Is the tide turning on our property markets?

Australians love to talk about four things: football, the weather, property and interest rates.

And right now what’s going on with the property markets is top of mind for many Australian investors. Over the last few weeks it has become obvious that the tide is slowly turning from a seller’s market to a buyer’s market and many people are asking, is this the beginning of the end?

Six interest rate rises, lower affordability, fewer finance approvals, concern about overseas economies and more properties for sale than last year, have all combined to slow down the boom we have been experiencing.

So… is this the beginning of the end?

No. In my opinion this is the end of the beginning…

And I’m not being smart with words. After a year or so we have now completed the first stage of the property cycle and the markets are behaving normally.

Every property cycles begins with something real, something fundamental and last year it was pent up demand from homebuyers who had put off their buying decision because of the GFC.

The flame was ignited by historically low interest rates and the first home owners boost which turned into a second and third home owners grant as these first home buyers went out and borrowed $40-$50,000 more and handed it over to elated vendors, who then spent this plus more on their next home.

The markets then boomed with what seemed like an insatiable appetite for real estate from homeowners to upgrade their homes and from investors who had now regained their confidence and took advantage of low interest rates.

The latest figures from Residex show how our various property markets performed over the last 12 months, and while overall the markets are still running strong, there are signs that finally demand is starting to be satisfied.

Of course the media is jumping on signs like falling auction clearance rates to write spectacular headlines and the doomsayers are out again saying that the “property bubble will burst”.

What do I say to this?

I guess many in the media have forgotten what a normal market is. Only 18 months ago we were in the depths of a financial crisis that was touted as the worst since the Great Depression (remember those headlines?) And more recently auction clearance rates of over 80% and booming property prices have caught the headlines.

Neither of these are normal markets.

To be honest I’ve enjoyed the last year when the value of many of my properties has gone up more than 20%, but I knew this couldn’t last. In fact, I didn’t want it to last otherwise we would be setting ourselves up for an almightily crash.

So what next?

The markets will enter the next stage of the property cycle – after the initial strong rise the market will keep rising, but more slowly and more selectively.

The same fundamentals that underpinned our property markets last year are still in play – increasing demand from a rising population and insufficient supply to meet this demand. Add to this a strong economy, rising building costs, low vacancy rates and virtually full employment and we have the fundamentals to support a healthy property market.

But despite these strong fundamentals, in the short-term at least it looks like it has become more difficult for some buyers, particularly the more price sensitive buyers to obtain finance or service their loans.

We are already experiencing two tier markets. While overall median prices are rising, in each city there are winners and losers. According to Residex research, more than 50% of suburbs lost value in the last quarter, as did more than 20% of the suburbs in Brisbane.

Our rising interest rates and property values will affect different markets differently.

Affordability will become more of a problem in the outer and first home owner suburbs, where wage growth is pinned to something like the CPI.

However, in the more affluent suburbs, affordability will not be as much of an issue. People living in these areas will have more disposable income and they are nowhere near as dependent on the increase in the average wage to increase their affordability. Many run businesses, own investment portfolios, and receive bonuses so their disposable income and ability to pay more for the home of their dreams is not as limited.

Hidden among all the bad news in the media recently there was some good news in the Reserve Bank Governor’s statement: the RBA believes the Australian economy is set to grow strongly and that the optimistic assumptions underpinning the Federal Budget are sound.

This should give comfort to those worried by the many predictions of economic disaster. If you pit the headline-seeking doomsday brigade against the RBA, I’ll believe the Reserve Bank any day.

Our research suggests that we will see 6–10% grow per annum in our capital cities, but the market will now be much more selective.

So what should an investor do?

Take advantage of this lull in the market to buy the type of property you would have had to fight harder for a few months ago. Currently established one and two bedroom apartments make great investments – especially those with a good floor plan, an element of scarcity and the ability to add value.

But you can’t buy any property – buy very selectively in suburbs in the upper price ranges and buy above median price properties.

I know this is different advice to what many other property people are saying, but think about it… If you do what everyone else does, you’ll get the same results everyone else gets, and we know most property investors never get past their first or second property.

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.