I looked behind the C word headlines to see what was really happening in the property market for the August 2005 edition of In The Black.
The property investment junk mail has started arriving. The innocent victim? Perhaps KPMG’s demographics guru Bernard Salt, who’s had his comments to the Courier-Mail – ‘Gladstone and Yeppoon the major hotspots’ – twisted to the spruikers’ advantage.
Meanwhile, highly influential English publication The Economist splashes the property crash on its cover.
Angie Zigomanis, property analyst at BIS Shrapnel, doesn’t use the word ‘crash’. An economic pragmatist rather than rationalist, he says everybody needs a roof over their head. This means property stagnates for a couple of years rather than collapses. ‘In that period if prices don’t move much,’ he explains, ‘real prices catch up so property becomes undervalued in real terms.’
Between June 2005 and June 2008, the property market is expected to experience a 7 per cent fall in Sydney and a 4.8 per cent fall in Melbourne. Estimated growth of 1.6 per cent in Brisbane is a fall in real terms, at least with CPI currently at 2.5 per cent.
Disaster? John McGrath, CEO of McGrath Estate Agents, doesn’t think so. As a real estate agent, he naturally wants to talk up the market. He points to his agency’s 69 per cent clearance rate up until just before the end of the financial year.
But sensing the change in market sentiment, six months ago he wrote The Ultimate Guide to Real Estate (HarperCollins $29.95), which deals with property issues in difficult markets. He reports there is no shortage of new buyers coming into the market. There is, however, a shortage of sellers in NSW following the introduction of the 2.25 per cent vendor tax, effective 1 June 2004, which has cut listing volumes by 30-35 per cent in NSW.
The dynamics of property prices were examined in the timely academic paper, ‘House Prices in Australia: 1970 to 2003 Facts and Explanations’ by Peter Abelson, et al at the Department of Economics at Macquarie University. From 1970 to 2003 there were four booms but in between, real house prices fell. The research also found a one percentage point rise or fall in real mortgage rates would lead to a fall or rise of house prices of 5.4 per cent.
There are many correlations between economic factors and prices, and there are strong relationships between real disposable income and CPI. House prices are also affected by unemployment, and there is a direct link between returns on the All Ordinaries index and the availability of housing stock.
The report also quantifies the lag between economic factors and house prices. When real prices are rising at more than 2 per cent per annum, house prices adjust in four quarters. When real prices are falling the adjustment takes six weeks.
Zigomanis says one thing stopping a major correction in the market is that unemployment is at historic lows, interest rates have crept up and wages growth has started to absorb that.
According to McGrath, in a difficult market it’s more important than ever to stick to the fundamentals. That’s the old cliché of location, location, location. He says don’t buy unless it’s for at least a three-to-five-year window. ‘It’s not a short-term investment,’ he says. ‘It needs to be seen as a medium and long-term [investment].’
Rental yields are currently at about 3.5 per cent and higher returns can be had in the stock market. As McGrath says: ‘Be very discerning in a flat market. Focus on capital gain, not yield.’
The economics gurus at Macquarie observed slumps of five, six and seven years between the booms.
Meanwhile, the junk is where it belongs and Yeppoon is worth a visit for a winter break.
Median House Price Growth by Capital City, 2005-08 (per cent)
   June quarter 2005(e) $’000  June quarter 2008(f) $’000  Per cent increase over three years*
Sydney  500  465  -7.0
Melbourne  375  357  -4.8
Brisbane  318  323  1.6
Adelaide  270  260  -3.7
Perth  280  287  2.5
Hobart  273  267  -2.2
Canberra  352  340  -3.4
Darwin  270  295  9.3
*not adjusted for inflation, (e) estimate, (f) forecast
Source: Historical, REIA; forecasts: Residential Property Prospects, 2005-2008, a BIS Shrapnel study.