John McGrath’s Market Review For Winter 2011

14th OF June 2011

By John McGrath, Property Expert
www.mcgrath.com.au

It is always darkest before dawn. It seems a lot of people are interested in buying quality property but many are standing on the sidelines looking in. Fear of a second correction has created some hesitation in sections of the market. However this is not representative of the general marketplace in high demand regions, where there is still reasonably strong buying up to $2M for the right properties and a reasonable depth of demand above $2M.

Last year, we saw the beginnings of a recovery but this has been punctuated by this new round of uncertainty fuelled by global and macro economic factors as well as natural disasters closer to home.

It’s not unusual that in this environment we see the property market stalling as it is generally driven up or down by the economic backdrop and consumer sentiment.

Last year I predicted solid growth in 2011. That prediction might be slightly delayed due to these changes, however I still feel the worst is behind us and we are at the beginning of a long-term growth cycle.

My best read is this will gradually move throughout the country starting in major eastern seaboard capitals and continuing for some 3-5 years.

Market Observations

Luxury property in every capital city seems to be the sector hardest hit. My experience however is when economic confidence returns this market segment can rise rapidly as high net worth buyers fight for the best homes.

Some inner ring markets (within 10km of CBD) defy the gravitational pull of uncertain economic times such as Sydney’s Inner West, which continues to show strong demand.

Interest rate uncertainty may be causing some concern for some buyers, however with 3-year fixed rates at around 7.25%, buyers can lock in repayments for the short term which should give them a level of comfort. This also suggests that lenders are not expecting rates to escalate much higher than current levels, or at the very least return quickly to those levels if they do. Banks are once again lending 95% LVR indicating a stable climate and the banking sector’s confidence and anticipation of a stronger property market with long term capital growth.

First home buyers. As rents continue to escalate there is a greater incentive for tenants to buy prior to the next growth cycle kicking in. NSW is the most popular state with first home buyers who comprise 17.3% of the market, well above the national average of 13.9%. This suggests that FHB’s continue to want to enter the market and break the renting cycle in favour of securing a quality asset. Whilst FHB Boost has been removed, there are still some incentives for first home buyers to make the move and with rents expected to continue their steep rise, it seems logical for them to find an entry point.

Excellent environment for investors with higher rental yields and slightly softer prices. One and two bedroom apartments are hot property in Sydney and there is a growing trend in Self Managed Super Fund investing. According to AFG Mortgage Index* data, VIC dominates with 38.4% of loans to investors; NSW is second with 37.5%.

Regional Markets

A continued growing confidence in regions outside major cities has been witnessed by many of our regional offices recording their best results in recent months. While it’s still early days and growth in some areas is patchy, it’s encouraging to see increasing activity and buyer confidence in areas such as Ballina, Tweed Heads, Wollongong and the Gold Coast.

Under $500,000 bracket: the strongest sector with local buyers upgrading or downsizing and out-of-area buyers investing or retiring. The exception is the Gold Coast where there is a significant oversupply – with 300+ homes in Surfers Paradise area listed on realestate.com.au in this price range.

Newcastle renaissance. Newcastle is undergoing a major transformation. The market is buoyant and positive media attention is encouraging retirees, seachangers and investors from as far afield as Melbourne, Brisbane and Sydney. Newcastle is shedding its steel city image and great value is available. A good 3 bedroom house in a decent suburb is about $500,000. The rental market is strong with a large undersupply and tenants willing to pay six months advance rent. A hot investor market with great capital growth prospects plus high yields.

Gold Coast Activity. The Gold Coast area has been the hardest hit market in Australia. With local business in South-East Queensland suffering and an overweight number of mortgagee sales taking place, prices have plummeted with some homes selling as low as 50% of their purchase price. Whilst this appears a scary time for property owners in that area, it also creates some amazing buying opportunities. We have seen a much greater number of buyers entering the market in the last 60 days. Whilst recovery won’t be overnight, right now it appears to me that buying quality residential property on the Gold Coast may deliver the best growth opportunity Australia-wide in the medium term.