Many investors have lost confidence in the share market and are now searching for new safe havens.
Property Planning Australia director Mark Armstrong says the flailing share market has turned the tables for investors, presenting opportunities for residential markets to bloom again.
"Melbourne and Brisbane had lots of interest in 2007, although most of it came from owner-occupiers driven by their confidence in a strong share market, historically low unemployment rates and a strong economy," Armstrong explains.
"That has ended now and these sectors will continue to soften throughout the rest of 2009.
"The areas with a good balance of owner-occupiers and investors, such as the two-bedroom apartment markets in Bondi or Paddington in Sydney or South Yarra in Melbourne, will continue to firm up and strengthen into 2009."
Armstrong says it is now not a matter of 'if' investors return to the residential property market, but ‘when’. His prediction is that this will happen before the end of the year.
"Rents are increasing, and the consensus is that interest rates will fall by another 1% by early 2009," Armstrong states. "So that differential between the cost of money and rental return for investors is going to reduce even more. This will be the catalyst for change."
He says investors will begin to target underperforming areas such as Sydney, where there is a low supply of available rental properties and high demand, pushing rents up further.
"Sydney will be the first to move because it is a wealthier city and there is a lot more cash available. It will then flow on reasonably quickly to Melbourne, then to Brisbane and then to Adelaide," says Armstrong.
Darwin is one of the few bright spots in Australia's property market, with median house values climbing by 1.56% over the three months to October. Over the past 12 months, median values jumped by 8.75% to $425,000.
This healthy performance is fuelled by the ongoing surge in public and private investment in the state. Business investment is currently very strong at $3.1bn over 2007/08, according to ANZ. It says public investment also grew solidly by 87% over the past 12 months.
This, in turn, attracted a large number of workers. ANZ estimates that the number of people employed rose by around 5% or 5,000 over 2007/08. "A weaker household sector should take some heat out of the economy in the Northern Territory, but mining investment will continue to underpin the state's economy for some time yet."
Darwin's property market is one of the tightest in Australia thanks to the dramatic slide in private building approvals. ANZ says this threatens to add to an already undersupplied housing market.
Suburb spotlight: Rosebery
Gennie Cox, senior salesperson at Elders Palmerston, says there is so much demand for land and properties in Rosebery that any that come up are usually snapped up in a few days.
"There's not a lot of land left in Palmerston," Cox says. "It has all been sold in the Rosebery area and we continue to have a real shortage of it compared to the demand in this area … If any land is put on the market it is snapped up immediately, and buyers are very keen."
Rosebery's western position in Palmerston is drawcard for buyers – both investors and owner-occupiers. It’s one of the suburbs furthest away from Palmerston’s industrial areas of Pinelands and Yarrawonga, which makes it cleaner and more desirable.
Cox says the desperate shortage of investor-owned properties in the Rosebery and wider Palmerston area means that vacancy rates are down, close to 0%.
Median house prices in Sydney fell by 1.50% in October, according to Residex. Year-on-year growth has also fallen, recording a drop of 2.82% to $562,500. Average growth per annum over the last 10 years is the lowest of all capital cities, sitting at 7.13%.
But confidence is not yet entirely lost. Property Planning Australia director Mark Armstrong says that as soon as investors begin to notice the effect of lower interest rates, they’ll return to the market and target the popular hunting grounds.
"Investors in 2009 will be attracted to areas like Balmain, Glebe, Randwick and the inner city, because these have traditionally performed well. Owner-occupiers only make up about 50% of the market in these areas and the rest is filled with good rental demand, creating good rental incomes," he explains.
Gareth Woodham, state manager of NSW for WBP Property Group, says the continuing cuts in the cash rate by the Reserve Bank of Australia will also create strong activity in Sydney's more affordable suburbs. "Quick action by those wanting to take advantage of this opportunity is recommended, and we expect a lot of activity in areas such as Bankstown, Blacktown and the Sutherland Shire as affordable properties are snapped up by first homebuyers and investors alike," he declares.
"This could be the start of a recovery from the bottom up in the Sydney market, with the fundamentals of excess demand and increased affordability tempting buyers back into the biggest property market in the nation."
