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Our property markets are not as healthy as they appear

You’d have to be living under a rock not to know we are in the middle of one of the biggest property booms for a long time. Just open any newspaper or turn on the TV and you can’t help but know that property values are going up almost daily.

However while some analysts are reporting extraordinary capital growth, there are others who are suggesting caution.

By the way it’s not just the cranks and nutty professors urging caution at present. In a recent insightful commentary respected property analyst John Edwards, CEO of Residex suggests, “It is not all as it seems.”

In fact he warns that there are some significant areas of our property markets that are losing value and he presents the figures to back up his claim. We have a summarised version of this in our feature article.

I respect the integrity of Residex’s research data, which confirms what the team of property strategists at Metropole www.metropole.com.au have been experiencing, so I take his warnings seriously.

Before we examine this critical trend more carefully, let’s first look at the latest market data provided by Australian Property Monitors http://apm.com.au/ last week.

Melbourne remains the country’s hottest property market with a rise in the composite median house price of $549,980, up 27% over the last 12 months and 6.8% over the last quarter.

During the same period the Sydney median house price increased by 14.7% to $609,353, while Brisbane was the only capital to report a fall in the median price for the last quarter (down 0.1%), but overall the median house price rose a respectable 9.1% over the year to $451,388.

In Perth the median house price rose to $519,526 up 9.4% for the year. Darwin recorded a 15.7% annual increase to $576,125, with Adelaide also recording a solid 12.1% increase to $449,704. Hobart saw prices rise 14.2% over the year to $318,119; while Canberra saw prices increase by 13.9% to $549,647.

Australian Property Monitors reported the composite unit price growth for the last 12 months as follows: Melbourne 13.7% (increasing to $388,230) Canberra 13% ($412,288); Perth 11.3% ($376,891), Sydney 10.4% ($416,910), Adelaide 9.7% ($289,295) and Darwin 9.2%($430,228). Over the last 12 months the median unit price in Hobart fell 4.5% in value to $225,687.

With such strong growth results, why would anybody be cautioning us over our property markets?

Mathew Bell, economist at Australian Property Monitors explains that house price growth slowed across the country in the March quarter as five interest rate rises and the expiry of the First Home Owner Boost began to impact prices.

His figures show that all capital cities except Adelaide and Darwin saw the rate of growth of the median house price fall in March 2010 compared to December 2009.

If the quarterly growth rates are moderating, why are annual growth rates still rising, you may ask. It’s the way annual figures are complied, with a relatively strong March 2010 quarter replacing a weak March 2009 quarter in the annual figures.

However, John Edwards, CEO of Residex, has a different concern…

He says, “Our Reserve Bank is not receiving disaggregated numbers and hence is probably not aware that there are sections of this market which are losing value or doing very poorly. Further, there has been in a number of their reports, discussions about high auction clearance rates and suggestions that these have been taken into consideration in their decision making process.”

“I would caution that while auction clearance rates do tell us something about market conditions they do not tell us (with the exception of Victoria) what the total market activity is. We should not read too much into them and all should remember that in most markets less than 20% of all sales go to auction and the lower cost properties have a very low tendency to be auctioned” says Edwards.

“Further, clearance rates in the 70% range are not reflective of anything other than a normal market. A “boom” market will see consistent clearance rates of better than 85%.”

Residex has also recently released its March figures and whilst the numbers are different to those supplied by APM (this is nothing new – all research houses report a different median price depending on how they analyse the data and what figures they report), the trend is basically the same.

The Residex data shows that if you take a broad overview (on an aggregate basis as Residex calls it) our markets are doing well. But Edwards points out that when you drill deeper some cities are in fact doing quite poorly, with many suburbs where the median house price was falling in value. For example, in Brisbane in the last quarter, more than 53% of all suburbs were losing value, while in Sydney more than 20% of suburbs lost value. Interestingly the only city where there is no suburb which is falling in value is Melbourne.

Digging deeper into the data Edwards shows that in each city there is a tendency for the lowest cost suburbs to be the worst affected. These suburbs are where there are a large proportion of first home owners and those who have upgraded once. He warns that in these low-cost suburbs we tend to find the lowest level of equity and highest loan to equity ratios and that these are the areas where borrowers are most at risk as their home loan interest rates increase.

What all of this means, is what I have been saying for a while – we are experiencing a 2-speed market across all of our capital cities. The overall figures hide the fact that strong capital growth is only being experienced in areas where people are better off than “Mr and Mrs Average” (as Edwards puts it).

There’s no sugar coating it, our current markets are making some property owners very wealthy while others are losing out. There is nothing really new about this and this trend will continue.

In some ways it’s the rich getting richer – those who are financially fluent and understand how to play the property game will do very well over the next few years, as I believe the underlying fundamentals will keep driving our property markets higher for another 2 to 3 years.

This means that despite all the hype you can’t just buy any property at any price and hope to become wealthy. You need to buy the right type of property – one that has a level of scarcity, meaning it will be in continuous strong demand by owner occupiers (to keep pushing up its value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages) at the right time in the property cycle (that would be now in many states) and for the right price.

To become a successful investor you will need to surround yourself with a team of independent and unbiased professionals – a team of people who are known, proven and trusted, so it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.

Remember we have no properties to sell, but access to every property on the market. If you want to find out a bit more about what is happening in your local market and what our research suggests is in store for us, join us at a free property briefing in Melbourne, Sydney and Brisbane. Just click on this linkto find out more and reserve your place.

Also if you would like to educate yourself please read the FULLY UPDATED NEW 3rd edition of my best selling book How to Grow a Multi-Million Dollar Property Portfolio – in your spare time. Over the last 4 years my book has become the property investment classic and this new edition will give you updated strategies to take advantage of the new property cycle. Please click here for more details or to order your copy today.



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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


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