China's outlook on our property

The mining boom in 2013 was shaping the Australian economy at all levels, and its influence was felt everywhere. Of course the mining boom is bigger than just China. You can add India and the rest
of emerging Asia to the mix. But it's a good barometer of how things are tracking.

Things in China are looking a lot better than they were 6 months ago. Coming into 2012, the Chinese authorities were worried that the Chinese economy was over-heating. There were imbalances forming in the property and financial markets, and inflation was threatening to take off. So they tried to take some heat out of the economy and it worked too well.

Underestimating the headwinds coming out of the global economy, the Chinese economy came close to stalling. Australia watched nervously, worried that the demand that had kept the mining boom steaming along might suddenly evaporate.

Chinese authorities put their foot back on the accelerator, and at the beginning of 2013, China seems to have solid momentum behind it. The accelerator is infrastructure spending. China has announced a new round of massive investment in subways, airports and other 'mega-projects'. According to HSBC, investment is adding more to the economy now than at any time since 2009 - when China was doing everything it could to avoid the fall-out of the GFC.

And so at the end of 2012, exports were stronger than expected, credit was surging, and retail sales were improving. Industrial production was also stronger as was electricity output. As a result, economists were revising up their estimates of growth through 2012, to just under 8 percent. China looks like it's back on track. This is good news for Australia. The emphasis on infrastructure spending is particularly
good news for the mining industry. Steel demand seems likely to hold at stellar levels.

And the rapid urbanisation underway in China isn't letting up anytime soon. China will add another 100 million people to its urban centres by 2020, bringing the urbanisation rate up to 60 percent. The long-term drivers are solid. And it seems that in the short-term as well, through 2013 and beyond, China is on the right track. It looks like this year, Australian property investors can rely on China.

Banks unwilling to finance new residential projects

The banks have come under attack for their unwillingness to finance the development of new residential projects in Sydney and are potentially holding back the recovery of the new housing market, says BIS Shrapnel managing director Robert Mellor.Speaking at the recent QBE LMI Housing Outlook breakfast, Mellor said developers had been telling BIS Shrapnel that a more favourable planning attitude had been adopted by the O'Farrell state government, ahead of changes to the planning regime next year. "We are hearing from developers that the state government has changed its attitude significantly," said Mellor."The sorts of comments I am hearing is that the government is far more accommodative even without the new regime in place and that's a favourable thing for new construction."But he said the most important thing needed to stimulate a recovery was "the banks freeing up their attitude to lending practices"."My personal view is that banks are being very tough on developers and very tough on individual borrowers."There is this perception [among the banks] that housing could still fall through the floor like it has done in other parts of the world."They need to realise that everything has been thrown at this sector over the last three to four years – it will be nine years since the boom ended coming up this Christmas."You can't talk about prices being massively overvalued when we have seen significant correction in prices, and in real terms they have declined around 12%."Mellor says while it is more still relatively more expensive to build in Sydney, there will be a recovery in construction on Sydney fringes. However, he says the substantial recovery will need to come in medium density and high density construction because the old days of relying on owner occupiers building new houses are over. "You need investors. "We have a favourable regime, but the problem is if banks take a negative attitude on that, then it will be held back. "If that's the case there is the risk of asset price inflation – you need more supply. "The banks have a part to play in that, whether it's funding fringe development or supporting high-rise development. "People need to realise there is no oversupply risk and no collapse about to come."

Buyer beware

The New South Wales consumer watchdog is warning prospective home buyers and renters of scams which are costing unsuspecting victims thousands of dollars.Legitimate ads on reputable property websites are being copied onto dodgy sites with homes and apartments being offered at cut-price deals.In one ad, a two-bedroom property in Sydney valued at $1,300 a week was being offered for a third of the price.Consumers are asked to pay a deposit into a Western Union account without seeing the property.They then lost their money.The Commissioner for Fair Trading, Rod Stowe, says overseas students and people looking for a bargain tend to be the victims.Mr Stowe says some of the ads claim a quick sale is required, or that the property's tenant is overseas."Usually [there are] very convincing stories given as to why the properties are being sold at a particularly discounted rate," he said."Be very cautious. If it sounds too good to be true it usually is."New real estate fraud prevention guidelines have been released to combat the problem.