Suburb spotlight: Sadleir (houses)
Sadleir is situated about 37km south-west of Sydney's CBD. The suburb is part of the city of Liverpool, and 56,000 new residents have relocated there in the last 10 years.
Sadleir is one of Liverpool's suburbs that's closest to Liverpool city, and it has easy access to retail and employment hubs. Other suburbs such as Miller, Ashcroft, Cartwright and Heckenberg are its near neighbours.
The average annual capital growth of Sadleir houses over the past year was 10.24%, which was competitive for the top-performing suburbs during September, according to Residex. In the last three months, houses have achieved a whopping 4.47% growth. The median rent was $270 in September, and Residex estimates the median rent rate at 5.35%.
According to the 2006 Census released by the Australian Bureau of Statistics (ABS), about one third of Sadleir’s dwellings were designated as situated in housing commission areas. Despite its lower socio-economic reputation, Sadleir currently provides many first homebuyers with the chance to enter the property market at an affordable median house price of around $263,000, according to Residex last September.
"Sadleir is quite affordable at the moment and houses here fall into many first homebuyers’ price range," explains Frank Settineri, director, Real Estate Direct – Liverpool.
"The suburb is also popular with investors because of the cheap prices and high rental yields which can stretch to 10% per annum. The average $250,000 three-bedroom house would be renting for $300 a week."
Although Sadleir has been a housing commission area, a gentrification process is being driven by local owner-occupiers who are choosing to buy these cheaper houses, then knock them down and build new double-storey homes, says Settineri.
The Melbourne property market saw values fall as homebuyers succumbed to the pressure of 12 consecutive interest rate rises and increased living costs, says Greville Pabst, CEO of WBP Property Group.
"This is evidenced by declining auction clearance rates in the first three quarters of 2008, as well as other influences including falling retail spending, consumer confidence, housing finance approvals and business confidence," Pabst explains.
"Added to this, there's the current uncertainty in the property market fuelled by the global credit crisis and the US sub-prime mortgage meltdown. As a result of these factors, Australian economic growth is expected to slow substantially over the next 12 months," he continues.
Melbourne house values fell by 0.98% to $477,000 during October.
However, over the past 12 months median house values grew by 5.19%.
The median unit value also slipped by 0.55% to $362,500 in the same month.
Pabst says the outer eastern and south-eastern suburbs experienced the biggest drop, although continued interest rate cuts and government support for first homebuyers are expected to entice purchasers back into the market.
"As a result, the first-homebuyers’ sector will experience a boost, making it more buoyant than other sectors in the residential property market."
Pabst says the typical first and second homeowner's suburb of Narre Warren has a very strong market in properties under $320,000, "while the market from $320,000 to $500,000 is weaker".
Pabst also notes property listed at above the million-dollar mark appears to be most affected by recent lows in consumer confidence.
"Recent valuations in Camberwell and Balwyn suggested the market has declined 10–15% for properties of over $1,000,000, while those under $500,000 seem less affected."
Suburb spotlight: Alphington (unit)
Alphington lies 7km north-east of Melbourne's CBD and is part of the City of Darebin, one of the biggest and most densely inhabited municipalities in Melbourne. Bordering Alphington is a large green belt, encompassing Bundoora Park, which covers 180ha.
Residents of Alphington can take a train direct to Melbourne's CBD in just 20 minutes on the Hurstbridge line, as well as the Alphington to Moonee Ponds bus (route 508). Heidelberg Road and the Eastern Freeway also lead into the city, while the roads east of the suburb provide a quick getaway to some of the Yarra Valley's best wineries.
This well-established neighbourhood has grown in median unit value by a substantial 19.64% in the last year to reach $384,000, according to Residex figures in October.
During the same month, median rent rates were returning a reasonable 3.81%, which equates to $275 per week.
Grant Leonard, partner at Nelson Alexander Real Estate – Northcote, says although the house market dominates most of the properties in Alphington, the unit market is very popular with young professionals and investors at present.
"There are clusters of apartments down on the Yarra River side of Alphington, which are very popular for those buying and renting," Leonard says.
"The suburb is a popular spot to rent and buy because it is close to the city and has the lifestyle factor. There are a lot of 1970–1980s blocks of units, and a number of them have been refurbished," he adds.
