Property market predictions for 2011 and beyond

Around this time each year, it’s customary for those of us in the property industry to peer into the future in an attempt to predict what’s ahead for our housing markets in the coming year and beyond.

While making such forecasts is not an exact science, I can safely make three predictions that I am certain will be true for 2011.

My first prediction is that it will be a bad year for those in the prediction business – most predictions will be wrong!

My second prediction is that most property investors will get it wrong this year. And my third prediction is that those investors who get it right will do very well out of real estate this year and set themselves up for the years ahead.

Before I discuss the reasoning behind these predictions in more detail, first let me explain how I think the property markets will perform in 2011 to put it all into perspective.

The property market for 2011

We already know that this will be a year of more moderate growth in property values, with prices falling sightly in some areas. It’s a year where the markets will be patchy, with some areas performing better than others. Different states will perform differently as they work their way through their own property cycles and within each state different price brackets will perform differently.

For instance, houses at the top end of the market – say above $1.5 to $2 million – will perform poorly over the next 12 months, only picking up when the sharemarket starts to show more positive growth and business confidence returns.

This is because these high-end properties tend to be bought by people in the professional or corporate world. This demographic tends to upgrade into new homes when business is booming or when the stock market is on a high, and stays put when it’s flatlining, as is the case at present.

Likewise, lower priced properties – those typically bought by first homebuyers and those in regional areas – will also suffer this year, with a lot of talk about affordability issues for those trying to enter the housing market at present.

Gen Y’s looking to make a break from mum and dad or their landlord will struggle with the relatively high house prices of our inner city property markets, which is where many want to live.

Increasing interest rates later in the year, as well as rising rents will add to their woes and force many to remain on the rental roundabout. Others will opt to take the plunge into the housing market, buying into the more affordable apartment market as house prices remain out of reach.

But for those whose only option is to stick it out as tenants, the already tight rental market will take its toll, with vacancy rates decreasing even further into 2011 and in turn, causing already rising rents to continue on their upward trajectory.

What about interest rates?

Everyone seems to have a different opinion on this. I know some are even suggesting rates could drop in the short-term, but I believe the Reserve Bank will keep rates on hold until the second half of the year and as the economy starts to show signs of strengthening, the central bank will be forced to hit borrowers with a number of rate hikes in order to keep a lid on inflation.

By this time next year, we can expect the official cash rate to have increased by close to 1% as the economy speeds up.

The good news is that we will have a continuing large transfer of wealth into Australia from overseas, propelled by China’s continuing demand for our natural resources.

The RBA predicts that the current China led resources boom will last for another 25 years, ensuring that our economy prospers over the long-term as the transfer of money from other countries into Australian coffers continues. This will of course translate into stable employment and increased capital expenditure, with the need for more infrastructure – all of which means we will enjoy increased spending power.

But it’s not just the stuff that comes out of the ground that the Chinese will spend their money on.

Demographer Bernard Salt believes that Australia will soon become the playground of China’s wealthy. And that makes sense to me.

Just like the Japanese, who holidayed here in droves during the economic boom they experienced in the 80s and 90s; as the Chinese enjoy increased wealth they will seek to spend more and more of their leisure time Down Under. This will in turn create a tourism boom for Australia and generate even more revenue.

In the short-term, recovery efforts from the terrible string of natural disasters suffered by many Australians over the past month will also boost our economic health, as more jobs are created and dollars are spent rebuilding the many affected communities.

So what does this mean for our property markets?

Well as I mentioned earlier, in the short-term – over the next 12 months or so – we can expect to see prices stagnate or fall slightly as the market still has further to correct. When you look at median house price data, you can see that (on average) house prices have been flat since around May last year and this is likely to continue until later into 2011, if cyclical patterns are anything to go by.

However, there won’t be a crash.

Despite all the doom and gloom we hear in the media about our economy and the property markets, things will not fall in a heap.

Why am I so confident about this? Because history is a great teacher!

And history tells us that over time, property values always go up and investors who stay in the game for the long-term always do well. Yes, there are periods of flat or falling values, but the sceptics who like to warn investors away from real estate always get it wrong.

If you think back over time, the naysayers are out in force when the property cycle starts to slow down. I have been investing in property for well over 30 years now and during that time I have been warned about a property crash on numerous occasions, including:

• In 2008 when the Global Financial Crisis rocked the world – many suggested property values in Australia were set to crash and we were all going to lose our jobs, but of course that never eventuated.
• In 2004, the property markets in Sydney and Melbourne housing values stalled, due to high interest rates that peaked in late 2003 but look what’s happened to property values in those cities since.
• Around the year 2000, there was a heap of negative press and worry about the impact of the GST that was being introduced in 2001. People said this new tax would destroy the housing market.
• In the early 90s, when interest rates peaked and the markets crashed, everyone said it was the end of Australian property wealth and it would all be downhill from there.

As you look back it becomes clear that there is a cyclical pattern to our property markets with the media and “clever” commentators offering lots of reasons not to invest.

But the truth is, we have periods of prosperity and periods of slow or negative growth in the housing market – this has always been and will continue to be the case.

Remember how I said most predictions will be wrong…

This is where the predictions I made at the very start of this commentary become clear. Remember I said that firstly, most predictions for 2011 will be wrong?

Well looking at the examples above, it’s clear that those who forecast a catastrophic end to the property market did indeed get it wrong.

But more importantly the short-term predictions many of us make are wrong because every year there is an unpredictable X-factor. Something that comes out of the blue and take us by surprise.

What will this year’s X-factor be?

So far this year, we’ve had the floods and Cyclone Yasi, but there will probably be another – some unpredictable dynamic that impacts the economy (in a good or bad way) unexpectedly. There’s always one or more that crops up during every year.

My second prediction was that most property investors will get it wrong. That one was simple – because they always do! And I’m not talking about those who fail to act and don’t even get in the market.

According to data from the Australian Housing and Urban Research Institute, 20% of those who invest in housing will sell within the first 12 months and 50% will sell within the first five years. They will not gain the long-term wealth creation benefits that property investing is all about.

So on to my third prediction – those who get it right will do very well – and again this has always been the case.

Investors who see the negative press about property as a countercyclical opportunity have consistently done well for themselves. They recognise the slower market as an opportunity to invest when others are too afraid to buy and when there are more willing sellers in the market than purchasers.

But not all investors who buy during the downturn will get it right.

That’s because you can’t just buy any property and expect it to outperform well in the long term. The key is to buy the right type of property, in the right location.

At this time in the cycle you need to buy a property below its intrinsic value and one that has a “twist.” Something special about it – like value add potential potential which allows you to manufacture capital growth through renovations or redevelopment.

Ideally you should look at purchasing an investment in the inner areas of our major capital cities that have a historical pattern of above average capital growth, regardless of the ups and downs of the property cycle.

Why?

Because the value of property in good locations will continue go increase in the future due to scarcity. All of those factors that are underpinning our already healthy economy – the resources and capital expenditure booms, strong employment and an influx of overseas dollars – will also have a positive impact on this type of property.

The more wealth we realise as a nation, the more prosperous we feel as consumers. And of course, as the perception of wealth and prosperity increases, so too does consumer confidence. In turn, we are more willing to buy goods – new cars, furniture, electrical items and yes, houses.

So the big question is – what will 2011 bring your way in terms of wealth creation and the property markets?

Here’s one more prediction for you….

Most people reading this blog will do nothing different in 2011 than they did in the past.