The future's so bright

 

Author: Tim Lawless
Publication: rpdata

2010 Outlook

The Australian market recorded a much larger than expected surge in home values after the Global Financial Crisis (GFC) related downturn.  Australian residential property values started their growth run in January 2009 after a 3.8 per cent decline between February and December 2008.  Who would have thought such a strong bounce in home values would have been on the cards after what was heralded as the worst economic crisis since the great depression?

Over the fifteen months ending March 2010 the combined value of Australia’s capital city housing markets increased by 16.7 per cent.  Growth rates remained high up to March 2010, averaging about 1 per cent capital gain each month, despite four interest rate rises totaling 100 basis points between October 2009 and March 2010 and the wind back of the boost to the First Home Owners Grant.

It wasn’t until April 2010 that capital gains in the Australian housing market started to moderate.  The April results from the RP Data-Rismark Home Value Index saw growth rates flatten to just 0.2 per cent over the month; the lowest month on month movement since December 2008.  In May capital gains remained sub 1 per cent for the second month running with a gain of 0.6 per cent.

A variety of leading indicators had been hinting at a market slow down over the months leading up to April.  Mortgage interest rates had moved back up to the decade average of 7.2%, auction clearance rates had fallen below 70%, new home loan volumes were falling and consumer confidence was trending downwards.  All these factors together worked to dampen the exuberant market conditions that existed over the fifteen months leading up to April. 

The slowdown of home value growth has been most noticeable at the affordable end of the pricing spectrum.  While the top 20% of suburbs around the nation based on price have increased in value by 6.3% over the first five months of 2010, the bottom 20% of suburbs has seen a growth rate of just 2.8%.  Over the last twelve months the gap is much greater with the top end recording a gain of 14.3% and the bottom end recording a gain of 7.6%.

The higher rate of growth in the premium sector of the market comes after a larger than average fall during 2008 compared to the broader marketplace.  Across the combined capital cities, premium property values fell by just over 9% from peak to trough while the affordable markets saw a value decline of just 2.1%.  The larger falls in top end home values during 2008 can be attributed to the dive in share values and business conditions during the GFC when the supply of homes in this market increased while at the same time the bottom fell out of demand for homes in this sector.  Also hampering demand in this sector was the rise in the unemployment rate, a pull-back in lending from banks and little growth in wages coupled with many missing out on performance bonuses during the year.

Looking forward, the remainder of 2010 is likely to be characterized by much more modest capital gains in the housing market than what was experienced over 2009 and the first quarter of 2010.  Most of the key indicators that impact on property markets are looking reasonably healthy: 

• Interest rates look like they should remain stable at the decade average for the remainder of the year, with the ASX Cash Rate Futures suggesting a fairly flat interest rate environment to the end of 2011.

• Unemployment has well and truly peaked much lower and earlier than officially forecasted, with a current unemployment rate of 5.2%.

• Population growth remains very strong, with more than 430,000 new Australians recorded over the year to December 2009.

• Housing supply remains well below what is required.  The latest estimated from the National Housing Supply Council suggest an undersupply of more than 178,000 dwellings.  Building approvals for new dwellings have shown some recent improvements, however new approval levels remain well below what is required.

Balancing the positive factors outlined above is the fact that consumer confidence is deteriorating due to the increased level of uncertainty surrounding global financial markets, a federal election and the higher interest rate environment compared with last year. 

The combined effects of the positive and negative influences are likely to result in a modest growth environment for Australian housing over the remainder of 2010.

The market for investors, however, is likely to remain attractive.  Rental markets weakened during the middle of 2009, but have since shown some increases in weekly rental rates.  With affordability constraints once again hitting the market we are likely to see more demand flow into rental accommodation.  Higher demand in rental markets together with vacancy rates remaining below 2% across most capitals should see rental rates improving over the coming year.  The bi-product of higher rents and lower capital gains is likely to provide an improvement in rental yields for investors, especially considering that yields have softened during the last 15 months and landlords will likely be looking to improve the rental return from their property upon lease expiry.

Also, with fewer buyers in the market the balance of power in negotiation should once again shift towards the buyer.  The level of vendor discounting, which measures the average difference between asking prices and selling prices, averaged about 5.2% over the last 12 months.  As at May the average discounting level had increased to 5.3% and the trend suggests discounting will increase as the year progresses.  Over the last five years the level of vendor discounting has averaged at about 6%.

With the anticipation of less competition in the market during 2010 and the likelihood of improving yields, we expect investors to become more active and pick up some of the slack from the falling number of active first home buyers.

 

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