The year the property markets stalled

At this time of year it’s customary to look back at the last 12 months, as well as make some forecasts for the year ahead.

Well, 2010 will be remembered as the year the property market stalled. Rising interest rates, decreasing affordability and economic uncertainty were a volatile mix that stalled the property boom we experienced in the first half of the year.

While many property buyers think Christmas has come early, some home owners and investors are concerned by the bad news they are reading.

Yes, property prices are flat lining and auction clearance rates have fallen and there are more properties on the market than there are potential buyers, but nothing suggests that the property market is about to crash.

Let’s first look at the latest figures from RP Data:

The markets are fragmented

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

What I call “A class properties”, properties 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 – maybe 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).

And all the key indicators suggest the slow down will continue well into the first half of 2011. The number of properties on the market is high and many vendors still have unrealistic expectations. They would like the type of price they would have achieved six or nine months ago, but unfortunately most will be disappointed.

Properties are remaining on the market for sale longer and more vendors are discounting their asking price to sell their properties. Rising interest rates and the prospect of further increases to come next year means there are fewer home hunters competing for the properties that are for sale. With more houses for sale this means more choices for buyers, and the longer homes take to sell the more likely they are to go for a lower or more reasonable price.

What’s ahead in 2011?

Looking forward, 2011 looks like it will be another year when our markets are fragmented. The value of certain properties will keep rising, others will stagnate and certain properties will fall in value. However, rents are likely to increase strongly in most areas.

I see minimal growth and more likely falling values in some outer new home owner suburbs and cheaper suburbs where rising interest rate will hit hardest. In contrast, in many inner and middle ring suburbs, increasing demand from owner occupiers, investors and tenants is likely to maintain property values in these areas.

You see, the current tight lending criteria have meant that developers aren’t able to build the medium and high density apartments required in these suburbs. This lack of new rental stock together with a growth in the 20-24-year-old demographic group means our vacancy rates will remain at historic lows and rents will keep rising strongly. And this situation is unlikely to improve over the next four to five years.

Why will it take so long?

Currently builders are just not building apartments (other than in the CBD where an oversupply is looming.) Eventually the banks will start lending to developers again – but with the time lags involved in getting developments on stream, all this means it will be quite awhile before our vacancy rate impr oves.

Rents will rise

Even though house price growth has stalled, our capital city populations are still increasing at the highest rates in the Western world. About 150,000 new Australian households are formed each year and each of them needs a home.

When people can’t afford to buy they have to rent, and this means that capital city rents are going to rise significantly over the next year or two.

This means that if you want to increase your wealth through property, and take advantage of the new buyers market, then 2011 could be a great year for you, but:

1. You need to buy the right property – one that is bought below its intrinsic value, in an area of strong long-term capital growth and one with a “twist” – with an element of scarcity or one to which you can add value. And…

2. You will need to structure your finances correctly and allow for our changing interest rate environment.

I’m sure the ‘chicken littles’ will be back again yelling the ‘sky is falling’, as interest rates rise and affordability bites, however smart investors will be out buying the right type of property.

Sitting on the sidelines waiting to see how things pan out may seem safe to some, but it is likely to mean they will miss out on great opportunities. It is easy to do nothing… as Donald Trump says: “Nothing is easy… but who wants nothing?”

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.