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2012 the year the property market turned

Australia has had a boom and gloom economy over the past year. On the one hand our economy still grew – unlike many others around the world –underpinned by a resources boom. But on the other hand, consumers and businesses were gloomy.

And it was much the same with property. Some areas fared well through the year, but many didn’t.

However looking back, 2012 will be remembered as the year the property market turned.

It didn’t crash like many property pessimists predicted. Sure it stalled in some areas, dropped a little in others and prices fell significantly in a few spots, but in the middle of the year things slowly started to change.

So what gives?

Our property markets started the year in a tug of war caught between falling interest rates on the one hand and market uncertainty on the other.

There were concerns of a meltdown in Europe that could bring the financial system to its knees as well as worries about the US economy. The European economy is still a “basket case” and will remain so for years, however the major risks to the financial system seem to have been averted and over the year the USA economy has improved, albeit slowly.

However we have something new to worry about – the health of our resources boom has come into question. The Chinese economy, the powerhouse behind our resources boom, slowed down during the year and falling commodity prices and high costs of production have brought concerns about the future of many of Australia’s major mining projects.

What happened in our property market?

We started the year with more properties on the market than there were buyers as many potential home owners and investors stood on the sidelines, too nervous to make a decision waiting for the market to bottom.

Of course it’s not really as simple as that because there is not one property market.

Well priced properties in prime locations and with an element of scarcity in the middle price range (say $450,000 – $850,000) have still been selling well; even though clearly there was less interest from both owner occupiers and investors than before.

However “B” & “C” class properties have not been not selling well. Nor have expensive properties in our more affluent suburbs or holiday properties. Some dropped in value by up to 10% and some couldn’t be given away.

Well…it wasn’t really as bad as that, unless you were in some remote regional location, but you’d have to give a very steep discount for someone to buy them.

Then things changed:

Eventually a combination of increasing affordability due to higher wages, lower prices and falling interest rates brought buyers back into the market heralding an upwards trend in values from around the end of May.

This trend, shown in the following graph from RPData, has also been confirmed by figures from Australian Property Monitors, Residex and the Australian Bureau of Statistics.

RP data-rismark daily home value index

How did things finish off?

The latest figures from RPData up till the end of November show that capital city home values remain -5.6% lower than their historic highs of 15 November 2010, but up 2% from their low of late May 2012.

Year to date change

More good news

Another positive sign is that the level of confidence amongst Australian consumers (as measured by the Westpac-Melbourne Institute Consumer Sentiment Index) has been rising since April this year.

national consumer sentiment index

An easy way to interpret this index is that when it is over 100, optimists outweigh the pessimists and when the index is lower than 100 there are more pessimists than optimists.

In November 2012, the Consumer Sentiment Index was showing a value of 104.3.

Coincidentally, Comsec reported housing affordability as the best it’s been in a decade, as shown in the following chart:

best affordability in a decade

Consumer confidence is one of the most important leading indicators for the housing market. Put simply, when consumers are lacking in confidence (as they have for the last few years) they tend not to make important and expensive buying decisions such as moving house. And when confidence is high, the number of home sales increases.

And this is already translating into higher levels of finance approvals, which is another important leading indicator as most home buyers and investors get their finance 2 or 3 months before they buy a property.

Where are we now?

What these figures don’t show is how fragmented the markets really are.

We know there is not one Australian property market. There are many different markets in different geographic locations, at various price brackets and for different types of property. There is no doubt that home values are still falling in some areas and they are rising in others, but overall things are improving.

Buyers are back in the market, but at the right price. Stabilizing house prices and interest rate cuts are breathing life into the property markets.

Auction clearance rates are up in and vendors are more willing to accept realistic offers.

Vacancy rates are less than 2% in every capital city other than Melbourne, pushing up rentals. This together with better affordability will eventually bring more first home buyers back into the market.

At the same time overseas investors are snapping up many of our new apartment projects and Baby Boomers are buying properties in their Self Managed Superannuation Funds.

We’re in the stabilisation phase of our property cycle.

