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10-06-2009 - PROPERTY REPORT - March 2009 |
INTRODUCTION:
This is the year of hamburger real estate.
McDonalds loves an economic downturn. It's thriving in the current climate, as people shun "a la carte" restaurants and seek affordable dine-out options.
The same thing is happening in real estate. No one's buying cordon bleu property this year. The market in 2009 is in hamburger real estate.
The prospects for each of our major markets will be determined by how well they can service demand from the budget end of the spectrum. Markets that can provide a good supply of land, houses and units at prices attractive to first-home buyers will do well. Expensive markets will struggle.
Hobart and Melbourne are examples of markets that will do relatively well, while Canberra and the Sunshine Coast are typical of the locations that will struggle.
Hobart has a greater proportion of affordable suburbs than any other capital city. Melbourne has some of the cheapest residential land of any capital city. There will be price growth in some sections of those cities.
Canberra has virtually no affordable suburbs. It's a city where almost every location has a median price above $400,000. The Sunshine Coast has been found by an international study to be unaffordable on a global scale: there is only one suburb along the coastal strip with a median price below $400,000.
If you're a property investor, find out where the FHOG recipients are buying and follow their example. It's the year when fast food real estate will sell best, particularly if it comes with "sides" - rail links and good amenities.
NATIONAL OVERVIEW:
So, how come values haven't fallen 40%?
I've been out and about in the property market, sniffing around for buying opportunities. And I've been amazed to find that values haven't dropped 40%. Or even 10%. In some markets they haven't fallen at all.
We were told to expect the market to be in free fall by now. Remember how Associate Acting Professor Wannabe from the University of Far Western Somewhere predicted that our homes were about to halve in value. And that media-junkie fellow from Inaccessible Economics who's always trying to get himself on TV by saying things like "the budget's buggered" and we're all going to die in poverty in houses that are worth nothing?
I was truly concerned that my home would soon be worth half what I paid for it. That was until two houses in my street, both inferior to mine, sold for more than I paid. And my friend the real estate professional whose word I trust told me she'd been making good sales at solid prices.
And then I saw the latest data from a series of credible research sources and found that prices have fallen a small amount in some cities, and stagnated in others, and grown a little in others. This should not be happening.
I get emails from people who have absorbed all the negative media and are genuinely fearful about the value of their biggest asset. They don't need to be.
The key thing is this: nobody with any real estate cred has been predicting big falls in property values. There's a good reason for that: the conditions don't exist for values to fall greatly.
Those conditions do exist in the United States. A huge oversupply of new product, crazy unregulated lending practices, a basket-case economy drained by a hideously expensive war, a huge budget deficit, the most unpopular president in history.
We have a very different set of dynamics in Australia. We went into this economic reality check with a strong economy, a big budget surplus and low unemployment. Our banks are sound and our real estate market is underpinned by a shortage of new product, low vacancies and record population growth. We have a Federal Government willing to do whatever is necessary to insulate us from the worst of the global downturn, fortified by a strong budget.
While the media focuses on companies that are shedding jobs or closing mines, it ignores the new ventures starting up and the positive indicators that things are holding up surprisingly well. The dire predictions by doom-celeb economists are being regularly contradicted by cold hard facts: unemployment hasn't blown out much (yet), retail sales are still strong and residential property prices are proving resilient.
The data on the December Quarter shows exactly what I expected it to - and reflects what I expect for 2009: property values at the expensive end of the market are falling but there is good activity and some price growth in the outer suburbs of our major cities, with first-home buyers leading the way.
IT'S IMPORTANT TO KNOW WHO TO BELIEVE
I don't get many calls from journalists seeking my views on the cricket. This is not surprising as I'm not a recognized expert on cricket (although a keen follower).
Nor do I get calls from media seeking my analysis of the sharemarket. I have little experience in that field.
If media needs commentary on the sharemarket, the economy, the cricket, the rugby, Kevin Rudd's performance or how best to cook a Christmas turkey, they go to people with experience, expertise and credibility in the particular field in question.
So why, I'm wondering, do journalists passionately seek the views of non-specialists in real estate? (And why is most of the real estate coverage in major newspapers written by journalists who know little about property?)
One thing stands out among all the commentary about what will happen in the real estate market. Most of it is coming from people who have no credentials in real estate.
Journalists apparently believe that economists are real estate experts. I'm still waiting to meet an economist who's an expert on the economy, let alone the property market.
Every time a new set of numbers emanates from the Bureau of Statistics or the Reserve Bank, there are queues of economists lining up to express their surprise at the figures because they're different from what the economists predicted. They expected them to be higher/lower/slower/faster.
Your average run-of-the-mill economist can't even predict an interest rate decision or the next inflation figure (although all the component data is available) or whether building approvals will go up or down.
What chance they'll get it right when predicting real estate outcomes 12 months into the future?
At the start of each year, media rolls out their hardy annuals - seeking predictions for the year ahead in various fields, including real estate. Usually they ask economists. As most of them haven't got a clue what will happen in real estate, they predict the recent past. There are still economists out there predicting that Perth has peaked, more than two years after it happened, or that Adelaide will become "the new Perth", one year after that happened.
Some actually attempt genuine analysis but their common mistake is to go to their computers and look at graphs and statistics - data depicting the past. They seldom get it right because it requires years of experience with market cycles and what influences them to develop the gut instincts needed to understand where markets are heading. Reading rows of figures isn't good enough.
