Why we’re entering a residential upturn – Michael Matusik

It astonishes me that we still keep on reading about Australia’s pending housing market crash. 

Moody’s is the latest commentator to join the chorus singing for caution on the Australia residential market.

Sadly, most overseas commentators don’t understand the nuances of the Australia property cycle or how mortgages are granted & must be repaid in Australia.

Yet despite forecasting absolute doom about five years ago, our ‘property correction’ actually went sideways since the late 2000s.  And now the residential market is set to recover.

I am quite bullish about the outlook for east coast residential property & in particular in Sydney, Melbourne & South East Queensland.

I have several reasons for being so.  These include:

  1. Undersupply of new housing stock, especially in New South Wales & Queensland.
  2. Declining interest rates in concert with low bank loan to value ratios & our current high saving rate.
  3. Expanding population.
  4. Tight vacancy rate.
  5. Lower Australian dollar.
  6. Declining stock listed for sale; less private treaty discounting & shorter time on market plus increasing sales volumes.
  7. Rising confidence – i.e. The Westpac/Melbourne Institutes “good time to buy a dwelling index” which is close to its pre-GFC high.

 

Some thoughts

We currently are saving like there is no tomorrow.

Over 10 per cent of what we earn is now squirreled away; more so when you include the reduction in our level of debt.

But is this really the new normal?

I have suggested such myself, but I am really starting to wonder.

A poor federal Labor government (there is nothing else one could say) & flat house prices might be more responsible for our current malaise than the financial crisis or slower world economic growth.

Surely, assuming a change federally, a realisation that money in the bank now earns very little, & once the penny drops, that house prices are increasing (a broad residential recovery nearly always starts in Sydney), surely Australians will revert to their traditional form of tax free or ATO assisted saving – property.

I cannot see any other major investment path forward.

The ability of SMSFs to borrow to buy property plus the last chance (in their minds) for baby boomers to leverage & make an easier buck before they retire (or re-tread) just adds more fuel to the fire.

Ditto overseas buying in Australia.

 

Australian property is now close to 20 per cent cheaper than it was six months ago. 

Chinese money is looking for an investment home, especially as their home economy declines & restructures.

According to a recent survey by NAB, foreign buyers of new Australian residential property have doubled in the last two years.  Foreign buyers now buy one in every eight new homes sold in Australia, up from about 5 per cent in 2011.

[sam id=37 codes=’true’]Expats wanting to come home are also on the increase.  Keep in mind that one million Australians live abroad & the previous high Australian dollar (plus HECS payments) has kept them overseas longer than many originally intended.  The Rudd & Gillard show might have keep me away too, if I am being honest.

Plus, we have the new 888 significant investor visas, which allow overseas migrants free reign once approved & if they invest $5 million in an approved security.  This will have a big impact on the top-end of the residential market.

My work with the Brisbane Chinese community suggests that quite a bit of this visa money will be invested in SEQ.

Finally – & these comments are somewhat more speculative than my usual conjectures – as bank deposits (and our savings) start to be withdrawn & placed in more attractive investments, won’t the banks need to continue to build shareowner wealth/returns.

They have quite a bit of room to play with – a very large interest rate margin (currently 3.45 per cent between the cash rate & the standard variable mortgage rate) plus very low loan to value ratios for existing loans (around 50 per cent).

I think that they will start to chase market share, dropping mortgage rates & loosening lending criteria in order to secure more home loans.  More sales will take place as a result.  Prices will rise even faster.

 

End notes

We are surely about to enter another residential upturn.

Property along the east coast – and especially in the three main capitals/plus on the Gold & Sunshine Coasts – will be the big winners.

A baton change must happen from resources/mining to residential construction.  As interest rates (given the federal & state deficits) are the only tool in the shed, they will continue to fall until new residential construction lifts & stays high for some time.

We won’t get any joy this time around from the commercial sector, with office vacancy rates in double figures & the demand for new retail space in decline.  Residential, this cycle, will have to do most of the heavy lifting.

As a result, some are now forecasting that the cash rate could fall another 0.75 per cent to 1.75 per cent within the next 12 months.

I think the cash rate will go to 2 per cent by Easter 2014.  Anyone want to place a bet?

Property values are set to rise & they will most likely overinflate (like they usually do – see here) as a result.

I think the residential market will enjoy much better times post 7th September & will remain buoyant for about two or three years.  Prices then will then need to correct.

I don’t really know how much they will increase in the next, say, three years, but by as much as 25 per cent isn’t beyond the realm of possibility.  Who also really knows how big a future correction will be.  It might be another long fizz like the last five years or a sharp plunge.

The key is to invest and not speculate.  My colleague, Michael Yardney, has more to say about this here.  In the meantime, if you want to know what I think, revisit my thoughts here.

In summary, it is pointless saying that things are different this time around.

Property cycles & all of the hallmarks are there to see that a recovery has already begun.  We need a residential recovery.  We need more new housing starts.  The RBA will make sure we get one.

It’s game on!

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If you’re serious about property investment please join me and a group of property and tax experts at my upcoming Property Market and Economic Updates that I’ll be conducting in 4 states in August and September 2013

I will be presenting a heap of BRAND NEW content I haven’t discussed in public before. I guarantee there will be several things I reveal that you are not doing and you should be!

Click here now to get more details and reserve your seat.

Property & Econonomic Update

If you want to cut through all of the media hype, and all the contradictory predictions, and finally learn the truth (good and bad) about what is going to happen to the Australian property markets, this seminar is exactly for you…  Click here now to get more details and reserve your seat.

Michael Yardney

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Michael Matusik

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Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive


'Why we’re entering a residential upturn – Michael Matusik' have 1 comment

  1. August 23, 2013 @ 12:41 pm Melbourne Buyers Advocate

    Interesting article, and I agree with it being a good time to buy and that we may see further price increases, but am concerned about people taking advantage of the low rate at the moment, but not considering their ability to service a loan once the rates go back up in the future.

    Reply


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