Stabilisation phase of property cycle(c) Metropole Properties

We’ve moved into the stabilization phase of the property cycle.

You see, the markets don’t move directly from the downturn phase to a property upturn. There is a period of time where buyers return and take up the slack before prices start rising significantly.

And I expect more buyers to return to the market in 2013 year when they realize prices won’t fall any further.

By the way…the stabilization phase is a great time for smart home buyers and strategic investors to get set for the upturn stage of the cycle.

This may be a good time to buy property – I have always found it a good time to buy when everybody tells you that property is a bad investment. Now is the time to get set for the future.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'2012 the year the property market turned' have 15 comments

  1. Avatar for Property Update

    December 11, 2012 @ 11:34 am Leigh

    I think we have only stabalised for a few months and next year we will see a continued slide in property prices across the board due to a number of factors. End of mining boom – China’s bubble has popped and will continue to detoriate due to massive overcapacity in its economy (non productive assets) & private debt problems. This will lead to falling national income and higher unemployment. Property has followed national income up very closely during the last 16 yrs, hence with decreasing income and higher unemployment there will be less people who can afford the huge mortgages people have today which will lead to more housing stock on the market and higher rates of mortgagee sales at cheaper prices….interesting to note that already 40% of people who bought property from 2009 are in mortgage stress. USA – corporate earnings were terrible last quater and after one last suckers rally so the big boys can unload their shares on mum & dad investors, this will push stock markets down around the world in the New Year aroding wealth, causing panic and people will be offloading property out of necessity. Goldman Sacks in October put out an internal memo saying Australia is in for a crash and is set up as the best trade of the century. They made the same prediction about the USA in 2007 (things looked rosy in USA in 2007…3.7% unemployment then) ! Bankrupticies in Australia are also at their highest rate since the GFC. Europe and Spain in particular could cause another banking crisis in the near future which will restrict funding to property. There are so many other negative economic factors that I have looked at and it paints a grim picture for the years ahead I’m afraid. I believe property will be a good investment again, but not for many years, at substatially lower prices than today.

    Reply

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      December 11, 2012 @ 11:44 am Michael Yardney

      Thanks for your comments Leigh.

      I agree there are issues out there and the economy will put some speed bumps in our way.
      I’m not a theorist. I’ve put my money in the property market. It will be intersting to do a review in 12 months time and see where we are.

      Watch this space….

      Reply

      • Avatar for Property Update

        December 11, 2012 @ 12:10 pm Leigh

        Thanks Michael. Just to add, I sold all my property in 2007 and did very well. Those same properties are worth less today than what I sold them for and with high holding costs it was best for me to cash in and sit out for a while and buy again low in the future. I will again invest in real estate but not most likely for some time to come. I’ve always followed the method, sell high (in boom times whilst others are panicking about missing out and paying too much as we’ve seen last few years) and buy low (whilst most are screaming about how bad things are…unfortunately as I’ve said I believe that time is not yet upon us).

        Reply

  2. Avatar for Property Update

    December 8, 2012 @ 4:25 pm Mark

    Hi Michael how are u,just wondering about your your thoughts on the Perth property market ,”THEY”think its going to go up by 20% till 2015 …..surely something in Perth has to give …rents to skyrocket or increasing by more than 20%…cmon mate what are u really thinking ????????

    Reply

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      December 8, 2012 @ 4:33 pm Michael Yardney

      Mark
      A whole new generation of WA property investors learned about the property cycle over the last few years. After an amazing few years and a typical property boom where almost every property doubled in value in a short period of time, driven a rising population and a resources boom, speculation was rife and things had to stop.
      And boy did they… flat and falling prices for the last few years.
      But the market is moving on, rents are rising as the oversupply has been slowly taken up, buyers are coming back and prices are slowly rising – in some areas and not others. Perth is hovering around the bottom of it’s cycle, but no boom for a while yet

      Reply

  3. Avatar for Property Update

    December 8, 2012 @ 5:56 am Martin

    With the increase in quantitive easing happening in the worlds central banks,, I believe now it is wise to consolidate now as there is no easy fix to this situation. The debt super cycle is looking very frail so I would make some careful decisions moving forward – just my own opinion. By the way Michael, your books have been fantastic and helped me a lot in the years gone by. Cheers