Australia's most expensive houses

If you want to know where Australia’s rich live, it will probably come as no surprise that Sydney tops the list.Perth and Melbourne are a distant second and third behind the harbour city which has 19 of Australia's most expensive 25 suburbs, according to the RP Data. Perth has three, Melbourne two and Eagle Bay in Western Australia's Margaret River region also gets a top 25 ranking.As in most parts of the world our rich tend to live close to the center of town and if not close to the water.Why? Because the rich can afford the convenience.Sydney’s Point Piper, around 4 kilometres form the CBD tops the list with a median value of $7.382 million.With only 11 streets, including the richest in Australia - Wolseley Road – it has only 148 detached houses and 57 percent of them are owned outright (that is without a mortgage).Not surprisingly Point Piper residents have the highest average incomes in the nation, averaging just over $182,000.Second on the list of expensive suburbs, with an average home price of $6.5 million, is Watson's Bay, only seven kilometres away from Sydney’s city center. In third place is Centennial Park, followed by Woolwich - both in Sydney.Perth's Peppermint Grove takes fifth spot, where median values are $4.3 million, while a typical mansion in Toorak, Melbourne’s top suburb, a can be bought for a measly $2.8 million.Tim Lawless, research director for RPData said suburbs on the property rich list tended be in areas near the central business district, close to the water, or featured houses with a heritage value or houses perched on larger blocks of land.Only three of the top 25 most expensive suburbs are further than 10 kilometres from the capital city central business district.It’s no coincidence that the population living in these most expensive 25 suburbs accounts for just 0.5 per cent of Australia's total population.

State of the property market

In Australia there’s not one property market. Each state is at it’s own stage of the property cycle and each has multiple markets segmented geographically, by type of property and by price point.

Apartments are performing better than houses, luxury homes are not performing as well as median price properties and regional properties are in general underperforming capital city dwellings.

However, there are opportunities in every market...

Remember, you are not buying “the market.” As a strategic investor you would be buying an individual property in that market that you would be happy to hold in your portfolio in the long term and one that was bought sufficiently below intrinsic value so that even if the market fell a bit further, you would still have bought well.

CAPITAL CITIES

Sydney

While the overall market in Sydney has been flat over the last year, with median house prices down by around 1%, there's growing confidence in the harbour city.

After languishing for some years, the top end of the market is showing early signs of increasing demand, especially in the eastern and lower north shore suburbs.

While there is also increasing demand for houses in the middle and lower end of the market, over the last few years Sydney’s apartment market has outperformed the housing market with stronger rental and capital growth.

A good example of this is the strong demand from owner-occupiers for units in Sydney’s Inner West. A shortage of available “good” stock relative to demand is pushing up prices in these suburbs, which are going through gentrification.

Apartments in Sydney’s eastern, beachside suburbs and lower north shore suburbs are also performing well. However, buyers are being very selective and avoiding properties that are overpriced or apartments in secondary locations.

Strong rental demand, a shortage of rental properties, tightening vacancies and rising rents means investors will vie for the same apartments as owner-occupiers, underpinning prices.

The market for well-located apartments is likely to remain strong throughout Spring and this will be helped if interest rates fall once more as expected.

Melbourne

After falling in value over the first quarter of the year, the Melbourne housing market has been a bit of a surprise, performing better than many expected with prices rising around 3% over the last quarter clawing back half of their losses.

Again different segments of the market are at different stages of the property cycle.

Builders and developers have gotten ahead of themselves and there is a substantial oversupply of newly built house and land packages in the outer suburbs, especially in the west and the north. This will create downward pressure on property values in these locations and for properties in the first-home buyer category in general.

The top end of Melbourne’s property market is still quiet with an oversupply of property relative to the reduced demand for luxury property, however there is more demand for properties priced between $500,000 and $900,000 in the inner- and middle-ring suburbs of Melbourne.

With too many new apartment projects under construction there is an oversupply of CBD and near city apartments at a time when there is less demand. This will put downward pressure on prices and rentals for apartments, yet interestingly Residex reports that house rents in Melbourne increased by 10.53% in the past year.

Many of the apartments that have been sold off the plan are coming on stream over the next few years and have been purchased by investors. Some will have difficulty getting finance and settling their purchase.

Others will be disappointed to see the end value of their properties is less than their purchase price.

This oversupply apartments will overhang the Melbourne market for a few years, causing prices to fall slightly.

However established apartments with an element of scarcity, for example Art Deco features, are still selling well, as there is limited supply in relation to the current demand for these types of properties in Melbourne’s bayside, eastern and south eastern suburbs.

On the whole though, I expect the Melbourne market to remain subdued for a while but, as in every market, there are some great buying opportunities, especially for properties to which you can add value through renovations and manufacture capital growth.

Brisbane

After a number of tough years Brisbane median house prices fell 0.60 per cent and unit prices fell 0.61 per cent over the last year according to Residex and is now hovering near the bottom of its cycle.

Buyers are lacking confidence to re-enter the market and are sitting on the sidelines waiting for signs that the market has bottomed before they make a purchase. Many were waiting for the resources boom to reignite their property market, but recent negative media has dampened their confidence.

However we’re seeing more strategic investors getting a foothold in the Brisbane market recognizing that it’s a “buyers market” and taking advantage of counter-cyclical opportunities.

