Dec 212011
 

Spreading the Christmas Cheer

MarketWrap with John Edwards,
CEO of Residex and FindMeaHome.com.au

At Christmas time we could all do with a good dose of something positive.

Despite the significant and ongoing press about the economic concerns in Europe, our housing markets have turned in one of the best monthly performances since March/April this year. The Reserve Bank’s (RBA) reduction of the cash rate and the welcomed similar adjustments in home loan interest rates by lenders appears to have had a positive impact. Both the monthly and quarterly growth rates for Australian housing are positive in nominal terms and just negative (-0.7 per cent estimate) in real terms.[1]

The table ‘Australian Housing Growth’ presents housing market results for the year to-date, November 30 2011.

Australian Housing Growth

 

Houses

Area Median Value Growth Rent
 10 Years % p.a.  Year Ending Nov 2011  Last Quarter  Last Month  Rate Month Ending Nov 2011  Month Ending Nov 2011  Month Ending Nov 2010  Year Change
ACT $524,000 8.56% -3.22% -1.34% -1.21% 4.78% $480 $460 4.35%
Adelaide $392,500 8.41% -4.27% -1.25% -0.38% 4.39% $330 $330 0.00%
SA Country $257,500 8.43% -2.40% -0.34% 2.04% 5.47% $270 $230 17.39%
Brisbane $429,500 8.84% -5.97% -0.69% -0.62% 4.68% $385 $380 1.32%
QLD Country $369,500 8.93% -2.01% 0.41% 0.79% 5.37% $380 $360 5.56%
Darwin $493,000 10.30% -5.11% -0.62% -0.72% 5.71% $540 $530 1.89%
Northern Territory $469,500 10.37% -3.75% -0.45% -0.59% 5.89% $530 $520 1.92%
Hobart $378,000 10.84% -4.14% 0.75% 0.69% 4.55% $330 $335 -1.49%
TAS Country $269,500 10.55% -1.41% -1.83% -0.14% 5.14% $265 $250 6.00%
Melbourne $574,500 8.19% -4.11% -1.30% 0.02% 3.45% $380 $375 1.33%
VIC Country $335,000 8.44% 3.37% 2.36% 0.86% 5.06% $325 $300 8.33%
Perth $474,500 9.82% -3.28% 0.64% 1.91% 4.40% $400 $370 8.11%
WA Country $357,500 9.95% 1.37% 1.68% 1.95% 4.96% $340 $320 6.25%
Sydney $658,000 4.98% -2.63% -2.56% 0.11% 4.05% $510 $510 0.00%
NSW Country $333,000 6.35% -2.21% -2.02% -0.30% 5.48% $350 $325 7.69%
Australia $433,000 8.25% -3.55% 0.50% 0.23% 4.58% $380 $370 2.70%

Units

Area Median Value Growth Rent
 10 Years % p.a.  Year Ending Nov 2011  Last Quarter  Last Month  Rate Month Ending Nov 2011  Month Ending Nov 2011  Month Ending Nov 2010  Year Change
ACT $423,500 9.24% 0.76% -3.22% 0.36% 5.17% $420 $420 0.00%
Adelaide $310,000 9.52% -3.27% 0.62% -0.66% 4.88% $290 $280 3.57%
SA Country $231,500 7.52% -0.29% -0.19% 0.17% 5.13% $225 $190 18.42%
Brisbane $353,000 8.97% -2.75% 0.11% 0.21% 5.32% $360 $350 2.86%
QLD Country $307,500 7.75% -8.97% 0.14% -2.40% 5.43% $320 $310 3.23%
Darwin $386,500 10.49% -9.74% -0.52% 0.07% 5.94% $440 $450 -2.22%
Northern Territory $377,000 10.56% -8.87% -1.36% 0.04% 5.95% $430 $430 0.00%
Hobart $270,500 10.01% -7.05% -1.08% 1.27% 5.40% $280 $280 0.00%
TAS Country $203,000 9.83% -10.16% -3.31% -1.18% 5.40% $210 $210 0.00%
Melbourne $433,000 6.92% -4.26% -2.71% -0.61% 4.34% $360 $350 2.86%
VIC Country $257,000 8.18% 0.90% -0.88% 0.63% 5.38% $265 $235 12.77%
Perth $371,500 8.93% -7.57% -2.96% -2.00% 5.20% $370 $350 5.71%
WA Country $296,500 6.87% -3.94% -1.86% -0.22% 5.28% $300 $295 1.69%
Sydney $486,500 4.89% 2.51% 0.79% 0.21% 4.83% $450 $450 0.00%
NSW Country $300,500 6.69% -0.14% 0.14% -0.68% 4.95% $285 $260 9.62%
Australia $396,000 6.58% -1.33% 0.05% 0.36% 4.74% $360 $355 1.41%

