Australian Housing Outlook: 2nd Half of 2011

The Australia housing market is entering into an uncertain market in the 2nd half of 2011.

Interest Rates

The RBA have begun the process of raising rates from their highly stimulatory levels with an increase of the cash rate continuously.

The rise in interest rate had been much faster than expected by most economists, and Australian mortgage holders are starting to feel the pressure from these consecutive rate hikes. However, the Government has indicated that the rate increase maybe coming towards the end, and will take “sit and watch” position for the 2nd half of the year.

But, there are more likelihoods that interest rate will resume its growth cycle in 2nd half of 2011 even into 2012, if this is the case, it is likely to see interest rate back to close to 8% to 9% range, even 10% as some economists have predicted. This all depends on the property market performance next 6 months – recent statistics have shown that all main cities have reported correction in property price, so hopefully this is the first sign of improvement and enough to convince RBA to put a hold on the interest rate.

But this does mean interest rate for mortgage borrowers will come down, in fact, the separate issue now is where the banks continue to raise rates using expensive borrowing cost as the factor even without rise in the official interest rate.

The bad news is property price remains very high, and assuming an average house of $600,000 in Sydney, with 80% loan, this means a household has to put up $45,000 to $50,000 just in interest each year; which is considered as very big burden for many families, the average household income for Australian families is not even $70,000, this means, up to 80% of their income will be contributed towards just mortgage repayments.

Rental Markets
The vacancy rate in each city reflects the level of rental oversupply or deficiency. A vacancy rate of 3.00% in a market is considered as balanced, where rents will rise roughly in line with inflation.

Tight vacancy rates are expected to remain across most states in 2011/2012, before easing subsequent years as the forecast upturn in construction adds to supply.

One factor that can have impact on the rental market is international students, which have been a key source for rental markets especially in Brisbane and Melbourne. This has fallen significantly due to rising AUD which makes Australia unfavourable for international studying, this would have some impact on the rental markets for apartments.

Renting vs. Owning

The ratio indicates that at June 2009, the median rent represented 65% of the cost of paying off the median priced house, up from 42% at June 2008; in 2010, this had risen again as rentals continue to increase at around 5% to 10% p.a depending on the area. In popular areas, it is very common to see rentals are probably higher than the mortgage payments.

The difference between renting and mortgage repayments has made owner occupation relatively more attractive compared to renting, this is another reason to support further growth in property prices, as renters simply do not see any more points to rent, due to cashflow reasons.

Factors that will likely to impact on Property Price in 2nd Half

Unemployment Rate may rise as a surprise

Although the “headline” figures shows unemployment rate seems to be well in control in Australia; there are several danger signs:

A) The rising employment is largely due to part-time workers instead of full time jobs, this means, while they have positions and not considered as unemployed anymore; they are getting much less income as these are just part time jobs

B) Impending loss of jobs in the mining related sectors due to uncertainties ‘” mining sectors in particular, we have already seen some exit of mining companies, and this may impact on property prices ‘” first in the mining centres (regional Australian area), and spread across QLD and Western Australia, then followed by other related industries such as engineering, mining services and even financial sector

Better Investment Opportunities Elsewhere

The shortage of properties have put tremendous pressure on rents and as the rental yields reaches around 6 percent and interest rates stay around 6 percent or lower and a net population increase of some 350,000 pa and a continued build up of property demand over property supply of some 203,000 over the next 10 years.

With rental continues to increase, the rental yield may continue to improve, make it more sense to put your money into investment properties than in the sharemarket or term deposits.

But, while the sharemarket is showing lackluster performance so far in 2011, if the sharemarket starts to recover as in 2010, it can convince investors to switch from properties into the stockmarket again.

Exit of International Students

Some investors may not see this as a problem, but certain property markets are relying heavily on international students markets as the primary income source. This is especially the case for Brisbane, Melbourne and Perth where international students account for a sizable market share for rental properties; and often paying higher rental as well.

International students enrollments have fallen due to several factors: 1) bad international press and image relating to Indian students in Australia 2) rising AUD had made study in Australia comparatively much more expensive and 3) rising living costs in Australia which has seen many students moving to alternative locations.

International students are often cyclical, mainly from China, India and also some European markets. Indian students enrollment have especially dropped very sharply, some schools have been forced to close their doors due to financial problems.

In short, we believe the decline in international students could pose as a problem to certain sectors of investment properties; especially those properties built targeting at international students as primary income source.

Number of Listings

The future direction of the market will also be driven by number of listings. The last peak cycle for Australian property market was back in 2001, but in 2002, the market completely turned around as the number of listings had doubled even tripled in the apartment market?

Time to sell had subsequently changed from days to months, it was common at the time to take 6 months to 8 months to sell properties; and became “Buyers’ Market”.

The trend is yet to be felt in Australia this time ‘” but there are always clear signs that are happening in QLD and WA; there ware no more crazy multiple biddings on individual properties; while some properties are still sold within 24 hours of listing; the average “time-to-sale” time is now usually 3 to 4 weeks.

There are certainly signs around our neighbourhood where the average number of listings had jumped from 6 to 16 over past 2 weeks, a sign that increasing number of households are now considering selling their properties while the market remains bullish.

In our view, Sydney’s residential property market is now gradually moving into beginning of the correction phase, where the number of listings is expected to reach the peak during January ‘” March period in 2012; as summer time is usually the busiest season for property markets.

It’s hard to predict where exactly the property market will be by the end of 2011, but for those new in Australian property market; please be reminded that this is not a perfect market.

As I have lived here for over 20 years; I could recall at least 3 major corrections, where property value had dropped more than 20%, sometimes over 40%; and there will always be corrections every few years; the market may change from seller’s market to buyer’s market before you even know it.