There is an oversupply of apartments in the Brisbane CBD and surrounding suburbs with over 40 projects currently being marketed. Many of these apartments will remain unsold and this oversupply of properties will put downward pressure on prices and rentals.

The Brisbane detached house market is still languishing but on the way to bottoming out. House prices have dropped for the last few years in Brisbane but there are signs that the inner and middle-ring Brisbane home market is picking up with more buyers returning and many properties now selling under multi-offer scenarios.

All this means that Brisbane is entering the stabilisation phase of its property cycle, but prices are unlikely to start rising until 2013.

The good news for property investors is that house rents in Brisbane increased by 14.47 per cent in the past year.

Perth

The Perth property market, which has been in a slump for the last 5 years, appears to be moving again with median house prices increasing by 3.17 per cent and apartments by 10.05 per cent over the last year according to Residex.

All the fundamentals are positive - Western Australia has Australia's strongest economy, lowest unemployment rate and highest wages. Rents for both units and houses are rising and there is an increasing a shortage of accommodation for the increasing number of buyers and tenants

It’s the old supply and demand ratio at play. Population growth is strong and and levels of construction have been low for the last few years, so the cycle is moving on. And so are rentals. According to Residex house rents in Perth increased by 16.46 per cent in the past year.

Adelaide

The Adelaide property markets are flat at present. Median house prices fell 2.45 per cent and unit prices fell 2.1 per cent over the last year and median rents remained steady according to Residex.

Since the announcement of postponing any additions to the Olympic Dam project, confidence is waning as many locals were hoping this project would turn South Australia into the next big mining state. Unfortunately there is nothing in the wings to suggest this market will change in the near future.

Darwin

Darwin’s property markets have performed well with median house prices increasing by 3.37 per cent and unit prices by 5.95 per cent over the last year according to Residex.

Darwin’s market tends to be volatile and seasonal but is underpinned by increased activity in the resources sector, especially offshore resources.

Canberra

Median house prices in the ACT fell 0.26 per cent and unit prices fell 5.47 per cent over the last year according to Residex.

But the market may be turning as Canberra has low unemployment, relatively high public service incomes and a shortage of accommodation, especially at the cheaper end of the market.

Hobart

Residex reports that median house prices in the Hobart fell 6.36 per cent and unit prices fell 6.68 per cent over the last year and that median house rents did not increase.

While the Hobart property market has performed relatively well over the longer term, a weaker economy that lacks exposure to the mainland's resources boom and its relative isolation suggests there are better places to invest in property.

In summary:

Looking at the Australian property markets I see the glass being half full, while I know a lot of people see it half empty.

There are some excellent property investment opportunities for long term investors. If you have a secure job and the ability to service a loan, and that’s become much easier recently, now is the time to consider buying a well located residential investment property.

Australia's economic stance

Driven by the biggest resource-investment boom since the 19th century, Australia’s $1.379 trillion economy will probably overtake Spain’s $1.386 trillion GDP this quarter, data from Bloomberg shows. 

While the European nation of some 47 million people struggles to disentangle itself from the debt problems of its region, Australia’s economy grew at 3.7 per cent in the three months to June from a year earlier.

As most of the developed world struggles with high unemployment and debt, Australia’s unemployment remains steady at 5 per cent and has not suffered a recession in 21 consecutive years. 

“This is a nice microcosm of the structural shifts in the global economy away from the old developed core to the emerging and peripheral part of the global economy, in Asia particularly,” said Richard Yetsenga, head of global markets research at Australia & New Zealand Banking Group Ltd. (ANZ)

RBA cut

The Reserve Bank has cut its cash rate by 25 basis points, to 3.5 per cent - its lowest level since November 2009. Today's decision marks the biggest back-to-back monthly reduction since the depth of the global financial crisis.

Residex CEO, John Edwards said he was disappointed with today's outcome and that he believes The Reserve should have held its position.

"The ultimate outcome of the global difficulties which are currently unfolding could well be that the Reserve Bank will need as much ammunition as possible available to it in order to maintain Australian resilience in a potentially very difficult global economy. The need for this is even more acute in a situation where the Federal Government is failing to recognise the potentially very poor timing of its new taxes and impost which are about to come into play.”

Mr. Edwards went on to say that small cuts such as the one annouced today can get overlooked in the consumer’s perception of market conditions and ultimately have little to no impact.

"This can simply work to the negative by further undermining confidence given the very wide-spread press about difficult global finances. The size of today's rate cut is such that a lot of it will probably get lost in the bankers needs to maintain margins and their stability. Funding margins in the current global finance market will be being impacted on as markets look to reduce risk exposure, particularly in Europe.”

Overall, Mr. Edwards said he would have preferred a significant reduction in July if needed when the outcome of the Greek situation is understood and known.

”A single, significant reduction of 0.5 to 0.75 per cent later in the year would have a guaranteed outcome at the consumers 'gate' once the Banks have also balanced their position.”