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Slower property markets could mean opportunities for investors

The Reserve Bank voted to keep interest rates on hold last week despite financial markets and economists being almost certain of another hike in the official cash rates. But with predictions of the mother of all resources booms ahead of us many economists are still predicting 4 to 6 rate hikes by the end of next year.

This is decision is good news for property investors. The property markets didn’t need another rate rise – the six recent hikes we have had have done their job slowing down our property markets.

Even though national house prices increased by 8 per cent during the 12 months to August, current signs clearly indicate a cooling market with RP Data-Rismark’s Home Value Index showing that capital city median house price in Australia dropped by 0.2 per cent for August, with an overall decline of 1.2 per cent since the market peak in May.

Managing director of Rismark International Christopher Joye notes the slowdown has been broad-based and says, “The weakness since the end of the first quarter has been seen across all cities.”Hobart and Canberra house prices increased of 1.4% and 1.2% respectively over the last 3 months. Sydney was the only other city to experience a price rise, albeit a negligible 0.2%.

Over the last three months the median house price in Melbourne fell 1.5%,Brisbane’s median prices dropped by 2.6%, while Perth took the biggest hit with a substantial decrease of 4.8%. Overall the national median house price was recorded at $410,000 for August, down from $415,000 in July.

RP Data’s research director Tim Lawless says despite the recent flat-lining in dwelling values, investors are still enjoying positive total returns on their property portfolio.

“Since the RBA has normalised rates with six hikes, combined with additional bank top-ups, capital growth has halted,” he says. “However, property owners are still realising positive total returns due to the effect of direct or imputed rents.

“Rental yields across the capital cities are now showing signs of improvement. RP Data and Rismark estimate that the gross yield on units is 4.9 per cent while for detached houses it is a lower 4.0 per cent. On a total return basis, Australian housing has outperformed most other asset-classes over the last 10 years.”

Mr Joye says they are not expecting any further capital growth from our capital city housing markets for the remainder of 2010, with the RBA likely to move to decelerate the fast paced economy sooner rather than later.

“If the resources boom combined with frisky consumer spending compel the RBA to lift the cash rate 4-6 times by end 2011, we would expect to see nominal dwelling values decline modesty. This is not a bad thing. Asset prices cannot always rise – the volatile sharemarket regularly subjects investors to savage swings,” he says.

“Since 1993 there have been five instances when the RBA has lifted the cash rate sharply. On every single occasion national capital city dwelling prices have flat-lined or declined. If the RBA aggressively raises rates, there is no reason to expect 2010-11 to be any different.”

What does all this mean for property investors?

While the general property market has been pretty flat there are still some suburbs that have had very strong capital growth while at the same time many suburbs have had their median prices fall.

It’s like me putting one hand in a bucket of ice water and the other hand in a bucket of boiling water and saying “on average the temperature is fine!”

Some parts of our capital city property markets are hot and others are not.

We’re moving into the next phase of the property cycle – one of increased risk for many investors (because they won’t be carried by rising markets) yet one of great opportunity for those who know how to play the game.

This is a time when sophisticated investors look for opportunities, remain financially responsible and take advantage of the buyers market.



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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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