Basically the news is good. I continue to hope that the RBA will refrain from further interest rate increases for the present. As far as the housing market is concerned it looks as if they have done their job. Our markets are now slowing in a very orderly fashion and the risk of a “bubble” has abated.
In this article I will concentrate on Melbourne as it has been the most overheated market and did present the highest level of risk. Before moving to this topic let’s look at all markets. The table below presents the position.
The results provided above are not subject to any future revision. Residex has developed technology which allows it to release statistics on the performance of the markets with proven high levels of accuracy with lower levels of data than is required for hedonic and stratified median results.
This means Residex is able to release accurate results earlier than any other party in the market. The Residex method is unique and while it is based on a repeat sales technology it is not the usual method and therefore avoids the inherent problems in generally accepted hedonic, repeat sales and stratified median methods.
The most important fact presenting from the data is the increasing rental rates. Melbourne is the only house market where there is no rent rise. This points to the fact that the buying constraints have kicked in and demand for rental stock is again starting to rise. This will now be a trend for a considerable period of time.
The interest rate increases, I think can now be said to have been largely absorbed and those who were going to be excessively stressed from the first group of increases have probably largely exited the market or will do so very shortly. I suggest this as the number of Suburbs falling in value due to excess sale stock, where mortgage stress would be seen (those in the lower cost areas) are less than at the peak. The first wave peaked in February and since then it has been reducing.
The impact of the next group of interest rate increases is starting to flow through. This will result in some moderate increases in Suburbs moving to negative growth. Melbourne is likely to be the most impacted as it returns to a more normal growth pattern and the last group of interest rate increases flows through to cause those who were stressed but just making it to sell.
There is about a three to four month lag in the impact of rate increases as can be seen in Graph 1 – Average % of Capital City Suburbs below the Median Value adjusting in Value, where we look at rate increases and volume of Suburbs falling in value.
Melbourne remains the only capital city where for house and land values there are no Suburbs which are falling in value. For the first time in Melbourne in a considerable period there are Suburbs in the lower cost areas where unit values are falling.
In the last three years Melbourne houses have increased by 42% and this translates into an increase in wealth for the average Melbournian of $172,000. In the unit market there has been an equal increase in percentage terms and in dollar terms it has amounted to $132,000.
The rate of growth was very steep and was a cause of concern as when these types of increases occur and are brought to a close by robustly increasing interest rates there is a significant chance of a “bubble bust” as there is a tendency for people to pay excessive amounts for properties at the top of the market and get caught on a “cash flow tight rope” and be forced to sell at a loss at an inopportune time. The aggressive stand made by the RBA in so quickly increasing interest rates was a potential hazard for this market.
There remains, albeit a much lower risk now, that this market will get into trouble. If it does it is likely to be the only market in Australia that will. The more moderate increases in other markets and their more moderated progressive corrections over the last few months have left them in good shape.
In Graph 2 Australia vs Melbourne, I compare the Melbourne house and land market to the Australian market as a whole. The trend lines paint the picture.
The peak of the general housing market Australia wide occurred in about June 2009 while the peak of the Melbourne housing market was only reached in April 2010. Its downturn was caused by the RBA’s actions on the interest rate front.
Having said all of this, we should keep the knowledge in perspective as Melbourne is generally doing better than any other capital city. Immigration is high, business and consumer confidence seems to be high also and why not when the population has seen such significant increases in its wealth.
Additionally, the State Government is one of the few that seem to have things under control. The state is clearly far better managed than say Qld. Melbourne is home to the some very significant corporate entities, CSL, BHP, ANZ, NAB, Telstra and Rio-Tinto to just name a few. These entities as employment increases generally and immigration continues will maintain the demand for housing stock and ensure a limited correction impact.
I have in recent newsletters been advising against Melbourne investment as I could see the above unfolding. So what will be the long terms outcome here?
Our models are telling us that Melbourne like Sydney, about a decade ago, has arrived at the point of limited affordability. This causes house price growth to stagnate and grow at something slightly better than inflation and in some areas of the city to fall in real terms. Our models also tell us that rental costs will increase. There will be areas of the city that will do well.
These areas will be the Suburbs that are well positioned close to the city and currently have a median value at close to or slightly less than the city median. Units that are older style and again well positioned will also do well.
If you didn’t purchase in Melbourne a year or two ago, in a few months time, it will be time to go bargain hunting for these types of properties.
While we are discussing predicted futures may I conclude by indicating that the NSW State Government seems to at last be getting its act together and our models continue to indicate that well positioned property in this state is the best buy.
John Edwards is a director of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and individuals. Go to www.residex.com.au
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