This time around isn’t that much different from the last time & the times before that. There is always talk about “how it will be different” this time around. But history shows that there is a set of certain variables which, when combined in the right way (like ingredients in a recipe), drive the property cycle. The residential market is set to improve; & in some locations & for certain product types, quite substantially.
Five market phases
There are five phases of the property cycle – trough, upswing, peak, downturn & recovery.
Since 1880 – the date when housing statistics started to be recorded – there have been ten cycles in Australia. They have averaged eight years in length from trough to trough or peak to peak. There have usually been five years of improving market conditions – historically end values rose 11% per annum. There are also periods of decline, averaging three years in duration, where values – in the past – have fallen, on average, by 5% for each of the three downturn years. Overall, Australian residential property owners have – again in the past – enjoyed annual capital gains of 8.5% per annum when property is held for a whole cycle.
Many residential markets across Australia are in the recovery phase of the property cycle.
Four capitals are in the recovery position including Brisbane, Sydney, Perth & Darwin. Several Queensland regions have also entered a recovery phase being Bundaberg; Toowoomba; Rockhampton; Mackay & Townsville. The recent flooding in Bundy might hold them back a while, but the broad indicators do suggest that Bundaberg is set to improve. Three Queensland markets are knocking on the recovery door, so to speak, and these include Ipswich, the Gold Coast & the Sunshine Coast.
The recovery phase is characterised by these measures:
- Rising sales
- A return to price growth, albeit usually quite mild
- Improving yields
- More building activity
- A more equal market i.e. not a buyer’s or seller’s market
Wider market influences
So back to the original premise of property cycles, here are my thoughts on what drives the cycle:
Liquidity – the availability of funds & their cost drives the cycle. When there is more money available & it is cheaper (like now), this helps to improve the property market. When the opposite takes place, then the residential cycle enters a decline. The RBA wants this to happen – an improving market leads to more sales, building activity & general spending. This means more government receipts; more employment & better company profits. When things are getting too heated – i.e. inflation is rising – the RBA will lift the cash rate, making money cost more.
Economy – you need a job (it used to be a full-time one, but those rules don’t really apply in today’s portfolio-orientated career world), to borrow & buy a property. So business profitability first, then employment creation are important factors which influence the cycle. This is why we regularly report on jobs & company profits, even if it is just as one of the three items in Saturday’s Weekend 3.
Confidence – the “animal spirits,” as John Keynes once called them. Hard to pinpoint; even harder to predict; but bloody important. These days, we seem spooked by every little microscopic detail, much of which means very little in the scheme of things. Confidence is slowly getting better. It should be much higher. Our current skittish nature is holding back the housing recovery.
Returns – when residential returns start to become competitive & also are seen as less of a risk, investors start buying again. This is now happening. Gross rental yields have improved by about 0.5% over the last 12 months. This attracts the more experienced investors. The novices start buying once the general media start reporting positive property stories on the nightly news.
Demand – not just population growth, but household creation. In short, this equates to more “bums on seats”. Australia’s population growth rate has increased significantly in recent years, creating the need for more new housing. Often, new migrants (and of course an increase in more babies being born), are housed in our existing stock. As we have outlined in past posts, we have quite a bit of spare capacity in our established housing market. But something happens as the residential market recovers – caused by a mix of the elements above – and the demand for new property rises. Parents help get their boomerang 30-year-olds into their own place; other relations leave the somewhat crowded house for a place of their own & so forth.
Scarcity – new supply falls short of the increasing underlying demand & the amount of residential stock for sale & lease drops. More people go to auctions, open houses & display suites to find a crowd; offers being made & increasing contracts being executed.
Human nature – the “wax & wane” as I like to say in my presentations…..being overly cautious (like now) keeps the housing market subdued, whilst greed drives it over the top. As a general rule, we believe the worst & when we think we want something, we must have it. “No” & “More” are two of the first words that most toddlers learn to say.
Pity those words aren’t more in balance at the same time. Right now, we need a little less “No” & a bit extra “More”.
Article originally published in Matusikmissive.com.au 19/3/2013
Experts warn of ‘debt bomb’ as housing downturn worsens
That’s according to the sobering 60 Minutes segment Bricks and Slaughter which aired last night, revealing the country’s property downturn was just the tip of the iceberg.
According to reporter Tom Steinfort, the current slump is actually “more like falling off a cliff”, with a number of real estate and finance experts claiming houses could plummet in value by up to 40 per cent in the next 12 months.
If that happens, it would also cause an economic “catastrophe”.
Mr Steinfort spoke with data scientist Martin North from Digital Finance Analytics, who said Australia was uniquely vulnerable when it came to an economic crash tied to a property downturn.
“At the worst end of the spectrum, if everything turns against us we could see property prices 40-45 per cent down from their peaks, which is a huge deal,” he said.
“That’s higher than any other country in the Western world by a long way.
“There’s probably no country in the world more susceptible to the ramifications of a housing crash than Australia. We are uniquely exposed at the moment.”
Mr North said Australia was now in the same position as the US was back in 2006 and 2007 — a position which triggered an economic collapse.
“As a society, and as a government, and as a regulatory system, we’re all banking on the home price engine that just goes on giving and giving and giving. It’s not going to,” he said.
“We’ve got a debt bomb, we’ve got a debt crisis and at some point it’s going to explode in our face.”
He said foreclosures had also risen by 600 per cent in the region.
“The mortgage stress is definitely being felt especially in this area,” he said.
