oc | Thursday 20th February

Summer 2008 Market Update

MarketReportddWhat is going to happen in the high-end residential property market after
two boom years? In many areas, we have seen 30-50% growth and, before
that, 10 or more years of steady growth.
Let’s look at some history and look at the world market as a whole.

History – Stock Market

Last big stock market shock – September 2001 – high-end property unaffected. After the 1987 stock market shock – high-end property continued to perform well and in fact went into boom mode until the turn of the decade.

Interest Rates

We have had a sustained period of lower than previously normal interest rates and there is no doubt that the overall residential property market has benefited from this in terms of wealth building by virtue of increased housing prices. However, interest rates don’t always control the property market (and especially the high-end) as evidenced by the boom in the late ‘80s when the residential market was hotter than hot and rates were at record high levels. Eventually, punitive rates do affect the market, but there is a good case to say it indirectly affects businesses and employment, which
then has the flow-on effect of decreasing housing prices.

So what does affect the high-end markets?
In our opinion: “New Migration” and “Local Confidence”. As of Australia Day 2008, both “local confidence” and “new migration” are still strong.
Whether the pre-Easter market continues on and follows the upward trend from last year’s incredible levels, or goes a whole new way, only time will tell.
Footnote: By “New Migration”, we mean interstaters or overseas (often expats) or buyers from the outer suburbs whose financial circumstances
have changed through business etc.

Normal property growth is price growth that comes from demand exceeding supply – simple. That is why Docklands and outer Melbourne has not performed as well as over the long haul. Demand does not exceed supply. Abnormal price growth, as we have experienced at the higher levels over the past two years ( only) has been triggered by “New Migration” into these areas and the offerings looking very affordable by “New Migrants” standards. The “New Migrants” might say “I’ll pay you $2.3m for that $2.0m house” and the local buyers let it be sold.
After this is repeated several times, the local buyers recognise that $2.3m is the new benchmark and if their “local confidence” is high enough (in employment, profits etc) they begin to match the $2.3m on the next property offered. In super hot times, the “New Migrants” then offer $2.7m on the future offerings and the “local confidence” is dragged along if they are to compete. 2006 and 2007 inner Melbourne experienced this with $2m homes becoming $3m homes within a period of 18 months.

Falling Markets

Japan has been a lousy market for 15 years – although the worst-affected sector was commercial, there has been patchy recovery of the higher-end properties for a few years now. There is sound argument to say it is a reflection of the stock market, as the Nikkei has been underperforming compared to other world markets during this time. However, in our opinion, the housing market has been affected by “New Migration”, as in very little of it and limited overall population growth. Japan’s population is predicted to be the same in 2050 as it was back in the 1970s. Australia and Melbourne are forecast to have substantial population growths in the foreseeable future. While supply of Japan’s housing is even more restrictive than ours, the demand factors required to increase prices seem to have been very poor.

Melbourne. There is no doubt that in the early 1990s, the saying “the bigger you are, the harder you fall” was found to be true, as some of the worst-performing suburbs, where the median prices fell by a far higher percentage, were such as and . Of course that is to be expected as in many cases there was simply no demand for some properties that had to be sold. Middle Melbourne geographically, like Glen Waverley and even as it was then, rode the 1990s reasonably well because there was still strong demand (unlike Toorak and ) and supply tightened because of fewer developments.

In 2008: Price Matters

OK, so what does this all mean?
In 2008, price becomes even more important than it was in 2006 and 2007.
The green line is the trend line. You may have bought above the trend because you didn’t research the price or it was a very competitive auction and you chose to win the prize. Below the trend lines means you bought well (or you had a brilliant buyer’s advocate – only joking), or you were fortunate to find an inexperienced selling agent, other buyers simply weren’t there or couldn’t see its potential.
In Figure 1, you buy expensively – say $2.1m (A) – when all the square metre prices of the precinct say you should have paid $1.85m. However, because the market is rising, your “mistake” is disguised somewhat when you come to sell or revalue (C).
In Figure 2, you buy expensively and your “mistake” (A) is exaggerated to such an extent that you become restricted in your choices (B) for future homes or even in some your ability to sell that property.
In Figure 3, you bought well (A) and, while the market has not been helpful, it hasn’t really hurt you. Should you choose to upscale at (B) you will be in a strong position to buy well again and “profit” in a falling market.
In Figure 4 Above we have been talking about 3-5 years and that’s important. However, long-term ownership (10-20 years) is what generating wealth through property is all about. Figure 4 shows it is far better to have all the ups and the downs on a good property than brilliant buying and selling on a piece of rubbish.

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