Fin Review opinion FYI MC (long)

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How much further will property markets run?
Dec 21
Robert Harley


Back in 1989-90, every home owner's psyche was scarred by the bust that followed the boom. House price euphoria was followed by the pain caused by rampant interest rates.

Which is why the outlook for 2002 is so hard to grasp. After an epic boom - with prices soaring from Point Lookout on Stradbroke Island in Queensland to Mindarie on the coast north of Perth - the markets looks like plateauing, although prices may rise in places.

Interest rates show no sign of an upward spike; the economy is holding its surprising strength; and household formation - the fundamental driver of housing demand - is continuing apace.

Sure, pockets of oversupply and weakness exist, particularly in a number of apartment markets. Pointers to further weakness can be seen in the To Let signs on apartments in Sydney and Melbourne and the way the First Home Owner Grant scheme is dragging forward demand.

Buyers and sellers should take care in markets where FHOG is the major factor driving prices, and should realise that, while prices surged across the board in 2001, 2002 will be far more selective. A particular house, suburb or region will shine, while others will simply hold their own.

But overall the outlook for 2002 is surprisingly upbeat. The Reserve Bank Governor, Ian Macfarlane, sees signs that the housing market is cooling and he is right. It has moved from red hot in August to tepid in late October, and then up a notch in December to pleasantly warm.

"If the end of 2001 is any indication, 2002 is going to be a very strong year in real estate," says the president of the Real Estate Institute of Australia, Michael Davoren. "The keys are the low interest rate, the First Home Owner Grant and a general acceptance of real estate as a very attractive investment compared with its competitors."

But let's admit it, most of us picked 2001 wrong. "Things have not gone to expectation," says BIS-Shrapnel director Robert Mellor. "No-one would have expected interest rates to fall 2 percentage points. And after all that has happened to the economy, no-one would have expected it to be so strong."

Few realised what a significant impact the First Home Owner scheme would have - it injected $1.8 billion into the market. And we forgot that at some point in the cycle - earlier this year, as it turned out - investors would finally lose confidence in the stockmarket and turn to residential property with a vengeance.

The result was dramatic. Melbourne and Sydney, where prices had risen for years, kicked once again - and so did places such as the Gold Coast and Ballarat, which had not seen an upturn since 1989.

Melbourne has now had five years of price growth. According to the Home Price Guide, the median price of properties auctioned in Port Melbourne has risen from $182,500 in 1995 to $468,000. Similar huge gains, of 130 per cent-plus, have been seen at auctions in Albert Park, Coburg, Mt Eliza, Black Rock and Footscray.

"A lot of people think it [the Melbourne market] has peaked and cannot go any further," says the managing director of the property consultancy Charter Keck Cramer, Scott Keck. "But it can for the lower-priced inner urban houses on their own blocks of land and also for the million-dollar stuff in suburbs like Toorak and Hawthorn.

"Those values will continue to rise over the next 18 months to two years. There are simply more people to buy than ever before and you cannot build new blocks of land."

Sydney has seen similar gains. On the Home Price Guide numbers, the median price in Sandringham - a forgotten pocket of beachfront where the Georges River opens into Botany Bay - has risen from $222,000 in 1995 to $625,000 this year.

Also in the Home Price Guide's top 10 - all places with five-year growth of more than 130 per cent - are the inner-city precincts of Forest Lodge, the South African home-away-from-home of Dover Heights, Kogarah Bay (on the Georges River close to Sandringham) and Chittaway Point on the surprisingly strong Central Coast.

Sydney is not finished yet, according to the managing director of the consultancy LandMark White, Brad Piltz. "I think 2002 will be a lot better than people are predicting," he says.

"If we just focus on the number of household formations - 22,500 over the next four years - they will drive values. There may be oversupply in some places but others, like Sydney's eastern beaches, will not be able to supply enough stock."

The REIA's Davoren expects to see the house price cycle slow first in Melbourne and Sydney while it gathers pace elsewhere. If that is the case, buyers in other areas should be looking for those pockets of lower-priced inner urban or waterfront sanctuary that have proved so rewarding in the big cities.

After years of seeming stagnation, south-east Queensland is "just starting to go" says Davoren, and Gold Coast real estate agents are looking forward to the strongest January sales since 1989.

On the Home Price Guide numbers, some Queensland owners have already done very well. Since 1997, the median price in Shorncliff - a hamlet on the Moreton Bay mudflats - has almost doubled to $280,000.

It's the same low-price inner-city waterfront story. Other strong Home Price Guide performers - all with four-year price growth of more than 60 per cent - have been Amity Point and Point Lookout on North Stradbroke Island and, close to the city, South Brisbane, Woolloongabba and Fortitude Valley.

