The next move in interest rates is more likely down than up. I note five things in this respect:
1. Housing finance numbers indicate a slowdown;
2. Housing growth in all cities other than Melbourne is starting to show “cracks” at the margins with lower cost suburbs presenting falls in values;
3. Retail sales look to be sluggish at best and more likely slowing;
4. The problems in Europe are flowing over into stock markets and wiping billions off the value of portfolios and hence zapping confidence; and
5. The Government’s “great big new tax” on the resource sector is going to unsettle people and runs the risk of diminishing employment opportunities as the resource sector holds back on new projects until there is clarity.
An investment in a unit in the right city, for the time being, looks to be the best approach. Of the cities Sydney remains my pick for general selection but again any unit purchase in this city needs to be carefully selected. The Top 100 Predictions will make this task easier. However, as a general rule, avoid brand new units and only select properties very close to transport hubs where their price is below $500,000. Remember also, the lower the cost of the unit, the higher likely rental return.
Why am I thinking like this?
The results for growth for the mid point in the market across Australia are nothing short of very strong as is evidenced from the results in Table 1 below.
Growth for the last three months to the end of April is very high. It is not correct to describe our markets as being in a “boom” phase but certainly the growth for houses in Melbourne for the last three months of 7.7% is approaching that proportion. This rate of growth has only been equalled or greater than this on three other occasions in the last 30 or more years. These periods were late 2007 when we had six months of strong growth, late 2001 where we had a period of three months of exceptional growth and during the Australia wide ‘Boom’ period of late 1988 when we saw annual growth rate in Melbourne of 31.33%.
The numbers when seen against a back drop of the ABS Housing Finance Numbers do not make immediate sense. The ABS reported*:
“In trend terms, the total value of dwelling finance commitments excluding alterations and additions decreased 2.2%. Owner occupied housing commitments fell 3.7%, while investment housing commitments increased 1.1%.
In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions decreased 1.4%.”
* 5609.0 – Housing Finance, Australia, Mar 2010
The ABS numbers are supported by the fact that there is also a decreasing sales activity situation. During the six months and on an Australia wide basis, sales activity decreased by more than 3%.
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 above suggests that the growth numbers might not be all that they seem. The median sales numbers being published in the market will be a little misleading in that to some extent, they will be measuring changing market buying patterns and not actual market value growth.
This is not a time to pay too much attention to the normally calculated median sales numbers.
Further, all median sale numbers will not be reporting or providing a true picture of the total market for a large number of reasons. The Residex calculation method is probably providing the best picture and will be lower than other measures of what is happening as it is a composite calculation process that does remove, without constant amendment, buying pattern changes.
Having said this, it looks at the mid point position of the market as do all other public releases of market performance. Importantly the mid point is not telling us what is happening in the upper and lower cost segments of the housing market.
Table 2 – Number of Suburbs Falling in Value identifies the volume of suburbs which are reducing in capital value (housing values are falling) in each city.
From the table there are a few interesting points:
1. Melbourne is the only capital city where there are no suburbs with falling housing values;
2. The unit market across Australia is performing better than the housing markets;
3. The low cost segments of the market other than in Melbourne are suffering in the more unaffordable cities.
4. Brisbane is suffering most across the market.
When the above is considered the ABS numbers do make sense. The unit market is the investor market and these investors will also be people who are likely to own homes in the mid to upper cost areas of the market. They will have seen in recent months and years increasing equity in their properties and an increased capacity to borrow. They will not necessarily be upgrading and this coupled with a general shortage of supply, increased confidence in middle to upper management areas will be creating demand and hence increasing house prices around the mid point of the market.
Overall, the outcome is as Residex expected. Melbourne units are going to be more expensive than Sydney units and that event is close at hand.
We suggested this was going to happen early this year but it s going to happen earlier than we anticipated. The difference is now only $14,000. A mere increase of 5% in Melbourne units will take us there assuming Sydney in the same period achieves a 2% increase. Given this situation, it is fair to say that before the financial year is over, Melbourne will have a median unit value that is higher than Sydney’s.
The RBA has a job that is going to get increasingly tough. We have a market that is far from uniform across Australia. They have a single “blunt” instrument; increasing interest rates. Further, increases in rates are probably needed in the Victorian market where there is clearly a high chance of a bubble forming. Other city and country markets are less “at risk” of this and based on the numbers, there is a serious risk that the economy in these markets could be imperilled by further rate increases. We should remember that housing and finance are very significant parts of our economy.
One other point to remember is that investors who are at present understandably active in the current market most often will fall into the middle to upper management segments and a large number will also be middle aged “empty nesters”. This group does not suffer so badly as a consequence of interest rate increases. Their tax rate is likely to be at the marginal rate and higher interest rates means additional tax benefits which to some extent offset the rate increase.
All of the above reinforces the view and recommendations I have made over the last few months.
That is, the place to invest is in unit markets where values are such that they are affordable. There will be good growth in these assets with increasing weekly rentals.
The selection process of the right area will not be straight forward. There will be some growth left in Melbourne but there will also be a large risk of buying at the top of the market and seeing the values of your investment fall as it will be very easy to pay more than it is really worth.
The time to find bargains in the lower cost areas of our cities has not yet arrived so hold back on buying affordable houses for the time being.
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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