According to Leonard, there's a mixture of one- and two-bedroom apartments in Alphington. A renovated one-bedroom apartment is likely to rent for $260 a week, while a two-bedroom one is $300 a week.
The usual flurry of homebuyers' activity that's characteristic of the start of spring slowed to a halt in Brisbane during October, a facet of the slowing demand from local purchasers.
"It would appear that vendors and investors have entered a holding pattern and are waiting to see how international influences affect the local market," explains Julian Harrison-Tubb, state manager, Qld, WBP Property Group.
Harrison-Tubb says although the Brisbane market is still buoyed by strong local mining resources, most of the market seems to have officially entered a slowing phase.
"The coastal towns that are dependent on the tourist trade appear to be more adversely affected by interstate issues and have suffered to a greater extent," Harrison-Tubb says.
Paul Wilson from We Find Houses says that, while dwelling supply has increased in Brisbane, good quality properties are few and far between. "Investors need to do their research properly to ensure they're buying the right property to maximise their rental potential," he advises
"Their biggest concern should be that they find a place in an area where there is still a market to rent it to," Wilson adds.
"Make sure you have a strategy before you buy and don’t go into the purchase blind just because the price might look right – or because it might be a good time to buy an investment property."
Suburb spotlight: Kingston (units)
Kingston is located between Brisbane, Ipswich and the Gold Coast, in the city of Logan. It is home to a young, diverse population – more than 50% of the Logan City region’s residents are under 30 years of age. The Logan Highway runs through Kingston, providing easy movement in and out.
The median unit price in Kingston was $224,000 in September 2008, thanks to strong growth in the 12-month period, recorded at 28.41%. The median rent was $250 in September, and Residex estimates the median rent rate at 5.77%.
"The Kingston residential market has grown 198% in capital growth over the past five years, according to the Real Estate Institute of Queensland, which is fabulous. Of that growth, 23.6% has occurred in the last year," explains Fifi Tarbey, principal, at Century 21 – Team Gold.
Tarbey says Kingston is the ideal market for first homebuyers due to its cheap properties (sub-$300,000 house prices) and substantial history of growth.
"The areas around Kingston in Logan City are really the top places to buy in. The average gated-style unit with three bedrooms sells for between $220,000 and $240,000, with a fabulous rental return of between $320 and $340 per week. The ungated estates in fact get $290 per week for similar dwellings," explains Tarbey.
"Even in a 'doom and gloom' scenario, you can't lose with the figures Kingston is returning – Logan is thriving. We have some great entertainment hubs, and also lots of schools and parks these days, so it’s developing into a very interesting area."
The Kingston region is receiving a huge amount of interest from developers building newer-style unit blocks, and these are now selling for $320,000–350,000 for three bedrooms and two bathrooms, according to Tarbey.
"There's high demand for these newer dwellings as well as the older unit blocks," she explains.
The slowing economy in the nation's capital continues to weigh heavily on its property market. Median house values dropped by 1.77% in October and lost 2.11% over the quarter to $456,000 according to Residex.
Population growth has slowed dramatically in the capital. Between mid-2007 and December 2007, it went from 1.7% to 1.3% and it is likely to slow down even further in 2008.
ANZ said in its report that population growth in the ACT has largely been leveraged by the public service employment cycle. In fact the Rudd government’s move to rein in expansion in the public service has not been helpful, it says.
"The ACT economy continues to do it tough, with stagnant public sector activity compounded by an overstretched consumer market and a softening housing one. Negative sentiment is overwhelming fundamentals which remain very positive," says ANZ.
"Housing in the city remains one of the most affordable (as a percentage of income) in the country and the market is still relatively tight. Building approvals have tended up sharply in recent months growing by double-digit rates in each of the past four months. While this will translate to stronger dwelling investment in the second half of 2008 and into 2009, it remains unclear if it is going to be a positive for the housing market. Overall, it's difficult to see a turnaround in the ACT economy until the shackles are taken off the public service and confidence begins to return."
Suburb spotlight: Holt
Holt is located around 6km from the CBD in Canberra’s north-west and forms part of the wider Belconnen region.
Residents there have access to the centre of Belconnen by Southern Cross Drive and to the CBD by way of the Barton and Federal Highways.