In the month of November, Perth topped the list for house price growth out of our capital cities at 1.97 per cent however its unit market wasn’t as lucky, achieving the worst growth of our capital city markets (-2.0 per cent). Hobart was the best performing capital city in the unit market (1.91 per cent) while Canberra was the worst performer out of capital city house markets (-1.2 per cent).

The trend in the data is also promising (see graph ‘Trends’).

Sales activity, however, is subdued (see table ‘Sales and Predictions’).

Auction clearance rates are low, particularly in Sydney where they are hovering below 50%. We should remember that in slow-selling markets, auctioning is not the ideal sale method and a good percentage of properties will sell outside this process.

The reduction in interest rates will be adding to the slightly improved consumer sentiment and helping to ensure the sales that are taking place are not settled at a discount to current values.

Sales and Predictions

Houses

Area Sales Predictions Expected Growth
Year Ending Nov 2011 Year Ending Nov 2010 Year Change 3 Year % p.a. 5 Year % p.a. Next 5 Years
ACT 5,854 6,064 -3.46% 2.17% 3.56% 19.12%
Adelaide 17,849 18,272 -2.32% 0.75% 0.00% -0.01%
SA Country 6,185 6,202 -0.27% 1.23% 0.00% -0.01%
Brisbane 28,657 35,141 -18.45% 1.80% 2.96% 15.69%
QLD Country 30,718 33,726 -8.92% 0.61% 2.46% 12.94%
Darwin 1,402 1,408 -0.43% 3.83% 3.51% 18.80%
Northern Territory 1,969 2,005 -1.80% 2.80% 2.68% 14.13%
Hobart 1,721 2,021 -14.84% 3.45% 3.91% 21.12%
TAS Country 3,416 3,792 -9.92% 3.37% 3.60% 19.35%
Melbourne 48,755 47,138 3.43% 1.29% 1.59% 8.18%
VIC Country 42,307 44,778 -5.52% 1.63% 0.60% 3.05%
Perth 22,264 24,420 -8.83% 4.97% 2.41% 12.65%
WA Country 5,383 5,834 -7.73% 3.68% 1.99% 10.36%
Sydney 36,176 40,769 -11.27% 2.98% 4.18% 22.70%
NSW Country 36,526 40,611 -10.06% -0.04% 1.59% 8.19%
Australia 287,780 310,773 -7.40% 1.76% 2.85% 15.07%

Units

Area Sales Predictions Expected Growth
Year Ending Nov 2011 Year Ending Nov 2010 Year Change 3 Year % p.a. 5 Year % p.a. Next 5 Years
ACT 3,520 2,919 20.59% 0.05% 1.68% 8.68%
Adelaide 4,596 5,091 -9.72% 0.00% -0.01% -0.05%
SA Country 483 632 -23.58% -0.01% -0.02% -0.09%
Brisbane 10,501 12,569 -16.45% -0.02% 0.00% -0.01%
QLD Country 10,651 13,554 -21.42% 0.00% 0.87% 4.41%
Darwin 689 939 -26.62% 2.89% 2.63% 13.84%
Northern Territory 859 1,189 -27.75% 2.33% 2.13% 11.12%
Hobart 549 657 -16.44% 2.95% 3.42% 18.31%
TAS Country 477 567 -15.87% 2.46% 2.58% 13.59%
Melbourne 27,196 28,632 -5.02% 3.38% 2.49% 13.11%
VIC Country 5,967 6,834 -12.69% 0.92% 0.00% -0.02%
Perth 5,067 5,888 -13.94% -0.32% -0.50% -2.48%
WA Country 477 536 -11.01% -0.30% 0.37% 1.85%
Sydney 37,766 39,092 -3.39% 0.00% 1.10% 5.61%
NSW Country 9,758 11,096 -12.06% -0.10% -0.03% -0.17%
Australia 117,867 129,256 -8.81% 0.62% 1.20% 6.13%

