Australian Property Update - 31 May 2011
This week we take a look at some of the latest news in Australia's Property Market
- Pain in High Priced Markets
- The Link Between Housing Values and Consumer Confidence
- Sydney's New Infrastructure - Australia's Biggest Brothel
- Is Your Home and Investment?
We continue to be vindicated on our view that the top end of the residential property market is more a punt than an investment. Statistically speaking, there is no doubt that high priced property in Sydney and Melbourne is historically about the most volatile in Australia. As the balance of wealth in the country is shifted by the resources boom to accommodate other centres, this principle will become more widespread but for now, the concentration of expensive property remains in our two largest cities.
One of the issues, particularly in Sydney, is how closely residential real estate is tied to the performance of financial markets. When indexes are booming, so is property, and the inverse is also true as we are seeing at the moment. To achieve real profit, property owners need to break out of the cycle or are only maintaining a bookmark in an increasingly expensive bracket. Anyone looking for diversity in their investment portfolio should not invest in both Australian equity markets and high priced residential property.
Strong employment around the country means that people can afford housing and the chronic undersupply in Australia means that they need to be competitive. These factors underpin the security of pricing at the lower end of the market. Homes are needed and the pricing is accessible. This argument is only common sense and is given weight by observing where the growth areas are in capital cities this year – on the outskirts.
We have often discussed the usually unreliable and frequently insane numbers peddled as statistics to the property market. Often it is worthwhile chatting to those at the coal face for a realistic view. NextHotSpot’s chats with local real estate agents in the high priced Sydney suburbs of Double Bay and Mosman suggests that in addition to low auction clearance rates (one agent suggested 40%), there are literally hundreds and hundreds of properties in both locations for sale but not listed on the market. This is a strong indicator that even those holding expensive property aren’t optimistic about its future performance!
As we have discussed in this report several times this year, the major single factor creating a flat property market in Australia in 2011 is a lack of consumer confidence. As the brilliant American economist Harry S Dent has asked – “what is an economy except people spending money?” It stands to reason then, that when consumer confidence is low, most sectors of the economy will suffer. Discretionary spending sectors like retail and property are particularly vulnerable.
Many sectors of the economy are highly reactive to movements in other areas, and as mentioned above, discretionary spending is one segment that can be highly sensitive when higher costs for the necessities of life have to take priority.
A major factor influencing how comfortable Australians feel (and hence how likely they are to spend money on non-essentials) is the perceived value of their home. Rightly or wrongly (and often wrongly from an investment point of view – see article below), Australia’s love affair with the concept of owning your home persists, and the emotional as well as the supposed dollar value of this precious pile of bricks and mortar predetermines most other spending. All this creates something of a “Catch 22”.
During the unprecedented global bull run in equities over the early 2000s, the wealth created here was spent in other markets (in Australia mainly housing), which in turn increased the relative wealth of these markets. As asset prices rose, the credit friendly credit environment created a booming economy – lots of people with the ability and confidence to spend money. As Australians felt richer, they had the confidence to spend money, which in turn creates employment and business opportunities and stimulates the economy even further. Some commentators have described the family home becoming a virtual ATM as home owners drew large amounts of money against the growing equity in their houses.
The reverse situation is currently prevailing, with consumer confidence low, house values are flat or softening in our major population centres. To set aside the rural centres that are booming due to industrial investment, in the short term we appear to lack the stimulus for a strong rise in house pricing.
When will our capital city markets boom? The answer in general terms is “when consumer confidence returns”. For Sydney and Melbourne in particular, lacking the impetus created by the development of mining industries, this could be a long wait.
A full report on the Australian Property Market can be found here.
Who said NSW is too broke to afford new infrastructure?
In our weekly “What’s Hot and What’s Not” report on 22nd March this year, we offered a cautionary thought for investors considering property in the City of Sydney. The council area covers not only the CBD market but fringe suburbs such as Glebe and Camperdown, which were once light industrial but now firmly residential. The top end of the market is a law unto itself as witnessed by last weekend’s sale of a Hyde Park penthouse for $14 million, the highest priced transaction on a Sydney unit for 3 years.
