OPINION: FOR many in the finance and property industries, Christmas 2008 will not be able to come quickly enough as it signals the end of one of the toughest years on record for the share market and an increasingly challenging property market, albeit not to the same extent of pain that equities have experienced.
Economic uncertainty has caused a decline in consumer confidence. In the last 12 months the average days on market in the
So let’s take a minute and attempt to understand what’s happened and, perhaps more importantly, what’s likely to happen in the short and medium term ahead.
Property, like almost all other asset classes, is driven by a number of fundamentals, the main one being supply and demand.
Having said that the unique dimension that applies to property as an asset class is, of course, that 70.1% are owner/occupiers (according to ABS*). So in some ways this brings more emotion into the acquisition than buying shares or bonds. It’s also one of the reasons that property generally weathers economic storms better than most asset classes as 70% of property assets are providing a roof over their owners’ heads. Most of those who are not forced to dispose of their property will often wait until they can secure what they believe is a reasonable market price.
Is it possible that this is simultaneously one of the scariest economic times of the past century and one of the best buying opportunities of the same period?
The answer is almost unarguably yes. Whether you’re buying blue-chip shares or real estate, the current panic selling and associated sell offs that are hitting quality assets will undoubtedly, in hindsight, provide many people with the opportunity to make the greatest investments of their life over the ensuing period.
Just as in boom times when investors often become oblivious to the fact that all markets have cycles that go in both directions, many people seem to be acting at present as though this may well be Armageddon. I don’t believe for a moment that it is.
Interest Rates
This week’s rate cut of 1.00% means we’re currently experiencing the lowest interest rates in seven years. Since September 2008, the RBA has reduced official interest rates by 3.00%, which is great news for consumers, with further rate cuts expected over the next year.
For a borrower with an average $350,000 mortgage, the rate cuts mean a repayment savings of around $650 per month. Housing affordability is improving with buyers and investors prompted to return to the housing market and I’m tipping this will continue as we see further movement.
Is it a good time to buy?
For this summer quarter, I’m excited to suggest some of the areas of
Now asking a real estate agent whether it’s a good time to buy or not is somewhat akin to asking your barber whether you need a haircut! Having said that I think it’s possible to set aside any natural tendencies to view the property market favourably and highlight the outstanding opportunities that will come from this market.
Market Influencers
Before we look at some of the specifics, let’s examine a few of the facts or at least things that we’re seeing very clearly, within the current market.
· The financial world is not ending and we will see a light at the end of the tunnel sometime soon. Whether the clouds start to lift in 2009 or 2010 is debatable but a lot of smart investors that I speak to are suggesting that they are hoarding their cash a little longer and are preparing to unleash as soon as they sense a stable bottom within the two key markets (shares and property).
· Interest rates are down significantly in the last 12 months, and likely to fall further in the first half of 2009.
· Property prices are down in general between 10% and 20% and I believe could fall a further 5%. Those who are predicting a 40% decline are out to sell headlines rather than provide a realistic view on the likely asset revaluation.
· Property under $1 million in
· Unemployment is the greatest issue at present in my opinion. As yet we’re not finding it challenging to get the majority of our Clients set with competitive finance. As long as you have a 10% deposit, good credit rating and stable employment the only difference from a year ago is that you can borrow money at a significantly cheaper than you could last year.
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· With prices down by 10% – 20%, interest rates falling by 2.5% – 3% and rents up from 10% – 15%, an investment in residential property now makes so much better financial sense than it did a year ago when people were lining up at auctions each week.
· Increasing rental yields and declining vacancy rates will remain attractive for investors. Average weekly rents across
· Whilst the risks associated with commercial tenants is clearly higher than we’ve seen for a long time, we’re now starting to see quality commercial investments hit the market, yielding 8%-9%. Considering you can now borrow at around 6% the opportunity in the commercial property sector is starting to emerge.
Return of Expats
Expats are again entering the local market. Many are returning to Australia due to the unstable overseas markets and are taking advantage of the low Aussie dollar (at its lowest since April 2003), and falling interest rates. Shopping with
The top end of the market, priced at above $15M, remains strong with high interest among overseas buyers. Premium property in exclusive harbourside locations remains tightly held and in demand.
Best Buying Opportunities
· For Buyers, there will continue to be a flight to quality, so don’t stray far from the top 50 suburbs of
· Residential gross yields have now increased in many quality areas to around 6% (courtesy of falling prices and rising rents). So, whilst I’d keep an eye on emerging commercial markets, I suspect residential property will still provide a safer interim and better growth over the next five years. I suggest that you give retail a pass at present.
· Blocks of residential flat buildings. By definition these are excluded from the owner occupier market and exclusively targeted by investors. With many investors still sitting on the fence, I see blocks of 4-12 flats in prime locations providing outstanding buying and growth opportunities in 2009, as investors start to filter back into the market.
· Due to margin calls, job losses and disappearing bonuses, residential property in areas that have historically been in high demand areas for financial executives will offer the best buying during the first half of 2009.
These include Primary Residence areas such as:
Vaucluse
Hunters Hill
Longueville
Northwood
Northbridge
Cremorne
Mosman
Second home hotspots such as:
Avalon
These areas count amongst the best in the country, so now is the time to buy in before the market surges back, which I suspect it will in these areas by 2010.
In Summary
· For those who are in a position to buy, the next six months may present some of the best buying opportunities for almost 20 years.
· Stick with quality location, position and design to capitalise on the greatest gains once the market rises again.
· With falling interest rates and rising rents, combined with the “sleep at night” factor, property again will offer investors a viable option to maximise their returns with minimum risk.
By John McGrath, chief executive, McGrath Estate Agents.*
Australian Property Journal