Predictions for the next few years are modest. In the table ‘Sales and Predictions’, I have added the total changes in value predicted over the next five years so a clearer understanding of the impact on asset values is evident.[2] Our goal, as presented in the Residex Best Rent Report and Top 100 Predictions Reports, is to identify the suburbs that will do considerably better and direct you to the areas that will present the best opportunities in difficult times.

Predicting a future outcome is difficult. History is our only guide to the future and national politics and international events do have an impact. Any given population tends to react to unique events in similar ways from one time period to another however, to judge or model the most likely outcome from historical data, you need re-occurrences of various historical events. Looking forward in the situation we find ourselves in, where the events that are taking place are unique and would probably only occur less than once in a century on average, is indeed very difficult.

Our prediction models are picking up that markets will be subdued and this intuitively seems very plausible. The issue is then only to what magnitudes is the slowness in the market. Given the past success of Residex predictions, you should be reasonably confident that we can identify the best suburbs to invest in.[3]

The current situation leads people to question whether investing in any type of asset is a good option as opposed to simply putting their money in the bank.

In my opinion, you should never hold all of your investments in one assets group. In a normal economic environment, a good rule of thumb is to equally invest across bank deposits, residential property and stocks. In doing this, should one category be badly affected, the other groups of assets will help offset the poor performance and ensure you hold your relative wealth position when compared to all assets in the market at any point in time. You should also remember that high rates of return identify high rates of risk and each asset class carries its own risk levels. If an economy gets into trouble, bank deposit rates decrease. If an economy gets badly into trouble, retrieving money from a bank will be much more likely but there is no guarantee that it will be immediately available.

Asset classes can be ranked in order of risk, from lowest to highest, as follows:

  • Bank Deposits;
  • Residential Property;
  • Commercial Property; and
  • Stock Market.

If you leverage or borrow money to fund any class of asset you increase the risk profile of the asset investment. Via this mechanism you can alter your position in the list by increasing the return and at the same time, the risk.

In the current environment, if you wanted to minimise risk while keeping an upside, you would probably have to diminish or alter your mix of assets so you carry a limited amount of Stock Market investments and higher levels of residential property and bank deposits. Remember, you are likely to have some stock market exposure via your super fund.

If you put all your money in the bank, you will have low risk but no upside. If the economy does not move into significant trouble the value of your deposits (in real terms) will probably fall as its interest rate fails to keep pace with the natural growth and recurrent cash flow yields of other assets. If you hold more in residential property you hold an upside but at slightly higher levels of risk.

There is a real chance that Europe will move into severe recession and the EU will be broken up. I do think that this will have flow-on effects to Australia however I don’t believe Australia will be affected as significantly; we will be shielded to some extent by Asia. Australia, unlike so many other countries in the world, is a core wealth generator that causes increases in basic levels of money or wealth that comes from labour and/or raw material and/or rural produce. Australia is currently generating wealth from raw minerals and rural produce and, to a far lesser extent, from labour. Our trading partners, who are at equal risk of the troubled global economy, are producing wealth from labour.

When an economy gets into trouble, central banks move to stimulate demand by reducing interest rates. This in turn has the effect of making housing more affordable and will probably create a situation where rental returns are higher than deposit rates.

On the other hand, an economy in trouble will have higher levels of unemployment so we may have to reduce rental rates or at worst, the property may not be rented at all.

