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Market Update with Tim Lawless of RPData.com

2012 is likely to be characterised by continued growth in Sydney, Brisbane, and Perth, says Tim Lawless, but do not expect too many changes from the market conditions that we have experienced this year.

What is your outlook for the Australian property market as we head into 2012?

I believe that 2012 is likely to be a fairly similar for the residential property market as 2011. We are suffering a hangover from the large amount of debt taken on in recent years and the continuing economic weakness. I expect all consumer activity (retail trade, lease finance and housing finance) to remain subdued as households continue to pay off debt and look to reduce their debt burden. So long as these conditions continue, the prospects of any significant growth in property values remain a way off. I do not anticipate that property values will fall at the same magnitude as they have over 2011, however, I do not expect to see any significant improvement. In the best circumstances, values will rise in line with inflation. The market is likely to be characterised by continuing limited supply additions and further rental growth in some regions: namely Sydney, Brisbane, and Perth. The overall prospects would appear to be strongest in Sydney after no growth in values for such a long time, and Brisbane due to its relative affordability to Sydney and Melbourne showing significant improvement.

On the other hand, Melbourne is likely to be the weakest performer after values have increased by almost 45% from the beginning of 2007 to August 2011. If interest rate cuts do come to fruition, as many expect, we will probably see an increase in sales activity, however I do not expect that it will result in a significant uplift in values.

For investors, where should they be looking to buy – capital city CBD, suburban areas, regions or focus on mining areas – or look at all of these areas?

Active investors should look at all areas, but the crucial thing to do is undertake the right amount of research before making an investment decision. Over the last 10 – 15 years, homeowners have become accustomed to fairly rapid growth in values and readily available. With credit harder to come by, the likelihood is that property values will also increase at a much lower rate. Investors must be aware of this, and I believe should have a much greater focus on positively geared investment properties rather than the negatively geared ones, which have historically been so popular. In certain capital cities, we anticipate fairly robust rental growth and select areas are likely to provide opportunities for positive gearing. Mining areas offer some exciting opportunities but are all about timing. Getting in the market at the right time is imperative as is getting out. Remember in many cases these communities are built entirely on the back of mining, if it slows or stops, demand is also likely to stop. Regional markets are likely to have fewer opportunities than capital cities and mining areas; but in many instances prices are well below their peaks. If an investor has a long enough time frame in mind they are likely to wait – prices have been at a certain level before, there is every chance that at some point in the future they may return to those levels.

What has consistently been Australia’s best performing capital city for rental yields and why?

Darwin continues to record the strongest rental yields of all capital cities. Relatively strong population growth and large projects happening in the Northern Territory are driving demand. Add into the mix the fact that many residents do not live in Darwin for the long-term there has historically been strong rental demand. Similarly, Canberra typically enjoys strong rental yields.

With so much mining activity taking place, how are regional markets performing in these areas?

It actually depends – areas where there is a shortage of housing such as Port Hedland, Karratha, Moranbah, and Dysart are seeing severe increases in home values, and more so in rents because of surging demand and limited supply. Other areas where there is sufficient supply of housing are not seeing as dramatic increases in rents or values.

How is Australia’s top end/prestige property market faring compared to the lower end at the moment? The most expensive 20% of capital city suburbs have been quite weak with values falling by -5.5% over the 12 months to August 2011 compared to the most affordable 250% of suburbs which have recorded a value fall of just -2.9%.

We’ve heard that spring is the month when most sales are achieved – is this correct?

RP Data completed an analysis last year that looked at listings and sales by month over recent years. The analysis found that the greatest volume of sales take place in March and over the autumn period, whereas listings are greatest in November and during spring.

How is the auction market performing now compared to when the market was racing along in 2009 and early 2010?

The auction market is decidedly weak at the moment, reflective of lower levels of consumer confidence, slow growth in housing finance and general consumer caution. Last week, the weighted average capital city auction clearance rate was recorded at 46.4%. At the same time in recent years, the clearance rates were 2010 – 54.0%, 2009 – 72.4%, 2008 – 47.6%. At the moment, clearance rates are weaker than they were in 2008.

Which capital city has the highest rate of auctions?

Victoria always has the greatest number of auctions with around 25% to 30% of all properties sold having been taken to auction.

What are your leading indicators showing about how long it takes to sell a property; and how much are you seeing vendors discounting from the original asking price?

Vendor discounting and time on market remain at inflated levels. Over August 2011, capital city houses were taking an average of 56 days to sell compared to 46 days last year. Houses had to be discounted by an average of 7.3% this year compared to 5.7% at the same time last year.

Which is currently the busiest buyer segment for residential property?

Based on housing finance data the one segment that seems to be most active in the housing market are the “upgraders”. First home buyers have dropped back to just 15% of the overall owner occupier market and investors, based on the value of finance commitments, have fallen back to 30% of the overall market after peaking at 35% in early 2010. There is likely to be more home buying activity across the financially mature groups such as baby boomers and “dinks” compared with the more debt sensitive segments such as first home buyers, young families and low income households.

How have these groups changed in regards to their house buying behaviour? Who is buying what?

Generally, over the past decade, there has been a subtle shift towards more unit sales compared with house sales. Units now account for around one third of all home sales across the capital cities; in Sydney the ratio is close to 50%. Upgraders would generally be seeking larger or better-located homes, however, one of the hurdles this group is facing is that they most often need to sell their current home before purchasing another. In a period where there are sub-optimal selling conditions, this can present a significant challenge.

How will this change as the economy evolves?

To a large degree, the housing market hinges on the interest rate environment and the jobs market. With interest rate stability now much more accepted and potentially a rate cut around the corner, we would expect consumers to become more optimistic about the prospects for housing. This is supported by the latest ‘Time to buy a dwelling Index’, which is released together with the Consumer Sentiment data by Westpac and the Melbourne Institute. The most recent Index reading for September showed Australian’s were 14 per cent more optimistic about prospects in the housing market over the quarter, and the index was up 16 per cent over the year.

What is the current impact on finance/banks?

Most homebuyers will need to borrow from a lender in order to purchase a home. In the wake of the GFC, lending standards have been tightened and the banks have rightly become much more risk averse. Borrowers will need to show a demonstrated track record of savings and will need a deposit of at least 5-10% in most cases in order to be eligible for a loan.

How does this affect supply of stock?

The number of homes available for sale is actually about 30% higher than what was available in the market at the same time last year. To put it simply, more stock is being added to the market than what is being absorbed by buyers. This ‘effective supply’ is quite different from the underlying or base supply, which refers to how many news homes are being developed. New housing starts have been trending downwards since mid last year primarily due to a wind down in Government stimulus and public sector building.

What has been the overall impact of the First Home Owners Grant? What other incentives are affecting the market?

The boost to the First Home Owners Grant, together with interest rates falling to historic lows post GFC saw first homebuyers surge back into the market. The proportion of first time buyers in the market moved from around 16% pre-GFC to 28% by mid 2009. As the Boost was wound back and interest rates started to raise first home buyer numbers consistently declined to reach their current base, once again back around the 15% mark.

It actually depends – areas where there is a shortage of housing such as Port Hedland, Karratha, Moranbah, and Dysart are seeing severe increases in home values, and more so in rents because of surging demand and limited supply. Other areas where there is sufficient supply of housing are not seeing as dramatic increases in rents or values.

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Tim Lawless

Tim Lawless is the Research Director at CoreLogic Asia Pacific. Tim has been in the Australian housing market industry for more than 20 years with a focus on research.