The median house price in Holt was $360,500 as of October 2008, thanks to a marginal 1.41% growth over the month. Over the 12 months ending October 2008, Holt experienced 7.40% growth, delivering investors with a substantial 5.40% median rent rate.
This equates to $375 per week for houses in the suburb.
"The blocks in Holt are relatively large and the median house prices are a bit below Canberra median prices of around $460,000. So this is an affordable suburb," explains Angus Howell, team leader of residential division, Herron Todd White Canberra.
"Purchasers should be looking to buy an older-style ex-government-housing home that’s in good nick but original condition with the potential for renovations. That way they can get the most out of selling it later on."
Belconnen is home to the University of Canberra and one section of the Canberra Institute of Technology. Although the suburb of Holt itself is located on Belconnen’s far western corridor, residents have easy access to all the facilities available in the district, such as the Calvary Hospital in the nearby suburb of Bruce.
The Australian Institute of Sport and the Canberra Stadium – where both rugby league and rugby union games are played – are also to be found in the Belconnen region.
While these major stadiums draw tourists to the area, Holt also benefits from Belconnen’s retail and tourist services. These include the Belconnen Mall and Lake Ginninderra, that lie in the heart of the region.
The city of churches is predicted to be one of the few capitals to put up a fight against falling property prices and financial turbulence – thanks to its resource-rich status and strong migration base – says Peter Koulizos, The Property School lecturer, property investor and author of The Property Professor's Top Australian Suburbs.
"The great positive that Adelaide has is that we have more than our fair share of international students generating demand for rental properties, which pushes up rents," he explains.
"We also have more than our share of overseas migrants settling here who generate even more demand until they can buy."
"This underlying demand is slowly building up. While Adelaide may only be treading water at the moment, it’s certainly not dead in the water. We can see land – and it’s not that far away – but we have a bit of hard work to do to get there."
Bart Quinn, state manager, SA, WBP Property Group, says that the boom times of 2007 appear to be behind us but the Adelaide property market should fare well under the current climate.
Koulizos says serious investors should be looking to take advantage of Adelaide’s low prices, increased rents and the declining interest rates.
"If you can find the initial finance despite the credit squeeze to invest, it's certainly easier now to hold on to the property. Adelaide has the lowest mainland house prices in Australia, so it’s the ideal spot to be investing in real estate" Koulizos says.
"Vendor discounts have been creeping up as well," he adds.
"Those wanting to sell their homes have been discounting their asking price more than they would like, just to generate some increase."
He predicts this trend will last throughout 2009 and begin to pick up during 2010 as continued interest rate reductions encourage homebuyers back into the market.
Suburb spotlight: Christies Beach (houses)
Christies Beach is one of Adelaide's best-kept secrets. Tucked away about a half-hour’s drive from the CBD, you find this beautiful sandy shore at the end of Beach Road, where local families and tourists love to spend their weekends.
The basic, somewhat run-down dwellings in Christies Beach have been the main reason this beachfront suburb has remained one of the most affordable in Adelaide.
Today, the area is gaining in popularity and this is why Koulizos tips Christies Beach as one of the hottest places to buy a property in Adelaide.
"Generally speaking, when the market is soft and people are tentative they tend to look at the cheaper areas because there’s less risk involved. So the ones to watch for the next 12 months would be places like Christie’s Beach and Port Norlunga with median house prices of around $300,000. You’re not borrowing too much and therefore you’re reducing your risk," says Koulizos.
Christies Beach includes a developing shopping strip, picnic facilities, a caravan park and a boat ramp among its many amenities.
According to the Australian Bureau of Statistics (ABS) in 2006, the majority of the properties in Christies Beach area were separate dwellings with 13.7% units.
In 2006, the ABS also estimated a substantial 30.5% of the properties in Christies Beach were rented.
Median house values fell below the psychologically crucial $500,000 level in October, losing 1.34%, to $498,000 according to the latest data from Residex. Over the previous 12 months, house values had fallen by 1.48%. Units fared slightly better, falling by only 0.88% to $384,000 in October.
"The Perth housing market is moving into uncharted territory," says Real Estate Institute of Western Australia (REIWA) president Rob Druitt.
