boom has come into question. China’s economy, the powerhouse behind our resources boom, slowed during the year. This, coupled with falling commodity prices and high costs of production, have brought concerns about the future of many of Australia’s major mining projects.

What happened in our property markets? We started the year with more stock on the market than there were buyers, as many potential homeowners and investors stood on the sidelines, too nervous to make a decision waiting for the market to bottom.

Well priced properties in prime locations with an element of scarcity and priced in the middle range ($450,000 to $850,000) sold well; even though clearly there was less interest from both owner-occupiers and investors than before.

B and C-class properties didn’t selling as well and nor did expensive dwellings in more affluent suburbs or holiday properties. Some dropped in value by up to 10 per cent and some couldn’t be given away. Well… maybe it wasn’t as bad as giving them away, unless you were in some remote regional location, but you’d have to give a very steep discount for someone to buy them.

Then things changed. Eventually, increasing affordability due to higher wages, lower prices and falling interest rates brought buyers back into the market, heralding an upwards tick in values from around the end of May.

This trend, shown in the following graph from RP Data, has also been confirmed by figures from Australian Property Monitors, Residex and the Australian Bureau of Statistics.

The latest figures from RP Data up to the end of November show capital city home values remain 5.6 per cent lower than their historic highs of November 2010, but up two per cent from their low of late May 2012.

Another positive sign is the level of confidence among Australian consumers, as measured by the Westpac-Melbourne Institute Consumer Sentiment Index. It has been rising since April.

An easy way to interpret this index is that when it’s over 100, optimists outweigh the pessimists. When the index is lower than 100, there are more pessimists than optimists.

In November 2012, the consumer sentiment Index was showing a value of 104.3.

Coincidently, Commsec reported housing affordability as the best it’s been in a decade, as shown in the following chart.

Consumer confidence is one of the most important leading indicators for the housing market. Put simply, when consumers are lacking in confidence (as they have for the past few years) they tend not to make important and expensive buying decisions such as moving house. When confidence is high, the number of home sales increases.

This is already translating into higher levels of finance approvals, which is another important leading indicator as most homebuyers and investors get their finance two or three months before buying a property.

Where are we now? What these figures don’t show is how fragmented the markets really are.

We know there isn’t one Australian property market. There are many different markets in different geographic locations, at various price brackets and for various types of property. There’s no doubt home values are still falling in some areas but they’re rising in others, and overall things are improving.

Buyers are back in the game, but at the right price. Stabilising house prices and interest rate cuts are breathing life into markets. Auction clearance rates are up and vendors are more willing to accept realistic offers.

Vacancy rates are less than two per cent in every capital city other than Melbourne, which is pushing up rents. This, together with better affordability, will eventually bring more first homebuyers back to the market. At the same time overseas investors are snapping up many of our new apartment projects and baby boomers are buying properties in their self-managed superannuation funds.

Source: Metropole Properties

We’ve moved into the stabilisation phase of the property cycle.

You see, the markets don’t move directly from the downturn phase to an upturn. There’s a period of time when buyers return and take up the slack before prices start rising significantly.

And I expect more buyers to return to the market in 2013 when they realise prices won’t fall any further.

The stabilisation phase is a great time for smart homebuyers and strategic investors to get set for the upturn stage.

Michael Yardney is the director of Metropole Property Investment Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He’s a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog.

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5 Comments

  1. Well presented Michael! It’s great to have some market optimism which is based on quality research and an understanding of current market conditions.

    I would like to add that from an investors perspective the current market offers some great opportunities. Low interest rates and improved rental yields have significantly reduced the holding costs for investment property. In Queensland this has occurred not just in mining towns but also in many “blue chip” suburbs in Brisbane. Rental yields for units in suburbs such as Bulimba, New Farm, Ascot, Hamilton, and West End are now above 5% making making property investments in these areas affordable for everyday investors.

    While it is impossible to predict exactly when the next boom will occur, it makes sense to purchase when prices are low and holding costs are affordable. That way investors are well positioned when the market starts to move.

    Matt Reeves

    Comment by Matt Reeves — December 7, 2012 @ 3:16 pm

  2. Impossible?
    Here is a prediction, a 30% rise in property values to 2016, then a minimum 4x and maximum 8x price increase to 2026…..

    Comment by Dr Carr — December 10, 2012 @ 3:58 pm

  3. Hi,

    Just wanted to let you know about quiet little tip. Seems by my calcs that the value for money of property in Adelaide is well under that of the rest of the country. I mean around half that of comparable properties in comparable locations, not just median values. Dont believe me then check them out.

    Comment by John — December 11, 2012 @ 11:55 am

  4. The median house price statisic is misleading, I suggest investors use this information for what it is a trend of sales. An article I read yesterday talked about a 19 sqm studio partment, with no internal bathroom, in Balmain, Sydney purchased for $328,000. Thats $17,263 per sqm of living space. Now thats a stat I would like to see compared across all capital cities. Ignore the median house price.

    Comment by John — December 18, 2012 @ 9:54 am

  5. I am agree with you john. Today price of properties are increasing so much. At present rising in properties price can’t be saturated. The value of property is a random sometime so high sometime very low.

    Comment by Inventory Clerk Kingston — December 19, 2012 @ 8:37 am

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