So what is going to stop this real estate run? A rise in interest rates? Weakening economic confidence? Investors becoming disillusioned with poor returns? Or simple exhaustion of demand as the country runs out of first home buyers?

Domestic housing rates look particularly benign. On average the 15 economists polled by Dow Jones for the Australia & New Zealand Economic Survey expect the Reserve Bank's key cash rate to be only 25 basis points higher in December 2002 than it is today.

But Australian rates may not be the trigger. "We are looking for signs of interest rate increases in the US because then an adjustment may not be far away," says Ray White Real Estate's chairman, Brian White.

At the same time, Sydney and Melbourne investors are experiencing a level of residential vacancies, and rental weakness, not seen since 1989. For some analysts, such as Gerry van Wyngen, that is a sign of price weakness to come.

LandMark White's Piltz has a different view. Sure rents are under pressure - he knows of an apartment on the north shore in Sydney where the rent has dropped from $550 to $450 a week - but with lower interest rates, investors can accept lower returns.

For BIS Shapnel's Mellor, the key to the future is just how much demand has been pulled forward by the FHOG. On average first home buyers account for about 110,000 loans a year but in the 12 months to June 2001 the figure was 127,000 and, according to BIS-Shrapnel, this financial year's number is soaring towards 150,000. "You would think that would be balanced out," he says.

Mellor believes 2002 could again surprise but this time on the downside. He still expects median price growth, perhaps 4 per cent, with Brisbane a little better, but he is downbeat. "There's not a lot of upside. You would have to say Melbourne is pretty well-valued and doesn't have much further to go (a different view to Keck's), Sydney has vacancy rates at 4 per cent, Adelaide is oversupplied and Perth has pockets of oversupply."
 
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From: Ctrader .


Another outlook from "The Business Daily Newsletter - Property Weekly with Tim Graham 21/12/2001"

METROPOLITAN AND INVESTMENT PROPERTY

FOCUS SWITCHES TO COAST & COUNTRY AS CITY TRADING GOES INTO HIBERNATION

Capital city property markets, both residential and non-residential, have now gone into hibernation for the annual Christmas and New Year recess after what most people in the industry has been a solidly successful year, but one without spectacular highs or record sales.

Now, after the bare minimum of a break, the holiday, coastal and country markets are moving into their seasonal top gear. In these regions, from South-East Queensland to Victoria, there was a pre-prime season surge in late November. The results, especially at the top end of the market, were mixed, sufficiently so for most agents to be cautiously optimistic rather than outright bullish for the January selling period.

In many areas, particularly on Victoria’s Mornington Peninsula, stock levels are still low in the prime rural sector and at the very top of the housing market. However, there is still a fair sprinkling of offerings in the seven figure category and agents reported just before the Christmas break that listings for the summer were beginning to increase, albeit slightly later than usual.

Preliminary outlooks for 2002 are also mixed for most sectors of the market. According to analysts in South-East Queensland, there has been a strong baby boomer demand for units on the Gold Coast, but on the other hand, other observers are predicting a fall in house prices.

There is in Victoria, the conventional wisdom that the response to the holiday season selling is indicative of what will happen when metropolitan selling resumes.

However, most January out-of-town sales are discretionary or investment, with longer-term objectives, such as retirement in mind. And this year, after all the economic upheavals globally and nationally, discretion is going to be the key word.

MARKET STARTING TO OVERHEAT - ANALYST

Queensland property analysts, Matusik Property Insights believe Australia’s residential market is beginning to overheat and that a correction in prices is very much on the cards.

Their latest report says a further drop in interest rates will not help the housing market.

Also, money that was going into dotcoms is now being channelled into highly-leveraged property investments, while the continuation of the first home buyers’ grant is also exacerbating the situation.

As a result of the combination of these factors, the supply of rental properties in the major capital cities is increasing.

“At the same time, along the eastern seaboard at least, the supply of new apartments for rent is running ahead of demand,” the Matusik report says.

“Such developments are not sustainable. The risk is that some less sophisticated investors (and first home buyers) who have recently entered the market and paid too much, are unable to lease their properties at a rate that will meet their mortgages and they may be forced to sell.

“If this occurs at the same time that the first home buyers’ grant closes and interest rates rise, then prices could correct.

“Finally,” the Matusik report says, “high inflation is not around this time to protect falling assets.”

SYDNEY, MELBOURNE HOUSE PRICES HIGHER THAN AVERAGE

Sydney and Melbourne have higher average house prices than most developed countries, but the quality of housing is no better, a discussion paper released by the Reserve Bank of Australia, says.

This higher than average price was brought about by the concentration of Australia’s population into these two cities.

The paper’s authors, Ms Luci Ellis and Mr Dan Andrews from the RBA’s economic group, say this outcome may be undesirable.