Of more concern for small investors was the Sydney Local Environment Plan for 2011. As we reported in March;“Zoning for such activities as child care, food and beverage service home occupations (sex services) has been included subject to council consent.
This is not a formal rezoning but does change the basis for residential premises. The possibility is that as a resident of a ‘Zone 2A’ dwelling anywhere roughly between East Sydney and Glebe, you could have a small brothel or a child care centre (presumably not both) pop up next door.”
We underestimated the potential for change of use of real estate as the Fairfax Press reported on May 16 that Australia’s biggest brothel may be created on Parramatta Rd Camperdown. A DA has been lodged by renowned businessman Eddie Hayson for an extension to the existing ‘Stiletto’ premises, which would result in a facility offering “40 working rooms and 21 waiting rooms with underground parking”. It is believed that if successful, the DA would make Stiletto the largest business of its type in the country. It is also believed that plans have been submitted for a 24 hour adult shop in close proximity.
Whilst these businesses may well have a legitimate place in our society, the “NIMBY” principle (not in my back yard) works strongly here. As a named local resident said, the 20 existing rooms at Stiletto see “cars and men coming and going at all hours and girls arriving with suitcases through the night.” Expansion of the premises and the addition of related sex industry retail may attract a certain type of business but not one that generally appeals to tenants, and therefore landlords. “How is this compatible with plans to revitalise Parramatta Road?” asks our resident.
A lesson in watching the activities of your local council with vigilance? Maybe it’s just proof of the old adage that pubs and brothels are recession proof!
An interesting article by Adam Creighton, Research Fellow at The Centre for Independent Studies was published in both ‘The Age’ and ‘SMH’ on 23rd May. Alternatively titled “Dwelling upon ‘investment’” and “Homes are not ‘investments’”, it addresses the issue of unemotionally assessing your home as an investment. As the second title suggests, the results of his analysis for owner occupiers is not good.
“The return from buying a house to live in, sentimentality aside, is the right not to have to pay rent. So the relationship between rental cost and purchase price of equivalent homes (''rental yield'') determines whether buying makes sense.
On that criterion, I can't understand why anyone would buy a house now. Renting makes vastly more sense.”
It is an issue that superior financial planners have addressed with their clients for some years now. Darryl Dixon, perhaps the pre-eminent financial advisor in Australia, has been heard on ABC radio offering the view that from a financial perspective there is serious doubt as to whether anyone in Australia should live in a house that they own, no matter how wealthy they are.
We agree with Adam Creighton that generally you need both capital growth and income to make property investment worthwhile. That is why we look for areas that deliver both superior potential for growth and strong rental yields.
NextHotSpot’s own analysis suggests that it is possible to hold multiple investment properties and rent yourself whilst maintaining the same lifestyle and budget as an owner occupier. The moving parts of the equation are rental yield, loan to value ratio, marginal tax rates and age of the property. As always, every investment is a specific, but as a rule of thumb for someone on the top marginal tax rate, 25% equity, 5% rental yield and a full depreciation schedule (new property is best) will achieve a neutrally geared investment. This means that it costs you nothing to hold the property, but to profit from holding it you need capital growth.
In the Press
Some of the articles that caught our eye this week include;
- Mortgage delinquencies point to property market chill – Dow Jones Newswires 26.5.11
- Auction rates misleading, says Louis Christopher from SQM Research – The Australian 23.5.11
- Sydney market fragile – smh.com.au 23.5.11
- No-go boom towns in Sydney Real Estate – The Daily Telegraph 9.5.11
- Rental returns sluggish for Australian capital cities – news.com.au 23.5.11
- Auctions on the increased, but not clearances – smh.com.au 24.5.11
- Economy on the move, property flat – smh.com.au 23.5.11
- Go regional for the best bargains – The Australian 7.5.11
- RBA warns many first home owners who used government grants may now be vulnerable – The Australian 26.5.11
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Missed out on last report? Click below to view the May 24th edition of