The final piece of the property puzzle has fallen into place

For much of last year the Australian housing markets were a “tug-of-war”, with low interest rates pulling hard on one end of the rope and poor consumer confidence at the other.

Despite many of the fundamentals being sound, consumers were sitting on the sidelines waiting to see how the economy played out or for someone to ring the bell that the property market had bottomed.

Well… no one rang the bell, but our property markets did bottom in the middle of last year and consumer confidence is slowly returning.

In a moment I’m going to share nine reasons why I feel our property markets are going to perform well this year, but let’s first look at:

Consumer Confidence

Last week the Westpac/Melbourne Institute index of consumer confidence rose to its highest level in over two years. Consumer confidence rose sharply in NSW and Western Australia and recorded healthy gains in Victoria and Queensland.

The index is up 7.2% over the year to February and this is the first big jump in confidence since the RBA commenced its rate-cutting cycle which dropped its interest rate by 1.75%.

Now don’t get me wrong, this is good news for our housing markets, but confidence isn’t at the level it was in previous rate-cutting cycles and this points to more subdued property price growth than might be expected given the current level of interest rates.

Source: Westpac

What does all this mean?

Over the last few years, global as well as local economic uncertainty caused Australians to stash their cash. Some saved their pennies, many reduced their credit card debt and others took advantage of low interest rates to pay off the principal in their home mortgage.

But things are changing and the average Australian is now feeling more confident about their future and their job security. There has also been a strong wealth effect for households from rising stock prices on the ASX.

If history repeats itself, increasing confidence, low interest rates and robust financial positions will encourage many Australians to ramp up their borrowings again and get into the property market.

The following chart from economist Leith Van Onselen of Macrobusiness plots the annual change in house prices (as measured by the ABS) against the annual change in the consumer sentiment index on a quarterly basis up to December 2012 and shows how rising consumer sentiment is a bullish indicator for Australian house prices.

What are the implications for interest rates?

It’s likely we’ll see the increase in confidence feed through to the broader economy, as well as stimulating further rises in our sharemarkets and house prices.

In today’s connected society, as confidence rises there will be a new group of investors who will fear missing out and this will stimulate the investment cycle to once again move forward.

This suggests that the Reserve Bank won’t make changes to interest rates any time soon, preferring to see how the economy responds to the rate cuts it has already made.

Nine reasons our property markets will perform well this year

I’m confident about our property markets in 2013, not only because consumer confidence is rising but:

1. Last week NAB confirmed that business confidence is also rising. This is good for our economy and for job prospects.

2. The Australian sharemarket has performed remarkably well over the last year, enhancing people’s wealth, replenishing their super funds and instilling confidence in investors.

3. The world’s economic problems seem to be diminishing. China’s growth seems to be back on track with predictions of 8% growth this year. The USA is slowly working it’s way through its economic problems, and while Europe is still a basket case, no one seems to be worried that it will bring down the world banking system like they were last year.

4. We have record low interest rates. This means existing home owners and investors are benefiting and paying down their debt faster; while new borrowers will reap the benefits of being able to borrow more.

5. Household budgets are in good shape. Since the GFC, Australians have been saving more. Credit card debt is low and 68% of people are ahead on their mortgage payments. Our robust household balance sheets means we have more money to invest and as people hear more good news stories in the media they’ll start to put their money into property.

6. Low interest rates and less volatility in our economy make cash and interest bearing deposits unattractive investments. While some investors will look at getting into the sharemarket, many won’t forget how the volatility of equities burned them a few years ago and will look to the security of bricks and mortar.

7. After the turmoil following the GFC more Baby Boomers are keen to control their own destiny by managing their own self-managed super funds (SMSF). Rivers of cash from SMSFs are going to be flooding the real estate markets over the next few years.

8. Increasing immigration and a shortage of properties in some inner and middle ring suburbs of our capital cities will see rents continue to increase. On the one hand, this will provide investors with better yields, but it will also encourage a new group of first home buyers to get a foot on the property ladder.

9. Recently, economist Christopher Joye used the following graph in The Australian Financial Review to confirm that despite what some of the overseas reports are suggesting, Australian houses are more affordable than they have been for over a decade:

In summary

The property markets have bottomed, consumer confidence is returning and the property cycle is moving on. Already we’re seeing more people attending open for inspections and making offers on good properties and auction clearance rates for the first few weekends of this year have been strong.

The beginning of a new property cycle is a great opportunity for investors to ride the next property wave and doesn’t come around that often.

2013 will be a good year for property. Educate yourself, learn lesson from the past and take advantage of the opportunities the market has to offer.

Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog. Subscribe today and you’ll receive a free video training: The Golden Rules of Property Investment.