According to REIWA, median house values dropped for the third consecutive quarter with median house prices losing 2% in the September quarter to $435,000, down from $445,000 in June.
"Perth had not experienced a period like this since 1982, when the median house price fell 10.5%," says Druitt.
On the bright side, while the value was down by a modest 8% on the peak price in December 2007, there were still a number of regional sub-markets that experienced growth during the September quarter, according to Druitt.
"These pockets of growth covered all market sectors, from first homebuyers in Armadale/Serpentine, Swan and the north-eastern part of the City of Wanneroo, to the trade-up markets in South Perth/Victoria Park, Fremantle and the northern parts of the City of Joondalup," he says.
"A surprise return to positive price growth was seen in Perth’s affluent western suburbs, which had recorded sharp falls in recent months."
Druitt says areas targeted by first homebuyers have held their values in a falling market. "The level of first homebuyers’ activity is the saviour of the current flat market. They now represent 32% of the overall market, making it difficult to ascertain how many additional buyers might be drawn into it by the Rudd government’s First Home Owner Grant boost."
Suburb spotlight: Kambalda East
Kambalda East is part of the larger mining town of Kambalda and located around 615km east of Perth, around 55km south-east of Kalgoorlie and about 75km from Coolgardie.
The eastern region of Kambalda is the original town centre and is home to around 250 older-style properties. The western area of Kambalda forms the new town centre and has around 1,000 properties. The place as a whole is known for the classic 'mining town' feel and the preservation of its native flora.
Tracey Tate, sales consultant for Kambalda with Fyson and Associates, The Professionals, says the eastern area of Kambalda East has taken longer to grow than the western side, but it is now achieving very reasonable capital growth. "Both Kambalda East and West have done fairly well in terms of growth over the past year to October 2008. The key drivers of this have been the local industries mining nickel and gold.
"Although the economic position has put a slight dampener on this influence, and there has been a slow-down in the price of nickel, I expect this industry will pick up again in 2009."
The majority of buyers in Kambalda East are currently owner-occupiers who have family members working in the local mines. The town is also a popular place to live in general because the house prices are more affordable than nearby Kalgoorlie.
A new $18m recreation centre was due to be opened at the beginning of 2009, and Red Hill Lookout gives views of Lake Lefroy, the producer of mirages.
Real estate terms
The median value is the middle price in a series of sales: half the sales are of lower value and half are higher. For example, if 15 sales are recorded and put in order from the lowest value to the highest, the eighth place is the median price. Medians are used rather than average prices because they are unaffected by a few that are unusually high or low, so they are a more accurate indicator of true market activity.
Calculations of the median house price typically cover a quarter (three months) and/or a calendar year. Median value can be broken down further into upper and lower quartile, the top 25% and bottom 25% of sales.
Mean price The mean, or average, is the sum of a list of numbers divided by the total number in the list. The mean house price is calculated by adding up the value of all sales over a set period (month, year) and dividing by the total number of sales.
One problem with using mean to calculate property values is that it may not depict the typical outcome. A sale that's significantly high or low can skew the data, strongly affecting the outcome.
Capital growth This is often used in real estate to describe the increase in the price or value of a property. For instance, the median price of a house in Coburg in the March quarter 2008 was $509,250, and a year before that it was $407,500. Therefore, the capital growth is the difference between the two, $101,750, divided by the earlier figure, $407,500, which equates to 25% over a year. Capital growth is also known as capital appreciation.
Investment return From a real estate perspective, an investment return is very similar to the capital growth figure. It's the percentage of change in value of the investment over a given period of time.
Gross rental yield This is frequently used to compare the investment return on a property. To calculate the amount, you divide the yearly rental income by the purchase price of the property. For instance, the yearly rental income on a three-bedroom house in Coburg is $18,200 and the median house price is $509,250, resulting in a gross rental yield of 3.57%.
The vacancy rate is simply the number of vacant rental properties that an agency has on its books divided by the number of rental properties they have. For instance, if an agency has 100 rental homes on its books and five are vacant, the vacancy rate is 5%.
The vacancy rate is a general measure and it may be the case that it is higher in one suburb than another. It may also differ depending on the type of property.