Buyers are picky, but well-priced, well-located homes are in great demand

By Catherine Cashmore

Wednesday, 07 September 2011

Spring is here, and it’s a buyer’s market isn’t it?  Well, not quite – we may have formally entered spring, but don’t be fooled – the traditional buying season doesn’t really kick off until after the AFL grand final.  No one wants to run an auction on grand final day, therefore we’ll see existing stock peter out as agents work to tie up any loose ends on properties already scheduled for auction, and a short delay  marketing new stock until we move closer to the event.

Media reports are still telling us house prices are softening – however this isn’t the case across the board. Although market has been suffering “low” demand, it’s not suffering “no” demand. Homes in the $500,000 to $800,000 “affordable” price bracket presenting quality are not only selling well, they are producing some difficult buying conditions for current property shoppers The last thing you’d expect to see in a cautious market is heated bidding and above average prices; however this is what’s happening in certain areas of the real estate landscape – principally the price bracket that attracts investors and the main demographic of home buyers.

This is partly due to continuing volatility in the stock market and a political landscape that is currently in disarray.  Therefore there’s been a slow but steady increase in the number of investors who have moved their attention towards more tangible assets (a number we’ve seen increase over the last three weeks as a company and a trend that seems to be playing out generally).  This isn’t surprising when you take into account there are 2,500 property trusts set up in Australia every week.  Moreover, the banks are awash with deposits, and as a result have been wooing investors with cheaper rates and lower fees for both fixed and variable loans.  The small increase in rental stock particularly in Melbourne (good news for tenants) is a direct result of this investor activity.

Therefore news this week from the Australian Housing and Urban Research Institute that 25% of investors sell within a year of purchasing is less than reassuring for anyone thinking of taking the plunge. Most mistakes are made when investors focus on property that is marketed principally for their demographic.  Small one- and two-bedroom apartments in high-rise blocks attract nice yields, but don’t generate much price appreciation.  This is because it’s owner-occupiers who fuel price growth, so choosing the right property in the right suburb is a case of appealing to those looking from a lifestyle perspective, as well as an investment perspective. Get this formula right, and even on the sliding side of the property cycle, losses will be minimised and gains maximised.  Considering the apartment market is currently awash with stock – with more in the pipeline – it’s therefore extremely important to proceed with care.

So what’s ahead for spring?  Well, it’s not going to be an easy ride.  It’s a common misconception to think of our housing market as a large living, breathing beast that rises and falls as a single entity.  However, the housing market is both fragmented and fickle.  It’s made up of individuals like you and me with different needs and different budgets. Each piece of real estate has its own intrinsic quality – unlike stocks, it’s impractical to put off buying, and then expect to quickly secure the exact replica of the same product a few months on at a reduced price. Part of purchasing well is understanding we’re in an “opportunistic” market. We live in a country with a rising population, where the best seats in our major cities have been taken.  No one’s all that eager to move into the outer-metropolitan or regional areas where land is arguably overpriced due to hefty development overlays. Therefore taking advantage of a buyer’s domain means being ready to act when you see something that represents a good long term acquisition – after all, you’ve got to be in it to win it.

Australia’s predicted surge of 35 million by 2050 – 8 million in Melbourne alone – suggests at the current level of growth, Australia is falling short of 40,000 homes a year.  That’s quite a statement and needs to be qualified considering demand for new homes is generally weak. In truth it’s not the amount of homes constructed that’s the issue, but the areas they’re located in. New housing is largely concentrated in outer suburbs – classic “mortgage belt” neighbourhoods. These areas are subject to affordability, attracting first-home buyers and low-income families. As such, demand fluctuates depending on economic factors such as the first home buyer’s grant, which is geared towards regional development and new home projects.  Demand for new homes is low not just because of the costs involved in building, but because of the negative aspects of living in suburbs with poor infrastructure and limited employment opportunities.

However, inner-city demand for housing is significant and rising, as anyone working at the coalface will tell you. The housing stock in areas where people want and need to live is not in abundance, and therefore with a rising population, it’s logical to reason that demand alone will once again force the price of well-located residential real estate upwards.  However the speed of those price rises will be moderated by affordability and in a two-speed economy we’ll see a widening split between rich and poor. As we move forward consumer sentiment is going to play a part in how fast prices rise.  Therefore if you’re purchasing now with the intention of selling in one, two or even three years’ time, you’d be better off renting and investing your money elsewhere.  However, if you have a long-term plan, open your eyes and take advantage of where we are now, rather than trying to predict the short-term future.

Catherine Cashmore