    Reply

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      December 8, 2012 @ 7:42 am Michael Yardney

      Thanks Martin – yes we’re in for some interesting times ahead.
      I believe in being prepared for the worst and looking forward to the best

      Reply

  4. Avatar for Property Update

    December 7, 2012 @ 7:42 pm Jamie

    I find this article very factual and it’s not making any unsubstantiated predictions of the future. Rather it’s looking at the past and the facts associated in an attempt to gauge the future. This is what analysis into investing is about. Further, Michael continuously refers to his investing principles and so far I’ve read his books and a lot of his articles and have not seen him contradict himself. Where there is contradiction there is usually a pure sales basis behind it which I don’t believe is purely the case here. I invested in 2 of his books before investing this year and used it as a reference for validating my property selection, negotiation, purchase, refurbishment approach, and property management. It’s made me thousands already and a lot more as time goes on.

    Reply

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      December 7, 2012 @ 10:09 pm Michael Yardney

      Thanks for the kind words Jamie
      I’m really pleased I’ve had a positive influence on you.

      Reply

  5. Avatar for Property Update

    December 7, 2012 @ 2:07 pm Michael K

    Michael,

    Do you think Victoria is now also in the stabilisation phase or is it still in the slump phase because of all the building supply expected to come in the next year or two?

    Reply

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      December 7, 2012 @ 2:18 pm Michael Yardney

      Hi Michael
      Overall, I see challenges to Melbourne’s market with too many new house and land products being built in the western and northern suburbs and a few too many off the plan apartment projects close to the CBD. Melbourne’s population is likely to grow at about 65,000 new residents per annum for the next few years, but most of these people will not want to live in those areas of oversupply.
      Interestingly the inner SE suburb have a shortage of properties shown by strong auction clearance results and firm to slightly rising prices.
      While overall “the market” may fall further – you are NOT buying the market – but individual properties at the right price so that even if things drop a little, you are covered. Then I like to add value and “manufacture” some capital growth

      Reply

  6. Avatar for Property Update

    December 7, 2012 @ 9:33 am Zetetic

    Very simplistic idea of how bubbles work. Please compare the bubble theory graph here http://en.wikipedia.org/wiki/File:Stages_of_a_bubble.png
    To the graph of house prices in Australia since 1987 (scroll down 1 article)
    http://www.eurekareport.com.au/graphs/list?page=28
    DENIAL!

    Reply

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      December 7, 2012 @ 9:44 am Michael Yardney

      Zetetic
      Thanks for your opinion
      For the 40 years I’ve been investing in property people have been waiting for the bubble to burst. This phenomenon is nothing new.
      Of course while they’ve been sitting on the sidelines worrying, many Australians have secured their financial independence through astute property investment.
      Of course I can see challenges for the years ahead. but the long term outlook is very encouraging

      Reply

    • Avatar for Property Update

      December 7, 2012 @ 9:51 am Amanda Lang

      Zetetic
      Have you ever owned any assets? Do you own any property? Or are you just a theorist having a go at us who’ve worked, saved and invested in order to have some control of our financial future.
      I’ve just read this article by Michael and maybe I’m not as academic as you, but it makes sense and his views seem to be confirmed by the data the provides.
      Keep up the great work Michael and don’t be put off by the pessimists – if you look for the worst in things that’s exactly what you’ll find

      Reply

    • Avatar for Property Update

      December 7, 2012 @ 11:16 am Big D

      You are overlooking the big picture here.
      If you scroll down 4 articles you will see beer has been on a steady decline since the 70’s and wine is in boom town baby.
      Someone should tell the founders of Little Creatures Brewery not to do it, starting a brewery for a few million dollars that is now valued at $380M a decade later. They need to look at the graphs, they made a really bad investment, they should get into wine, There seem to be a few in receivership available because of supposed poor market conditions, but if they look at the graph instead of whats actually happening, they will know wine is the better investment.

      Reply


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