17 June 2010

Australian property markets generally, and those of Melbourne particularly, are notably less frantic of late, begging the question of what now?  Our key observations currently include:

• Lower Sydney and Melbourne auction clearance rates, but still at relatively high levels
• Available properties are at, or near, record winter levels
• Auctions now see limited competition: commonly one or two bidders, compared to five or six until very recently
• Sales are increasingly around quoted ranges, rather than dramatically above them

We also note commentary suggesting interest rates are at or near ‘neutral’ levels, with further increases likely to be at a reduced pace.  Also very significant is that, the ‘first home owners boost’ (FHO Boost) impact on the market has now played out.  Generally poor levels of analysis, however, mean that the key significance of this change has not been acknowledged. 

The Boost brought forward large numbers of FHO sales, so FHO activity has fallen dramatically since late last year.  Thus, the composition of buyers has been altered dramatically, leading to a strong upward impact on median prices. 

While there has indeed been strong price growth over the last 12 months, it should be understood that a significant portion of the growth is due to buyer activity moving from lower to higher priced properties which, by definition, supports higher median values.

The other, more commonly recognised effect of reduced FHO activity is the tightening of the rental market.  It has recovered from a short period of softness, with prospective home owners no longer leaving the rental market.  Many other buyers are also staying longer due to reduced affordability.

Overall then, property prices are ‘softer’ rather than weaker.  A reversion to more normal levels of growth should be quickest in Melbourne, as a result of the recently strong price gains.  Over the next year growth in Melbourne will be no more than single digit levels, while in Sydney it’s likely to be stronger, driven by good yields and a reassertion of price premiums over the Melbourne market. 

Underpinning the lack of downside is the shortage of housing relative to demand from a growing population.  Further, the likelihood of higher rental yields will see investors underwriting property prices at current levels.  One threat to the outlined outcome is an increasingly unlikely GFC mark II.

The outlined scenario will not be felt consistently.  Outer areas will generally be weaker than inner ones; well presented properties will gain stronger interest that ill-presented ones, and mid-range properties: $500,000 to $900,000 will perform more strongly than others. 

Rents are expected to increase more strongly than over the past year, with significant growth a realistic possibility by year’s end.  Given slower capital growth the likelihood is that yields will, therefore, improve.   Again the impact will vary as tenants are increasingly chasing good houses, so well presented properties in prime locations will perform more strongly than others.

To ask questions on the impact of market changes on your property call Portfolio Management Services on 03 9614 8211 (property management) or 03 9621 1044 (property investment).