Uncertainty may hold opportunity for property investors

Our property markets started the year in a tug of war, caught between falling interest rates on the one hand and market uncertainty on the other.

Now that we’re almost a quarter of the way through the year, it’s worth reviewing what’s really going on in the property markets and what’s ahead for the rest of the year.

Commsec economist Craig James is calling Australia the boom and gloom economy. Our economy is still growing – unlike many others, especially in Europe – and underpinned by a mining boom, but consumers and businesses are gloomy.

And it is much the same with property – some areas are faring well, but many aren’t.

So what gives?

The world economy is slowly working through its problems.

The concern of a meltdown in Europe that could bring the financial system to its knees now seems to have been averted. And the US economy is improving, albeit slowly, however its property market is still in a slump.

Back home we started the year with political uncertainty, which hasn’t really disappeared. Worries about the mining and carbon taxes, as well as the effectiveness of a minority government still remain.

Add to that the fact that the banks are now raising interest rates out of line with the Reserve Bank plus threats of increasing unemployment and many of us are putting off making major purchasing decisions like buying a new house or investment property.

What’s happening in our property market?

Fact is…the number of properties on the market is high, properties are remaining on the market for sale longer and many buyers are still nervous about making a decision.

Of course there is not just one ‘property market’. What I call ‘investment grade properties’ in the middle price range (say $450,000 to $850,000) – in prime locations and with an element of scarcity – are still selling well; even though there is clearly less interest from both owner occupiers and investors than there was before.

However, ‘B’ and ‘C’ class properties are not selling well.

Some have dropped in value by up to 10% and some can’t be given away (well, it’s not really as bad as that, but you’d have to give a very steep discount for someone to buy them).

When you look at the whole of Australia, property sales are at a 16-year low, with RP Data reporting that only 375,000 properties sold last year. In more normal times, sales were over 600,000 properties a year.

The problem is that even though turnover is down the number of properties listed for sale is climbing, with about 310,000 properties for sale across Australia.

This is up 23% on a year ago and more than 50% above pre-global financial crisis levels.

So what does this all mean for the future?

This means the market has about 10 months’ supply of housing for sale, up from a more normal level of four months of stock.

In other words, unless we see a substantial improvement in sentiment or in the economy we are not likely to see much change in house prices over the next six months.

What these figures don’t show is how fragmented the markets really are.

We know there is not one Australian property market. There are many different markets in different geographic locations and at various price brackets.

There is no doubt that home values are still falling in some areas and they are rising in others. And overall our property markets are flat.

It’s a bit like me putting my left hand in a bucket of ice-cold water and my right hand in a bucket of hot water and saying “on average the temperature is fine.”

Currently there are some property markets that are strong, with more buyers wanting the short supply of available good properties, and there are other markets where the property markets are ice-cold, with few buyers available for the large number of properties available for sale.

It’s worst at the top end

The top end of the market has been worst hit.

The most expensive 20% of suburbs across Australia have registered price falls of about 6.5% over this period. And if you broke this group down further – into say the dearest 10% of suburbs – you would find steeper losses again.

Source: RPData.com

Some green shoots

Before all this makes you feel to gloomy, there is some good news out there:

The vacancy rates in our capital cities are low and rents are increasing.

More properties are selling – sure it’s still a buyer’s market out there, but vendors are becoming more realistic and meeting the market.

Consumer confidence is slowly increasing.

Finance preapprovals are slowly rising. This always happens when new buyers are getting themselves ready to enter the market.

The cycle is moving on as it always does. We are now in the stabilisation stage of the property market.

So what is a property investor to do?

While some will sit waiting for the proverbial bell to ring proclaiming that we’ve reached the bottom, others are taking advantage of the opportunities that this uncertainty is dishing up and getting set for the next stage of the property cycle by buying the right type of property.

One with an element of scarcity, in an area that has always exhibited above average capital growth and one to which they can add value through renovations or development, thereby ‘manufacturing’ capital growth.

We are moving into the next stage of the property cycle

And the next stage is the stabilisation phase of the cycle.

You see, the markets don’t move directly from the downturn phase to a property upturn. There is a period of time where buyers return and take up the slack before prices start rising.

And I expect more buyers to return to the market later this year when they realise prices won’t fall any further.

By the way, the stabilisation phase is a great time for savvy investors to get set for the upturn stage of the cycle.

This year may be a good time to buy property – I have always found it a good time to buy when everybody tells you that property is a bad investment. Now is the time to get set for the future.

I’m looking forward to the balance of 2012. Are you?

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.