John McGrath’s Market Review For Spring 2011

By John McGrath, Property Expert

www.mcgrath.com.au

Recent economic events have caused a heightened level of uncertainty. This will prove problematic for property at the higher end over the next quarter, however I still believe most markets are at the beginning of a long-term growth cycle. Property remains an excellent asset class for long-term investment and definitely offers more stability than the volatile share market.

Once confidence returns, Australia will be in good shape. Unemployment remains relatively low and rents are very strong. A key factor is interest rates. If the RBA moves to decrease rates further, this will supersede many macro economic issues for the average buyer. Buyers have been concerned about interest rates moving upwards and we really need to see a rate reduction that puts the steep rises of the past 18 months behind us. With three year fixed rates now below the variable, this indicates the banks’ belief that interest rates are on the way down.

In short, we are experiencing great buying opportunities. Take a long-term view and purchase quality property in blue-ribbon areas or markets that show great prospects for capital growth.

Market observations

New RP Data figures for the June quarter show a -0.9% seasonally adjusted decline in capital city property values nationally. However, most transactions in investor and upgrader markets have been sub $750,000 with fewer transactions at the premium end.

Currently the market appears to be taking a breather. A pause in any growth cycle should always be considered a positive. Markets don’t go up in straight lines, they always reflect growth punctuated by a pause or occasional corrections.

Many consumers have de-leveraged by paying down their loans. Whilst not good for retail, they have more cash in the bank and their super funds. In some markets, people are deliberately downsizing to a more affordable home specifically to reduce the size of their mortgage. People are currently conscious of debt and are acting accordingly.

Affordability is a key issue for buyers. With people less confident about taking on large amounts of debt, we are finding higher competition on the more affordable homes.

Buyer demand, although weaker across the board, still outweighs the lessening supply. In the month ending July 30, RP Data reported 5,000 fewer new advertised listings nationally compared to July 2010. In NSW alone, there were 3,000 fewer listings. However, demand is solid, with Australia’s largest mortgage broker AFG, reporting an 8.6% increase in home loans in July 2011 vs July 2010.

Sydney and Melbourne clearance rates are in the low mid-50% and trending upwards. As a company, we are seeing our auction clearance rates shift towards 70% which is still a very healthy percentage in any market.

Upgraders and investors are still active. An increasing number of young people are choosing to buy an investment property ahead of their first home. People still want to enter the market and if they can’t afford it, they will stay at home longer, save for a bigger deposit, or buy with family or friends.

Record high refinancing indicates buyers are taking advantage of better deals so they can upgrade or at least reduce the interest rates on existing properties. Three-year fixed interest rates are below the variable rate right now. As an example, ANZ is offering 6.44% for two and three years fixed vs 6.9% variable.

The US debt downgrade by Standard & Poors will no doubt make people nervous, however property still presents as a stable investment. Strong rents are driving investor demand. Many more people are using self-managed super funds to buy property – latest Tax Office figures show a 13% increase in property investment via SMSFs over the past year.

Vacancy rates are very tight with renters competing strongly in markets with little stock. Some renters are offering higher rents or advance payments. There were 9,000 less new advertised rentals in July 2011 vs July 2010 nationally, according to RP Data.

In RP Data’s June results, Canberra was the best performing capital city with property values up 0.5%. Prices are now beginning to stabilise after 3-4 years of sustained growth. Great fundamentals for investment remain with apartments under $1M still in high demand and gross yields around 6.5%. The Australian National University has announced 6,000 new places which will add further demand for apartment rentals.

John McGrath’s Top Metro Suburb Picks

Houses

Abbotsford
Breakfast Point
Frenchs Forest
Freshwater
Haberfield
Northbridge
Palm Beach
Queenscliff
Seaforth
Sylvania Waters

Apartments

Bronte
Cremorne Point
Dawes Point
Earlwood
Kensington
Newtown
North Parramatta
Pyrmont
Sans Souci
Wollstonecraft

Regional Markets

There have been ‘green shoots’ in terms of property demand in most regional areas in which we operate. Some of the hardest hit markets such as Bowral, Ballina and the Gold Coast are receiving more new buyer enquiry than they have for several years – a good sign that smart buyers are picking the bottom.

Buyers continue to look for value, however they are now starting to purchase when they see it. The backlog of buyers is starting to create activity in markets such as Bowral where demand has increased noticeably over the last quarter, where our office reports significant new interest from Sydney investors seeking long term capital growth.

John McGrath’s Top Regional Picks – Best Buying Opportunities