Apr 212011
 

The market is moving to the position we foreshadowed many months ago and predicted as many as three plus years ago. That is, growth is slowing and rentals are again on the rise. This is as it should be, and in fact presents us with lower risk levels moving forward as the increases in rent rates will help to cover off interest rate rises when and if they occur.

Affordability is moderating our markets growth rate. There is much publicity about negative median numbers even though they are very small. An even bigger problem is that there are those who are clouding issues by aggregating all property types into one mix. This has two important impacts – it fails to allow us to see if the adjustment is uniform across markets and it presents a false impression about affordability. The overall value of a significant part of the market is overstated (the medium density market) and discourages uninformed people in entering the market and understates the house and land market.

Putting the above aside, we should not take the median numbers for the sectors (houses and units) as anything other than a guide. We should remember that they are simply the mid-point in the growth stakes and there will be many suburbs that do both better and worse than this value. Yes, this should be obvious, but given the excessive concentration on median figures it is easy to fail to remember this. In the table below (Best and Worst 3 month Growth by State), you get a good view of the disparity between the two ends of the market.

Best and Worst 3 month Growth by State

State Suburb Best  Performance last Quarter Suburb Worst Performancelast Quarter
Queensland Blackwater (U) 5.6% Helensvale (H) -6.59%
New South Wales Abbotsbury (H) 5.17 Queens Park (H) -4.31%
Australian Capital Territory Palmerston (H) 3.56% Gungahlin (U) -1.87
Victoria Romsey (H) 5.67% Casterton (H) -2.96%
Tasmania Mowbray (H) 3.17% Sandy Bay (U) -3.1%
South Australia Port Augusta (H) 3.93% Mawson Lakes (U) -3.39%
Western Australia Wandina (H) 6.27% Kenwick (H) -5.39%
Northern Territory Rosebery (H) 4.18% Bakewell (U) -3.99%
(H) = Houses and (U) = Units  

The table should make it clear that, in each state, there are good and bad performers and if you are an investor, then your task is simply to identify the suburbs that are usually to be found in the group that outperforms the median. Is that possible? It most certainly is and that is exactly why we produce Best Rent Reports and the Top 100 Prediction Reports that so often identify the best outcomes for our investors.

There can be little doubt that the interest rate increases implemented by the Reserve Bank have taken its toll on housing purchase activity, and the retail market generally. Further, it has reminded borrowers that certainty in the future is limited, and they need to save for a “rainy day”, which more people are now doing. While this is good, it is also a “Catch 22” situation where saving slows the economy and as this happens, it causes people to become even more uncertain so they spend less and save more.

It is for this reason that we are so interested in the intentions of the RBA. There has been a lot of comment about an expectation that the RBA will increase interest rates toward the end of the year. However, I am not so sure. I predict that the next interest rate movement will not be a small increase but a small movement down, which is something I have pointed to previously and I am becoming more confident in the prediction as time passes.

I am yet to see any significant public comment about the impact on rising petrol prices. We should all remember that there is a significant multiplier impact from increasing oil costs. It is not only our weekly spend that goes up as we fuel our car, but all goods and perishables increase in cost as freight costs rise. Further, increasing fuel costs are a better moderator of the household spending than interest rates as increasing fuel costs impact on all of our community, not just borrowers. As an aside, I often wonder if a better monetary policy manager might not be a fluctuating and managed energy tax, and not interest rates. Perhaps we should only use the blunt interest rate management tools to manage our exchange rate. On my calculations, the RBA has no need to increase interest rates for a number of reasons, but principally, increases at the fuel pump have solved their problem and is perhaps in over kill mode. Certainly, the weak retail household goods spending and cafes, restaurants and takeaway food services trend figures for February (-0.3% and -0.5% respectively [source: ABS 8501.0 - Retail Trade, Australia, Feb 2011]) tend to support a view that households are finding things more difficult. Additionally, it is clear the construction and resale home market is weak.

The last RBA interest rate increase was in November 2010, and since then petrol prices have increased by more than $0.25 per litre. On my calculation a rise on $0.39 per litre is the same in dollar cost per week as a 0.25 per cent increase in interest rates on a $300,000 mortgage. Remember, my calculation does not take into account flow on impacts of fuel costs either. We have also been shielded from the full impact of rising oil costs by our strong dollar. In the graph ‘Petrol Prices vs. Cash Rate’, I compare RBA cash rates to petrol prices. The strong growth in fuel prices is clearly evident.  A continuation of the increasing fuel costs and any decrease in the value of the Australian dollar should quickly cause the RBA to move rates down to avoid moving a large portion of the economy into recessionary behaviour.

There can be no doubt that many of our markets are going through a period of adjustment, albeit mild. The trend graph for all of Australia presents the position for Houses (see graph ‘Trend: Australia’).

 

On an Australia wide median value basis, I would be surprised if we are at the bottom of the adjustment phase. However, there will be markets that have passed the bottom of its adjustment cycle, or are very close to it. In particular, both Brisbane and Sydney markets do present as if they are about to, or have already, moved to an upward growth path. These two markets are, based on our numbers, the only two markets that are currently in housing shortage. It is these two markets that we should be focused on in the medium term. Perth is a little behind and should be watched for a movement which indicates it has passed its correction phase.

Have a happy Easter.

John Edwards

Founder and CEO Residex Pty Limited.

  5 Responses to “FROM THE CEO”

  1. Hi John your views and insights into the market property market place have always been very informative to me and many of the Australian investors. I follow your ideas and foresight very closely as it helps and assists to make important decisions about my future and the clients I help move through the property market. Thank you again Grant Matterson LJ Hooker Northern Beaches Sydney

  2. thanks for the market update.

    LISACA Property Management
    http://www.lisacapm.com

  3. Hi John,
    At the end of your article you state that Brisbane is in ‘housing shortage’. I have read and been told the opposite this also seems to be confirmed by large number of houses for sale. Could you please let me know if and when you have time the reason you feel there is a housing shortage and am I confusing supply with demand? Thank you John for you informative articles.
    Regards,
    Trish Hawkins.

    • Hi Trish,

      We can’t provide a short answer to this as there is a lot of data that is being used to come to our conclusion. Given this, we will keep our response at a high level.

      We calculate that the shortage is in the order of 2,000 to 6,000 properties across Queensland.

      The shortage number is calculated from data provided by the ABS (up to 31 December 2010) or with respect to some, a little later. To calculate the position, we take into account formation of new households as a result of the young Australians forming new households and net immigration (both state and international), and we assume there are about 2.39 people to each new household.

      We note, population growth rates seem to have bottomed out and commencements and approvals are in a down trend. There will be markets that are in surplus, like the Gold Coast, but this will be a function of over supply and high exchange rates. Given the volumes of new units that can be provided in a single release, a unit market can move into over supply much quicker than a house and land market.

      Full details of our analysis can be found in our Residex Report for Queensland, which you can find at http://www.residex.com.au/index.php?content=rprr&from=fpmain.

      Regards,
      John E

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