60 Minutes also spoke with several Aussie homeowners who gave harrowing details of the stress they faced trying to pay off their mortgages, including having their power turned off and being “hounded’ by their banks.
What does a million dollars buy in Aussie capital cities?
Market analyst Louis Christopher of SQM Research said the market had been “clearly overvalued”, labelling the downturn as the “correction we had to have” — at least in Sydney and Melbourne.
“On our numbers, Sydney was effectively over 40 per cent overvalued. And Melbourne was overvalued by about the same amount,” he said.
But property investor Bushy Martin said the blame lay squarely at the feet of buyers who “mortgaged themselves up to their eyeballs” in a bid to snap up dream homes before being able to afford them.
However, the segment has also sparked backlash online, with some claiming the situation had been exaggerated.
One Reddit user branded the report as an example of “alarmist journalism and scare tactics”, while another said it was “dramatic and cringe-worthy”.
Others also criticised the segment for making it seem like all homeowners would be affected, when the downturn was actually mainly focused in the NSW and Victorian capitals.
And some said it was unfair to blame the banks for the situation, and that homeowners needed to take responsibility for their own decisions.
That was in response to comments made by one homeowner on the program, who said the bank had “suddenly switched the mortgage to interest and principal”, raising his repayments by 57 per cent.
“The interest only part annoyed me the most. The bank didn’t ‘suddenly change’ your repayment from (interest only) to (Principal and interest) your IO term expired. You a) knew this would happen and b) assumed the bank would renew it when it expired. I hope this speculator gets burnt first,” one Reddit user said.
Related article: Experts warn of ‘debt bomb’ as housing downturn worsens
Queensland is the next property hotspot, experts say
As New South Wales and Victoria continue to experience weakness. Queensland is expected to take the lead, a National Australia Bank (NAB) poll of property professionals revealed.
According to the survey, industry experts project house prices in Queensland to increase by 0.7% next year and 1.3% in two years.
Some areas seen to perform strongly over the next year include Brisbane, Cairns, the Gold Coast, and the Sunshine Coast. Out of the suburbs, Coomera and New Farm are expected to realize robust gains.
Meanwhile, Queensland’s rental market is also poised to enjoy an upward boost, growing by 1.3% next year and 1.9% in two years. This is despite the stricter rules on housing investment.
The respondents of the survey also expect Queensland to retain foreign buyer interest. In fact, the share of foreign sales hit a four-year high of 22.8% over the previous quarter.
The results of the survey go against NAB’s own projection of the market. For instance, the bank expects house prices to remain flat in Brisbane over the next three years. Unit prices, on the other hand, is seen to fall by 4.5% over the next year.
NAB chief economist Alan Oster said Brisbane’s housing market seemed to be going sideways and its unit market still creates concern.
“It hasn’t peaked yet, so that’s good. We’re seeing quite strong economic activity in Queensland, so that always helps,” Oster said, as quoted by The Courier-Mail.
Gold Coast house values record the biggest growth in Queensland
The Gold Coast has recorded the strongest growth in house prices in Queensland over the past 12 months.
GOLD Coast house prices are leading the way in Queensland, up six per cent in the past 12 months to an average $620,000.
The latest figures by the Real Estate Institute of Queensland show homes on the Glitter Strip are $35,000 more on the same time last year.
Unit prices are up 1.9 per cent to $428,000.
REIQ data reveals houses on the Glitter Strip are worth $35,000 on the same time last year.
REIQ’s Queensland Market Monitor for March said the strong population growth came on the back of infrastructure projects such as the $550 million Gold Coast Health and Knowledge Precinct and M1 upgrades.
“The property market has been one of the big winners from the sporting event as the $1.5 billion infrastructure investment has boosted confidence and demand for housing in the region,” the report stated.
“We expect house prices will show an upward path in 2018. However, this growth will most likely be more moderate.”
A quiet real estate period leading up to, and during, the Commonwealth Games likely contributed to a slight drop (-0.3 per cent) in the March quarterly median sales price, the report reveals.
Andrew Henderson says a growing population and employment opportunities were contributing to a strong property market. Picture: Jerad Williams
REIQ Gold Coast zone chairman Andrew Henderson said he expected interstate migration to continue to benefit the city.
“I expect the market to remain strong,” he said.
“There is a heavy amount of interstate buyers moving here.
“I was at an auction recently where the winning bidder was from Sydney and the underbidder was from Melbourne.”
Mr Henderson said growing employment opportunities were also attracting homebuyers to the city.
The Gold Coast property market is expected to remain strong.
“We have some of the best health facilities in the country and our universities are world recognised.
“Those two things alone complement the tourism industry and the lifestyle aspects that the Coast offers.”
The report found the fastest-selling suburbs on the Coast included Worongary, Merrimac, Highland Park, Mudgeeraba and Carrara.
It also revealed the rental vacancy held tight throughout the first quarter of the year at 1.1 per cent.
Andrew Bell says the Coast had evolved from a tourist town into a vibrant city with an expanding economy. Picture Mike Batterham
Ray White Surfers Paradise Group CEO Andrew Bell said the Games heralded the next chapter for the Coast, as it evolved from a tourist town into a vibrant city with an expanding economy.
“The city’s property market is riding the irreversible momentum that has now come to the Gold Coast in terms of economic diversity and with more employment options we will need more housing options for people,” Mr Bell said.
“We are no longer going to be subject to tourism upsides and downsides as we were in the past because our economy has well and truly diversified beyond just tourism.”