Sydney and Melbourne together accounted for too much of the urban population, raising the national average price of dwellings and the share of dwellings in household wealth.

The authors say these cities are also prone to rapid price fluctuations, which may help explain the country’s susceptibility to housing price booms.

They said that strong growth in house prices would level out to match households’ income growth in the longer term.

“The windfall gains that accrued to homeowners in the 1980s and 1990s will ultimately end,” they said.

However, they do not expect a sudden crash because the dwelling wealth-income ratio has been built up over a period of 15 years, not through a brief period of speculation.

They contended that a price adjustment would occur through an extended period of slow or zero growth in dwelling prices and perhaps partly through a shift in the composition of stock towards higher-density units rather than prices of particular dwellings falling.



COAST AND COUNTRY

Although it is early days in the coast and country selling season, a check of the inventory of available stock suggests that the majority of the offerings will be in the holiday home category, with capital growth and a small investment return as secondary considerations.

In most holiday regions buyers looking for a new permanent residence or a retirement home usually avoid the peak holiday periods, believing that prices can easily be over-inflated.

However, there are some purpose-built properties designed for owner/occupier or investor purchase with income streams as part of the attraction.

In the Hunter Valley in New South Wales, the Yarra Valley and the Mornington Peninsula in Victoria, a number of vineyards are either on the market now or are expected to be listed in the next few weeks.

Vendors of these types of properties have been encouraged by spring and early summer sales, which have seen several Mornington Peninsula properties easily pass the $1 million mark.

The push on the joys and benefits of living on the perimeters of a golf course are also expected to create greater buyer interest.

This is especially so with the opening of the new Moonah Links on the Mornington Peninsula, a drive to heighten awareness of living near the Cape Schanck National course, the new development at the 13th Green on the Surf Coast, just off the Bellarine Peninsula and a renewed marketing effort on the rural and golfing attractions of Hidden Valley, north-west of Melbourne.

More so than in the past three years, not only out-of-town buyers but intending metropolitan vendors and buyers will be watching this month’s sales with great interest.

PORTLAND B&B ON THE MARKET AT $850,000

Victoria House, one of the most significant historic buildings on the Victorian south-western coast at Portland, is for private sale with an asking price of $850,000.

A two-storey bluestone house, built in 1853 and situated close to both the city centre and the beachfront, Victoria House has been completely restored and has been operating as a very successful B&B since 1990.

The house comprises eight large rooms with en suite bathrooms, a formal sitting room, a breakfast room, and a cottage garden for guests’ use.

There are also self-contained owner’s quarters.

Traditional décor and antique furniture complement the Georgian period of architecture.

It is being offered for sale on a walk-in, walk-out basis through Coastal Real Estate, Portland.

$1,495,000 SOUGHT FOR GIPPSLAND LAKES RESORT

The Wattle Point Holiday resort, on the shores of the Gippsland Lakes on Victoria’s eastern coast is being offered for private sale, with an asking price of $1.495 million for the freehold resort.

Set on 20 acres, the property comprises a modern 20-square residence and nine lakeside lodges.

Planning permission exists for six additional new lodges and extensions to the main residence.

The architect-designed lodges vary in size, sleeping between four and eight people. They are all fully furnished and self-contained with wood fires.

The holiday retreat also contains an indoor heated swimming pool, spa, sauna, tennis court and its own private jetty with berths for 16 boats. There are boat launching facilities on site and a public launching ramp close by.

Wayne Miller (tel 03 5157 7517), who is handling the sale, says Loch Sport is minutes away by boat, and Paynesville, Metung and Lakes Entrance are all within easy access.

He says apart from an individual buyer, the property could suit a syndicate. Each block is on a separate title and syndicate members could purchase an existing dwelling or one of the six blocks with planning permission.
 
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From: Roderick Aguilar


Thanks Anonymous,

Many nuggets of information there! I'd be interested to see as to when the correction in property prices will occur. The current prices I don't think is sustainable and many are over-committing themselves. Prices are rising faster than rent making the yield, in Sydney at least, less attractive. Couple this with the rising vacancy rate due to oversupply in some areas and the silly prices people are paying for IPs through humungous loans equate to a very dangerous cocktail for many first-home buyers. Any rise in interest rate which will eventually arrive (5 months or 5 years) once it hits rock-bottom can make it all come tumbling down for those who used emotions to purchase their IP. I know I found it difficult when one of my IP tenants stopped paying rent due to financial difficulties. They were good tenants for two years until they lost their business due to actions beyond their control. I had to make sure I curtailed my spending and have at least four weeks rent in my account as a buffer just in case they missed paying their rent which would have resulted in me defaulting on my loan. Which I'm sure all of you know is a definite big NO, NO!

Cheers,

Roderick Aguilar
 
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