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Strike while the property markets are cool

Not surprisingly, 2010 proved to be a confusing and frustrating year for many property investors. With alarming stories of a property bubble during the first 6 months, followed by headlines proclaiming a market slowdown and falling clearance rates, even the most seasoned investor can be forgiven for feeling a little uneasy.

But while the many alarmist stories coming out of the media have made it seem like fortunes are being made in a matter of months and lost just as quickly, this couldn’t be further from the truth.

In fact, the property markets are simply doing what they always do; experiencing cyclical shifts that coincide with long term, predictable trends. And even though there have been some small reported declines in housing values across most of our capital cities recently, our property markets are still extraordinarily robust.

Yes, buyer demand fell away slightly around the start of July, but this is a normal seasonal occurrence as the colder winter months set in. And despite the fact that clearance rates dropped away at the same time, the volume of properties sold at auction this year is almost double the number sold up to the same time in 2009.

The reason for falling clearance rates is more complicated than just a market slowdown. There are actually a number of factors at work whenever we see a drop or rise in clearance rates, the primary one being the delicate balance between the number of active buyers and sellers at any given time.

You see buyer and seller sentiment is influenced by a number of market fundamentals. During 2009 many potential vendors decided to hold off from selling due to the scare caused by the Global Financial Crisis and subsequent drop in buyer confidence.

As our economy bounced back with a vengeance late last year, buyer confidence rebounded almost overnight and in April this year vendors had reason to be more optimistic. The catalyst for many sellers was news of Melbourne clearance rates sitting at a strong 85% and median house prices rising by a staggering 27% in a year.

For those who weren’t forced to sell and had delayed marketing their property sooner, a group we call “discretionary vendors”, these strong market fundamentals provided a very enticing reason to make their move.

The resulting increase in stock, albeit relatively moderate on paper, came at a time when the previous year’s pent up demand had already peaked; during April and May, causing an imbalance in the supply and demand equation. In other words, buyers now had more choice and less competition.

This shift in supply and demand has seen clearance rates decline quite significantly in a short space of time and markets cool somewhat, as bidders are managing to buy at auction closer to the quoted price range in many instances.

These market conditions represent a good buying opportunity for investors, as long as they can see the headlines proclaiming falling clearance rates and stalling prices as creating an ideal investing environment and simply representing a normal aspect of the property cycle.

Not surprisingly, we are now starting to see the cycle move on again as supply starts to tighten once more, with discretionary vendors holding off until more favourable clearance rate reports start to resurface again.

I believe this year has provided a valuable lesson for property investors regarding the delicate balancing act that is the property market. With such extreme highs and lows in clearance rates and fluctuations in house values, 2010 has almost been a magnification of normal cycles and market trends, proving that while values might go up and down in the short term, ultimately property is a very sound long term investment.

A perfect example of how you can secure a great investment while the market’s a little softer is a property we purchased last October in the inner Melbourne suburb of East St Kilda.

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The neat and tidy, ground floor apartment featured a private courtyard, very spacious 2 bedroom floor plan with built in robes, parquetry flooring and of street parking.

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Located a short stroll from shops, the local park and tram and train services, we secured the property for $520,000. We know it represents an excellent investment, given that this property has a long history of strong capital growth. Our research showed it last sold in 2001 for $221,000, indicating solid long term capital growth.

We felt it was a good time to secure a property with such excellent long term potential on behalf of our cients, given that the September 2010 quarter statistics showed a slight sofening of unit prices in the area.

Having said that, the purchase price for this apartment was around 5% less than other recent sales in the suburb. In fact, we found comparable sales of similar 2 bed apartments in the area ranging from $540,000 to $570,000.



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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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