As interest rates decrease, our risk reduces. The capacity to meet interest repayments increases where our property is rented.

Given my brief big picture assessment; my advice to those who hold investment properties is:

a) Move to make sure you have sufficient reserves (bank deposits) or borrowing capacity to cover any situation where you may become unemployed or where rentals reduce due to longer periods of vacancy;
b) To the extent that you are not able to have sufficient reserves to provide for unexpected cash shortfalls, reduce debt. The last thing you want in a difficult economic situation is to have the bank dictating what your investment decisions are to be.

Should you identify the above position is acceptable and you have more capacity or cash, do you put it in the bank or make further residential investments?

I believe that careful investment in residential property is a hedge against low returns that are likely to come from all other asset sectors in the medium term, with lower levels of risk. Correct property selection is also likely to mitigate against reductions in values. I believe that:

  • Australia will not get into significant economic difficulties;
  • Our government has the capacity to stimulate the economy if things do get difficult by way of expansive monetary policy;
  • Current interest rates do provide the RBA with a significant margin to assist in stimulating the economy; and
  • Rentals will ultimately exceed cash deposit rates.

However, investing in any property just because it is residential and assuming it has lower risks is not wise in this type of market.

Some rules for investing in residential property over the next 12 months:

  1. Select suburbs where the number of mortgage holders is below average. That is, suburbs where there are typically older people with older children. These areas will usually be the older and more established suburbs;
  2. Select properties that are ‘tired’ and in need of renovation. Units built in the 1960s and 1970s are ideal. Tidy these properties up by providing renovated kitchens, timber flooring and a fresh coat of paint.
  3. Investing in mining towns – select established properties on larger sized blocks of land that allow expansion and/or subdivision and will also allow you to potentially rent out rooms to miners. If you are able to create a boarding house type of accommodation from older properties in these locations you could be rewarded with terrific returns; and
  4. Make sure amenities and transport is close to any investment property.

From the above you will identify the risk removal process I am proposing – ensuring we improve capital value to offset any small losses that may flow from adverse economic conditions. Equally, focus on areas where the adjustment process, should it occur, will be limited as owners will not be as inclined to be forced sellers or stressed.

Finally, let’s see if history supports the rules. I have selected two suburbs with similar median values in relative close proximity to one another (see graph ‘Established vs. Newer Stock Suburb Comparison’). One suburb (Artarmon) has well established sets of units built up to the 1970s with no further development possibilities. The other (St Leonards) has new unit high rise properties built in the last decade.

The position is very clear. Properties in St Leonards failed to perform after the Global Financial Crisis (GFC) while the older stock in Artarmon suffered little from the fall out. So, select the right property in the right area and the risk of losses are significantly reduced.

Have a happy and safe Christmas and as we move into the potentially difficult year ahead, allow Residex help you build wealth during difficult times. Take advantage of buying opportunities that may come about ensuring you buy the right property in the right place.

Until next year,
John Edwards,
Founder and CEO



[1] Nominal terms = before inflation; Real terms = after inflation.
[2] Residex predictions are median outcomes and in each city there will be suburbs that do considerably better than what is presented and suburbs that do worse.
[3] Residex models are a guide only and may not predict exact growth rates. They may either be higher or lower than anticipated depending on the events that unfold in this most unusual global economic situation; however, what should happen is that we identify the best suburb opportunities.

NOTE: Information contained in this report is the opinion of John Edwards and Residex, is general in nature and is not to be considered to be financial or legal advice. Residex recommends that investors always seek their own independent legal and financial advice that takes their personal circumstances into consideration before making any investment decisions.

*The results provided above are not subject to any future revision. Residex has developed technology which allows it to release statistics on the performance of the markets with proven high levels of accuracy with lower levels of data than is required for hedonic and stratified median results. This means Residex is able to release accurate results earlier than any other party in the market. The Residex method is unique and while it is based on a repeat sales technology it is not the usual method and therefore avoids the inherent problems in generally accepted hedonic, repeat sales and stratified median methods.

   
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