There are many credible real estate analysts out there. People like Rod Cornish, head of property research at Macquarie Bank, who has spent many years analysing what makes property markets tick and developing sophisticated models for predicting price movements. But you seldom see him quoted by journalists writing on real estate.
Margaret Lomas of Destiny Financial Solutions probably knows more about the nuts and bolts of property investing than anyone in Australia. She has a vast residential portfolio and a stable of published books on the subject, as well as a fleet of offices providing advice to investors. Yet media is more likely to seek real estate commentary from a bank economist with a clipboard than someone with a proven track record at the coalface of the industry.
There are others with the knowledge, experience and credibility to be listened to: gifted Brisbane analyst Michael Matusik, who runs Matusik Property Insights; university lecturer and author Peter Koulizos, who is known as The Property Professor; Tim Lawless, who ran research for PRDnationwide and is now heading up research for RP Data; and Neil Jenman, who owns lots of residential property and writes books that are must-reads for anyone contemplating buying real estate, as well as running one of Australia's most important websites for consumers.
The problem is, these are people who provide genuine analysis. Media doesn't want that. They want the gloom celebs, the people who will predict disaster or provide a sensational five-second grab for the six o'clock news. Whether there's any validity to the comment or not, who cares?
It's important for consumers to know who to listen to. There is an extraordinary level of misinformation out there at present, disseminated mostly by economists whose prime motive is to generate personal publicity and published by a media that doesn't give a damn.
Next time you read or see someone pontificating on real estate, first ask this question: what are this person's real estate credentials? If they don't have any, disregard everything they say. If the pontificating person is described as "economist", turn the page or change the channel.
CANBERRA AND THE ACT:
Not much to offer the budget-conscious buyer
My analysis of Canberra hasn't changed much since the previous quarterly report: the city has had a good run but affordability is an issue and we're unlikely to see much capital growth this year.
In the last quarterly report I wrote this: "It's difficult to see Canberra prices going anywhere fast in the next six months. The city has had a pretty good run for many years but recently prices have begun to decline. And there's little prospect in the short-term for anything better than a flat-lining price graph, with some fall in values the most likely outcome.
"The Federal Government has given considerable stimulus to the first-home buyers market but Canberra is not going to benefit as much as other capital cities. Overall, Canberra's median price is higher than Perth's or Brisbane's, and level with Melbourne's, making it the second most expensive city after Sydney.
"Whereas most of the other big cities have cheap areas where affordability is still reasonable, Canberra offers little. Its market has been driven by highly-paid public servants and outside investors, but there's little impetus from first-home buyers seeking affordable options."
I don't see that anything has changed. Canberra is the most homogenous market of all the capital cities - by which I mean it doesn't have the spread of cheap areas, mid-priced suburbs and very expensive enclaves you find in other cities; every suburb in Canberra is mid-priced or expensive. It's difficult to find anywhere with prices under $400,000.
The one saving factor for Canberra may be the new suburbs in planning in the city's west. If you can believe the development industry (and often you can't because they have such a vested interest in the arguments they put forward) Canberra is expensive because land supply is constrained.
But the ACT Government plans to facilitate the development of 33,000 homes over the next 40 years in the area known as Molonglo between Belconnen and Weston. There will be something like 15 new suburbs developed over time, with planning under way (and names selected) for the first three suburbs.
The plan is to create affordable housing. Time will tell. In any case, first residents won't be moving in before 2010 so the impact is longer term.
In the meantime, Canberra's median price declined in the December Quarter, according to both Residex and APM. Indeed, APM recorded a 3.8% drop in the quarter, and a 6.7% decline compared to a year earlier.
There's little reason for that trend to be reversed in 2009.
CONCLUSION:
Median prices will fall in some cities - even though values are rising!
If you want to make sense of what's coming up in 2009 - and to avoid being spooked by incompetent analysis - it's important to understand what a median price is.
If you list all the sales in a suburb from the most expensive to the cheapest, the median is the one in the middle of the list. If there are 101 sales in the suburb, the median is no.51 on the list, which means there are 50 cheaper sales and 50 dearer sales than the median-priced one halfway down the list.
This means that the median price often don't tell you what values are doing in an area - they tell you what kind of property is selling. If a developer starts marketing a budget housing estate in the suburb, there will be an increase in sales of lower-priced properties. That will have the effect of pulling down the median price, but it doesn't mean values have fallen.
Equally, if another developer sells property in an upmarket development with water frontage, it will mean a higher number of high-priced sales - so the median price for the suburb will rise. But it doesn't necessarily mean values are rising.
This is particularly true with apartments. Median prices are almost meaningless in terms of determining whether apartment values are rising or not. The median may fall because of a number of cheaper projects aimed at the bottom end of the market, or it may rise when a developer sells units in a new luxury development.
This is why media treatment of median prices is so misleading. Journalists use median prices as the definitive measure of whether values are rising or falling, and often it creates serious misconceptions.
This year I expect to see median house prices falling in most capital cities. This is because most of the activity will be in the lower-end of the market, led by first-home buyers inspired by low interest rates and high government incentives. They will be seeking affordable houses. Values will probably rise in the areas they target but the overall median price for the city will fall, because of the higher number of cheap houses sold.
This will be reported by media as evidence of falling values. They will be wrong but, sadly, most readers will believe it.
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