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Fourth edition -
June 2004 
Kirribilli - Sydney, NSW
A
bit of a longer newsletter this month to make up for skipping last
month. The topic this month will be the Australian property market and
its antics. I have indexed some of the articles from the Articles
section. If you are thirsting for more, drink
here.
The
Australian residential property market is always a hot topic in Oz, both in the
media and around the Saturday night barbie. And so it should be.
Ordinary people have become very wealthy by simply watching the equity
in their homes grow by between 10-50% per annum. Yes, that was fifty percent.
Recently it has featured
even more profoundly because of some changes to the tax laws for
investors and a "slow-down" in sales that has re-sparked talk
of a bursting bubble. In this issue we will briefly be discussing
some of the recent developments.
The Australian Property
Market
First some background info.
Property prices have been sky rocketing
to dizzy heights in next to no time. Some believe that the hosting of
the Olympics triggered the trend in Sydney. Other cities have been
playing catch up ever since, with even the rural communities in proximity
to cities being
effected. The rental market in 2004 has slowed down. Rent is actually
becoming cheaper mainly because of an "over-supply" of
apartments as a result of rampant property development.
A very real factor in big city property markets is still the steady inflow of migrants, the largest number of whom
settle in Sydney.
Prices are obviously set by what people are willing to pay. Willingness to pay is determined by what people can afford. What people can afford is determined by how much the banks are willing to lend. Thus
I believe the banks control house prices :-)
The housing bubble seems to be on hold, perhaps deflating. The opinions of real estate touts
are contradictory at the least, and many of these are saying the end is nigh.
The market went quiet during the December holidays, as it usually
does, but in February 2004, it had still not recovered to the heights
that saw out 2003.
Mid 2003 saw a downturn begin for investment units in Sydney and Melbourne.
The prediction is that 2004 should see some real bargains on the market as the market
turns full circle. Many people will not complete their contracts, developers will go to the wall and bankers will
be left holding the debt. Both The Economist and the Reserve Bank Governor
have been warning of this since 2003.
So let's review the first 6 months of 2004
In its New Year edition the The Economist reminded us that during
2003 it advised its readers of "six housing markets where prices look dangerously overvalued: America, Australia, Britain, Ireland, the Netherlands and Spain."
It says average prices have not yet fallen, although house price "have slowed in many countries."
It further pointed out that: "Housing markets in all six of these countries will face more testing conditions in 2004 than in the past four years. First, with house prices at record levels in relation to incomes, first-time buyers are being priced out of the market. Second, an excess supply of properties has reduced rents in many countries at the same time as prices have climbed. This has cut yields, making housing less attractive as an investment. In America, a record 10% of rental properties are vacant. Last, interest rates are more likely to rise than to fall."
In February, the Financial Review carried an article
reporting on the great house price increases of the past five years in
Australia. It concludes: "Most of the price lift has reflected the capitalisation of tax benefits, low interest rates, a strong economy, and more freely available credit. But with affordability hitting record levels and investment returns becoming marginal, these benefits are becoming increasingly capitalised into
prices".
In March the Australian Reserve Bank decided not to change
interest rates. This seemed to restore some calm to the uneasy
mood created by poorer than normal sales in the residential
property market for the first quarter of 2004 - compared to the
same time in 2003. The Economist likened Australia to the US before the
crash [see
article]. It was concerned about the housing and debt bubbles, which it
thought may both be bursting. It was also concerned about the strength of the
currency and the excessive current account deficit. Many punters
believed the signs were pointing to a slowly deflating rather than
a bursting property bubble.
In April the International Monetary Fund (IMF) in its twice-yearly World Economic
Outlook said that "global interest rates were very low, and would have to rise. Its review of the Australian economy said interest rate increases may be necessary to keep inflation in
check" [see
article].
In May the Reserve Bank again considered raising interest
rates. It did not, but declares that the "property boom is
over" [see
article]. Melbourne saw property prices "deflating
slowly" as the median price of apartments fell 2.1% in the
March quarter, and houses dropped 0.8% according to the Real
Estate Institute of Victoria. In Sydney, the front page of The
Australian reported "Crash fear amid auction slump". With auction clearance rates not much more than one third, Sydney is on "the brink of
collapse" [see
article].
Later the month The Australian carries
an article concerned about the fact that Australian investors seem
oblivious to the warning signs - "INVESTORS wanting more exposure to the property and financial markets apparently don't give a fig for warnings of high valuations and imminent price collapses. Latest Reserve Bank numbers show borrowings in margin lending are at a record level of about $12.3 billion - up 3 per cent in the March quarter
alone"
[see
article].
Towards the end of the month, Australian Property Monitors released revised figures for the March
quarter showing falls in median price in most cities. Most notably in Melbourne where the median house price fell 12.9% and the median apartment price by 7.5% in the quarter. The figures are
based on sales that are actually exchanged during the quarter, and the
large sample covers at least half the sales in each city.
In the first weeks of June, Melbourne's clearance rate dropped and Sydney's rose from 32.5%
to 47% of houses on offer at auction sold, Australian Property Monitors figures show.
According to The Economist, Australia's house prices are
falling but have further to fall, though Australians won't feel lonely because house prices elsewhere will also
fall [see
article]. This said, The Australian believes that
Australia's top end of the market will save the rest of the market
from the predicted pop [see
article].
In summary, depending on the statistics one consults, average house prices have either risen (by 2.5% in the March quarter, according to the
Australian Bureau of Statistics) or fallen by amounts that seem modest to
severe [see
article]. The truth seems to be that investment properties are in serious trouble just about
everywhere. For home owners, prices in Queensland seems to be holding up,
while Melbourne and Sydney are down by 5-20%. Other state capitals are somewhere in between.
Thus housing, as RBA Governor Ian MacFarlane pointed out in a recent
speech, is in some ways (particularly statistical) Australia's least understood
industry. Go figure!
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Related Interesting
Facts:
Debt - Australia has a 26.4 billion dollar credit card problem. Stats
claim that
86% of people who make a purchase on a 3yr interest free store account
refinance this debt at 35% plus interest. Even more staggering, it is
claimed that for every $1 earned, Australians spend $1.30.
Baby boomers - 5 million people were born in Oz between 1946 - 1965 (baby boomers) if you add 65
to 1946 = 2011 which is when 5 million people begin to retire
- 25% of
Australia's current population. Only 5% retire financially secure, while 2% of the population retire wealthy.
Home ownership - In 2002, according to the Australia Bureau of
Statistics, of the 7,51 million occupied private dwellings, 38.8% were
owned without a mortgage and 25.4% were rental properties.
I hope you found this informative and have some insight into what the Oz
market is doing. If you do, let me know...I need the help :-)
Regards,
Mark Cumming
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