The markets across Australia are indicating that they have passed the first peak in a normal part of a growth cycle. For most capital cities this means that we will see a slowing in the rate of growth (but still growth) during autumn and winter and a move back to higher rates of growth in the second part of the growth cycle.
This second phase or part of the growth cycle is usually longer and stronger than the initial growth period. The cycle has moved to being more normal, with upper cost areas of the market now leading the way forward. This is as one should expect as confidence among the ranks of our executive and upper management groups become stronger. It will flow on to other areas as corporate profits improve and there is lower unemployment and some wages growth.
Slowing is evident from the number of slightly negative growth numbers in the month of February for houses. The relatively strong performance in the unit market is evidence that investors have become much more active.
Here are the house and unit market statistics for February 2010.
| Houses |
| | | Growth | Growth |
| Area | Median value | Feb 09 to Feb 10 | 10 year average |
| ACT | $501,500 | 9.45% | 10.74% |
| Melbourne | $547,500 | 16.32% | 10.16% |
| Brisbane | $469,000 | 6.52% | 11.81% |
| Sydney | $634,000 | 13.28% | 6.62% |
| Perth | $481,000 | 2.00% | 11.67% |
| Hobart | $362,500 | 5.20% | 11.98% |
| Darwin | $501,500 | 11.20% | 11.28% |
| Adelaide | $400,000 | 7.95% | 10.48% |
| Units |
| | | Growth | Growth |
| Area | Median Value | Feb 09 to Feb 10 | 10 year average |
| ACT | $394,000 | 7.84% | 10.98% |
| Melbourne | $422,000 | 16.39% | 9.85% |
| Brisbane | $357,500 | 3.10% | 10.36% |
| Sydney | $444,500 | 10.41% | 6.00% |
| Perth | $391,000 | 7.27% | 11.08% |
| Hobart | $277,000 | 9.01% | 12.50% |
| Darwin | $410,500 | 17.02% | 11.09% |
| Adelaide | $306,000 | 8.01% | 11.57% |
Darwin houses are at last taking a breather and the growth for the month was for the first time negative in more than a year. Its rental yield remains the highest of all capital cities and will cause further investor interest which will continue to drive prices but at a lower level given the cost of property which is now relatively high by comparison to the other opportunities. The cost of an unit investment here is now only very marginally lower than in both Sydney (8%) and Melbourne (3%).
Graph 1: Major Capital City Trends
Graph 1 Major Capital City Trends clearly shows that the market is now softer than it was in September/October 2009.
The auction clearance rate in Sydney last week was approximately 65% while the clearance rate in Melbourne was in the 80% range. The impact of the RBA to increase interest rates has been more noticeable in Sydney but is a reasonable outcome given the higher cost of housing and the larger mortgage position for most when you consider that Sydney has been more expensive over a longer period. The momentum and confidence of Melbourne property buyers in a city which is growing strongly is likely to carry its growth phase for longer than in Sydney. However, both cities are exhibiting a slowdown as we move into winter. In both capitals investors are active in the unit market and prices are moving forward.
Our other cities are also exhibiting a softening but it is not as noticeable as in the two majors (see Graph 1). Again, this result is probably an expression of the lower impact of unaffordability and the RBA´s move on interest rates. (see Graph 2 Minor Capital Cities Trends).
Graph 2: Minor Capital City Trends
I have recently been reading suggestions and arguments about a price bubble in Melbourne forming.
I can see no evidence of this. Yes, houses are too expensive across Australia but that position is unlikely to change for at least a decade as it will take that length of time for governments to correct the stock shortage issues.
Further our population needs to expand to satisfy the fundamental needs of a growing resource sector. Add to this – the recent breaking of the drought and it is clear that Australia is in very good shape with the population more likely than not to see growth in wages, and reductions in unemployment than anything else. Add to this – a banking network that is strong and has the capacity to continue to lend to this sector and needs to, to maintain profits and we have a recipe for moderate to good total returns from our housing assets. Please note that I speak of total returns as the affordability issue will lead to renting becoming more normal than in the past and creating moderate capital growth, but at the same time causing rentals to rise.
But I digress a little. The RBA interest rate increases are having a slowing affect and the data is clearly showing that the rate of growth is moving back a little. This in itself points to a "bubble" being avoided as the growth rate would need to be increasing for there to be the potential of any major problem. One last point on this; our more than 170 years of data tells us that capital growth rates in the last 60 years are less each cycle and hence as property becomes more expensive, bubbles become harder to create. Having said that, we have to bear in mind, any long period of moderate growth with excessive bank lending with higher leverage being allowed or encouraged can lead to problems if the economic circumstance of the country turns down.
Our banks are well controlled and governed so a rapid adjustment to our housing values to make them affordable looks very unlikely.
With the market moving to a normally quieter period during winter, it is a good time to identify opportunities. For me winter is the best time to purchase as there is less competition in the market and sellers at this time are usually more anxious. You probably have a better opportunity to negotiate that bargain, particularly in Melbourne.
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