Report by CEO of RESIDEX John Edwards:

There has been a lot of bad news concerning our property markets so I thought I would shed a more positive light on what is happening. When you look hard at the overall numbers, there is actually quite a bit of good news:

• The market looks to be bottoming out, meaning things are about to begin to improve;
• Growth, in real terms, is lower than normal so, if history is any guide to the future, we can expect it to rebound. Given long term real rates and low inflation of about two to three per cent, the longer term nominal growth should be, on average, around six per cent  per annum; and
• There are markets across Australia doing very well.

First, let’s take a look at the markets that are doing well.

In the below table, ‘Best Performers’*, I provide the suburbs that are the current stars in the Australian markets. The suburbs presented are from both city and country markets and have been sorted in order of performance for the last three months.

There are several interesting things to note from the above list:

1. About 62 per cent of the suburbs identified have a median value of less than $500,000 and around 30 per cent have a median value of less than $350,000 – Affordability is again playing its part in growth;
2. The highest rental yield was found in Warren, at 9.58 per cent, where the median value is $111,000. Typically, where rental yield is greater than five per cent, the median value of properties is $296,000. Low cost properties will usually have high rental yields because weekly rental is a function of wages and the tenant’s capacity to pay; it is not so much dependant on capital value.
3. The capital growth for all of the selected suburbs exceeds 4.3 per cent, with the highest being a very significant 7.55 per cent in Wandina, WA. These quarterly numbers translate into an annual growth rate of better than 18 per cent; and
4. It should be clear that no matter what the greater market is doing, there are always gems to be found. However, it is important to remember a current “gem” is just that, current, and the opportunity to maximise returns has passed. We need to find the locations that are predicted to grow, just before they become “gems” to make the most out of an investment. Our Best Rent Report is an excellent starting point to identify such suburbs, with the June Report just released.

Let’s move on to the long term growth trend in inflation adjusted terms (real terms).   

In doing this, I am going to consider Sydney because it is the most mature and expensive market and it has been dealing with unaffordability the longest.

In the table ‘Real House Price Growth’*, I present a series of long term annual statistics for the Sydney median house price and Sydney CPI**.

There doesn’t appear to be good news in the table. Basically, real house price growth in recent times is low and is probably amongst the lowest one can find in any five year period. The last 20 and 60 years saw the highest periods of real growth. It is equally interesting that pre-1950, when rental yields were very high, house price growth was lowest but even then growth was higher than it has been over the last five years.

It should be noted that apart from the current position, low real capital growth has been accompanied by high rental yields; however the current average rental yield over the last five years is the lowest in the table.

When you look at the last five years in growth terms, it can be suggested that housing growth rates are already stagnating and will continue to do so for a little while longer. This is natural in a market where there is a significant level of stress as a consequence of consumers spending more than 50 per cent of gross income on home loan repayments. The position is compounded by lower risk taking by our lenders. The doomsday fortune tellers are speaking of value declines because of these two issues.

Historically, where there is affordability and credit can be easily accessed, real capital growth rates exceed five per cent per annum, evident in the table for most of the last 20 and 60 years. It can be shown that the last seven years (apart from the period of very low interest rates due to the GFC) was a period of the poorest affordability in the last 40 years.

So where is the good news? It is certainly difficult to find anything positive in the above data. It is clear that the long term real growth rate in housing is normally in the order of four per cent plus per annum, suggesting that, if history is any guide to the future, we will revert to this rate in the longer term so we should all “hang on to our houses”! However, it is unlikely that we will see the abnormal high growth rates that were achieved in the last 20 and 60 years again. We are in a change over period where rentals are going to become more important and real capital growth is reducing. The positive outcome here is real capital growth is likely to settle above the current five year average and our best guess is that it will ultimately be closer to seven per cent. Our risks in leveraging are reducing as rental and cash flow in turn increases. Another positive outcome is that the information points to a market where we are going to find both capital growth and high rental yields.

As evident in the above data, growth is a function of the ability of the population to bid for property due to available credit and affordability. This tells us that we need to seek out affordable properties, which will be found in the unit market, hence my advice over the last few years to find investments in well positioned units. (Additionally, affordable houses in well located areas will perform even better.) The good news is we are being given a clear direction for our investment decisions. The Residex Report will help you identify affordable suburbs. From this list you can then narrow down to suburbs that are well positioned, providing quality amenities and are close to transport links. Make sure you don’t overlook the regional markets in this process.

Now to my last point. In the last two Residex quarterly state reports it was stated that Sydney and Brisbane are the most important markets with the best opportunities. Both of these markets have a clear supply shortage while others do not display as though a supply problem exists. It was also recommended that the Perth market was worth watching as it was approaching its turning point.

Below are a series of graphs presenting capital growth that paint the picture better than words could of how our markets have been performing.

Below are a series of graphs presenting capital growth that paint the picture better than words could of how our markets have been performing.

• ‘Australia as a Whole’ appears as though there is generally some further adjustment to
  take place, albeit minimal.

• Encouragingly, ‘Brisbane’ is presenting as if it has reached its bottom of its adjustment
  process following the natural disasters. There could be a little further adjustment but we
  would  suggest, based on the numbers, it will be minimal.

• ‘Sydney’ is presenting as if it has bottomed out and growth should occur from here,
  albeit small.                                                                                                       

•  Very encouraging is Perth, now presenting as if it has also bottomed out and it is
  probably a month or two out of correction phase being over.                            

The markets that are potentially in trouble are Adelaide, Darwin, Hobart and Melbourne.

• Melbourne housing is providing some growth while the unit market is in correction.
  Our models indicate that there is likely to be correction in the short term or it will  
  hold at the current level for the next three years and under perform inflation.        

Overall, there is some positive news in the adverse property markets across Australia. While it is probably a little early to say the worst has passed, the worst of the corrections phase could well be over for a number of our capital cities. Interest rates look as if they are on hold for the moment and given this, and the continuing resource investment growth that will continue to stimulate our economy, we should all look to the future with an improved level of confidence. If we are at the bottom of the market in many of our cities then it is time for us to seek out the opportunities, but research and care are needed.

 Click here to view the actual report