Property Groundhog Day looks set to continue, but there could be tumult ahead:

By Catherine Cashmore

Tuesday, 22 November 2011

I don’t think many will be upset to see the end of this year.  It’s not been the best of times for the average investor – a term that should apply to us all.  After all, most have some form of investment, even if it’s just a small amount in their super.

Many markets have suffered extreme volatility – our strong Aussie dollar has undermined exporters and tested the tourist sector.  Half the year was spent with bullish predictions about interest rate rises, and then the single call of a potential interest rate cut came from Westpac’s chief executive and proved correct.  All in all nothing could be described as predictable – nothing, that is, except for the real estate market.

Capital city prices are down 3.6% over the 12 months to September 30 according to RP Data, however such movements can only be described as marginal – especially when viewed in comparison with the stock market.  Clearance rates have been stubbornly predictable.  Week in, week out,Melbourne – the auction capital – has averaged a clearance rate of around 53%.  Sales agents, instead of using comparable data sourced from the last few weeks to value a property due to market movements, are able to pull comparisons from results a few months old.

Quoted ranges for auction sales – which in the past have been dramatically underestimated as agents fall afoul of a rising market – now commonly have the final selling price falling within the range.  Weekly property editors are finding it hard to find something new and fresh to write each week, and we seem to be stuck in something akin to the scenario outlined in the film Groundhog Day.

It’s tempting to grasp onto anything that might produce a change in sentiment.  The 0.25% official cut in rates caused such a furore in the press you’d have been forgiven for thinking Christmas had come early.  Not that it was set to produce any perceptible change – conditions in the real estate sector have remained flat.  Much of the responsibility for this is down to vendor expectation, which has continued to be stubbornly resilient against any pressure to meet buyer’s cautionary needs.

A buyer can give every indication he’s interested in a home, and yet when the time comes to make that final commitment, a happy medium can’t be negotiated between vendor and purchaser.  Therefore we’ve seen a large number of re-listings lingering on the market and very few new listings to break the stalemate.  In particular, RP Data reports new listings down 18.6% compared with this time last year.

In the end there’s only one reason a property doesn’t sell in the major capitals where supply is tight, and that’s price.  Every home will sell if priced and marketed correctly, but working out the best path to reach an agreement on that price takes nifty negotiation skills. Only the experienced real estate agents have the ability to educate their vendors to meet buyers’ expectation, and in this risk adverse atmosphere neither party is budging – at least at the moment.

Furthermore, many vendors are not in a position where they feel forced to take a large cut in price. Unemployment is low, and while many may feel financial stress, let’s face it: not at levels felt in either Europe or the US. We have a sound banking system, normal interest rates, a record of good lending practices, extremely low default rates – add to the equation a rising population, and you should be able to see what’s ahead for the housing market – even if it’s going nowhere at the present time.  Long term, we’re on the way up.

In Australia, what really stands us out from the crowd is our passion for property.  We all know the stats commonly quoted when the question of home ownership hits headlines.  About 70% of us own or are paying off a mortgage.  Half that number have little or no debt leveraged against their principal place of residence.  Property brings up ideals wrapped in feelings of security, wealth, and a connection to the land.  Unlike many countries, you have to be a resident ofAustralia to own an established piece real estate – or at the least meet the requirements of the foreign investment review board.

To draw a comparison, it’s now being debated in the US whether to stimulate the market by providing permanent residency for anyone able to invest $500,000 in real estate.  That’s something we wouldn’t even think to consider this side of the Pacific –drastic measures indeed.

However, to further understand our obsession with property, you need to witness it.  For example, head to Melbourne on a rainy Saturday during which you’d expect most to be relaxing indoors, and you’ll see – as I did this weekend – spectators braving wet conditions in thongs and T-shirts to watch an auction just for entertainment value.  These aren’t just neighbours, they are people at all stages of the property buying and selling cycle – people animated by real estate.

I don’t choose to invest my disposable income in the share market – I don’t understand it, feel in control of it, or – particularly on recent observation – trust it.  However I understand property, I can see where the population is heading and the type of properties they want to live and invest in. Even in good times, Australia – unlike the US – has avoided building an oversupply in her capital cities.

Like many investors, I’ve ridden the false stimulating measures imposed by policies such as the first-home owners’ grant and changes to tax models that have produced short-term blips to the long-term graphs.  And agree, especially in comparison with many of the world’s falling markets, our housing on the face of it looks extremely unaffordable – but blame for this can be laid at the feet of consecutive governments that have failed to provide for a “big” Australia, and it’s not going to change overnight.  Never let it be said we’re immune from future crashes, no one is – however we’re also not immune from the many factors that have held us solidly on the world stage thus far.

The ebb and flow of the property market may be tumultuous as we head into a new long-term phase of tighter lending regulations and consumer caution, but it will take more than this to stop the property wheel turning in Australia.

Catherine Cashmore