The Property Market – What Are We Meant To Think?

It seems everyone has a point of view on the property market these days. And it is great that so many individuals, companies (semi-government, government & private), financiers and industry bodies can put out so much information, facts, stats, figures and opinions on the current and future state of our real estate market.

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The challenge is much of it is contradictory, inflammatory and in some cases inherently biased.

Being bombarded by all sorts of conflicting information can make it very challenging for investors to sort through what is relevant and then reach a conclusion. I have found that if you have an opinion, you will by default search for and then find information that tends to back up that viewpoint.

For example, if you believe that Australia is building too many houses, you might Google “oversupply of property.” Sure enough you will find articles loudly proclaiming that Sydney and Melbourne have or are building record numbers of apartments or there are record numbers of planning approvals being issued and therefore that must lead to an oversupply. That clearly is one part of the reporting process. What the articles may not share with you is that almost all of the apartments that are being built have been pre-sold, otherwise the developer would not get the funding from the bank to commence construction. Similarly, not all of the buildings that are issued with planning approvals will be built – this is because the lenders have been increasingly demanding much more stringent conditions to issue construction loans and developers are in many cases simply unable to fund the projects. On the demand side, lenders are also restricting the buyers of off-plan projects by asking for higher deposits and the banks announced they will no longer lend to foreign purchasers. Which means some developments are harder to sell and that means developers will back off and simply not build them – which perversely lowers supply. If demand remains high, prices would likely rise in response, creating another cycle.

Now Google “bank rate cut.” You will find articles on interest rate cuts by banks and predictions of more cuts later this year. Keep searching and you will find articles saying that interest rates are to stay flat and others saying they will go up, because of Brexit or any number of other external forces. Generally speaking, lower interest rates have been a good thing for increasing property values. But tell that to people who have invested in to Perth property – the end of the mining construction boom has seen an exodus of workers and migrants headed to the east coast looking for employment, and with that an easing of demand, meaning property values have come back 5-10%, depending on where your property is located. The question to ask here is – will that last forever? Answer – probably not.

During the same time period prices in Sydney and Melbourne have skyrocketed. So much so that if you Google “housing bubble” you will find articles on what a housing bubble is and predictions of a bust in 2017, which is as early as six months from now. And you will see just as much writing with the view that there is no bubble. Personally, I see no bubble burst of 30-40% decreases in Australia’s capital cities. I just can’t see that any conditions that would cause that actually exist or are building up. Australia has little to none of the lax lending practices that caused the GFC, the banking system is strong, population growth & immigration remain high, while unemployment and inflation are nicely balanced at the lower end of expectations. I do see the end of cycles happening now in Perth, with similar ends to come in Sydney & Melbourne. Prices always overshoot value at the end of a cycle and inevitably ease back, before flattening and recovering over time.

Usually quarter by quarter, the various real estate institutes produce figures telling us what the shifts in median prices have been in their respective states. Other organizations produce monthly figures, though how anyone can pick a trend in a real estate market based on the most recent four weeks is beyond me. Many of these organizations are selling their opinions in expensive reports and use sensational headlines to get media coverage to generate interest in their product.

And median prices are simply a reflection of the middle price in the sales range for a suburb or city – it may not even be close to the average price. Weekly rental figures and vacancy figures are reported by those dedicated agents who care – we trust that enough do so as to infer a reasonable result accuracy. Unless every single agent reported, the figures are more of a guide.

The weakness in all of these figures is time. Or timing. They all look backwards, sometimes up to six months. A lot can happen in a marketplace over that time period. Real estate so far can’t be valued instantly like the share market because you can’t list your property on an exchange and have someone bid to buy it immediately, giving you a value.

Then we get all the bad news, beginning from about 4pm going through to 7pm on our screens and then regurgitated again at around 10pm and again the following morning on breakfast shows and then mid-morning bad news. Don’t mention social media – Facebook, Twitter, Linkedin, Blogs – it is very hard to escape. Though I’m not sure escaping is the answer. I firmly believe that a successful investor is an investor who is well informed.

The answer is knowing how to filter the white noise and to be as objective as possible in interpreting results and information – if you can. At some point you will need to form your own opinion and make up your own mind as to what is happening and what is to come.

For your interest, and if you like, filtering – here is what I think is happening and what I see coming.

Perth & Darwin are likely to remain flat for the next 1-2 years – look for vacancy rates to start easing, average incomes increasing, selling times getting smaller, the number of housing listings decreasing and small upward increments in prices to signal a change.

Sydney & Melbourne are at or near their peaks – some say past peaks. Watch for vacancy rates increasing, auction clearance rates lowering, sales volumes decreasing and price growth slowing or declining. These signs will signal the start of the ease back in values.

Hobart, Canberra & Brisbane – houses not apartments – look like having solid growth in the next 1-2 years. Adelaide is its own little market and does not tend to work to any particular cycle however there is usually reasonably priced homes with decent yields.

A successful real estate investor is usually one who looks beyond what is happening now and takes a long term view. That way the daily, weekly & monthly white noise will have much less importance and is not likely to divert you from your desired course. Real estate by its nature needs to be a multi-decade position – meaning, the longer you own quality property, the more likely your chance for reasonable capital gain, averaged over time, notwithstanding market booms and corrections.

Real estate will always have fluctuations in the rate or decline of price growth – that is the normal cycle.

Ask yourself this – “If I could travel back in a time machine to 1950, would I buy real estate? How about 1970? 1990? What about 2006 – just 10 years ago?”

I believe that most people would answer “yes” – if they could.

Now ask yourself, if you will be asking yourself in 10, 20 or 30 years from now, if you should have (if you could reasonably afford to do so) invested in real estate in 2016?

The answer – it’s up to you. Just don’t let the “naysayers” or even the “yaysayers” decide for you.

What are you meant to think? You are meant to think for yourself.

Please note: I reserve the right to delete comments that are offensive or off-topic.