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What does the slide in consumer confidence mean to property investors?

Early this year all the news was good, and the property markets were booming,  but now we’re getting lots of mixed messages in the media and this seems to be scaring many Australians.

So what does it all mean for property?

Each month the Westpac/Melbourne Institute consumer confidence index reveals how Australians feel and this index fell in June by 5.7 per cent. This is the third consecutive month of falls. In fact over the past 3 months confidence has fallen by 13.7 per cent – the biggest quarterly fall since the period following the collapse of Bear Stearns (April 2008).

A subset of this, the time to buy a dwelling index, also fell, indicating that Australians are less confident about making the significant investment of buying a new home.

At the same time new home loans fell for the ninth time in 10 months in April, down by 1.8 per cent. These figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What does all this mean for property investors?

Well… Australians have become nervous. Rather than just good news in the media they’re hearing mixed messages and lately there seems to have been more bad news than good. Interest rates rising, affordability dropping, the resources super tax, problems in Europe, an election looming…

Yes, there’s lots of uncertainty and when people don’t feel confident they put off major decisions, like buying a new car or a new home.
At times of uncertainty, investors tend to fall back to tried and proven investments like residential property. While many have had their fingers burned in the sharemarket, the latest housing finance figures also confirm the attractiveness of property as an investment. While the number of loans for owner-occupiers continues to slide, investment loans have tracked higher. The number of investment loans approved have risen for the past nine months and are now up 26 per cent on a year ago.

Putting all this together would suggest we’re at the end of the first stage of this property cycle, and the market, which in some sectors has gotten a little ahead of itself, is now going to take a little breather.

We’re now in for a period of consolidation and this is to be expected after what has been a phenomenal run over the past year. Over the next few months some areas may even experience a drop in values.

In fact this is already happening…

For example, Residex reports that in Brisbane in the last quarter, more than 53 per cent of all suburbs were losing value, while in Sydney more than 20 per cent of suburbs lost value.

Digging deeper into the data, John Edwards, chief executive officer of Residex shows that in each city there’s a tendency for the lowest cost suburbs to be the worst affected. These suburbs are where there are a large proportion of first homeowners 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.

As we move forward we’re going to experience a two-speed market across all of our capital cities. There’s nothing really new about this and this trend will continue. Our current markets are making some property owners very wealthy while others are losing out.
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”.

This means that as we move into the next stage of the cycle 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.



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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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