In our ever changing world, where you never know whether to pack your brolly or your bathers from one day to the next, talk of the seemingly swift upward turn our property markets have taken of late has hit the news in a big way.
It is not just the climbing price tags and auction clearance rates that have many a scare-monger talking up the impending threat of a property bubble though, with coinciding apartment booms currently underway in Sydney and Melbourne fueling speculation of a dangerous impending oversupply in both cities.
Australia’s property sector has proved itself to be a very worthy investment vehicle over the last two decades. While other developed countries have seen their markets decline dramatically since the 2007-08 GFC, our housing sector has had moments of prolonged stagnation, but on average, enjoyed consistent growth that has largely aligned with the associated holding costs of investing in quality bricks and mortar.
Australian residential markets have not really seen a significant correction in the form of a major property crash since the 1980’s, when negative gearing was reintroduced in 1987 to entice investors.
Then between 1998 and 2008, our nation experienced the perfect property storm, with a combination of favourable factors causing values to rise by 74 per cent across the country between 2002 and the end of 2008, according to statistics from the ABS. Some of the drivers of this 12 per cent plus average per annum return included;
- A surge in real net disposable household income by an average of 2.8 per cent per annum (ABS 2009) and an increase in the number of double income households.
- The broad relaxation of lending criteria and greater promotion of real estate as an investment rather than just a home.
- Changing demographics and a growing population as single household numbers increased, coupled with an influx of overseas migrants that saw a massive rise in housing demand.
- Land values and the cost of building materials rising substantially due to the rapid imbalance in supply and demand, causing further supply issues as developers downed tools in new housing estates.
- Introduction of the First Home Owner’s Grant in 2000 and an increase of rental yields as vacancy rates plummeted, drawing people into the housing arena.
Even when the GFC hit, our favourable interest rate environment coupled with buyer incentives such as the government’s first home owner’s grant boost that took effect in October 2008, prevented the same type of catastrophic market collapse that occurred in the US and Europe.
In fact there was talk that we experienced a “mini-bubble” across 2008-09 as the market once again heated up, with investors wanting to take advantage of low interest rates now competing with keen, cashed up first homebuyers.
Australia’s housing markets continued to chug along nicely, with little signs of the bursting property bubble that many predicted actually occurring. Instead, the brakes were applied in some of our cities around late 2010, as interest rates climbed and first home buyer incentives were scaled back once more, causing affordability issues for those looking to break into the housing market.
So now we come full circle. Once again we find ourselves in a low interest rate environment, with investors keen to cash in on the opportunity to hold a high growth property in a cashflow neutral or positive portfolio buoying the market into a growth cycle, and causing many commentators to scream “property bubble!”
Recently the RBA suggested that potential hazards are particularly concerning in Sydney where the, “increase in investor activity appears to have been particularly sharp,” as investor loan approvals reach their highest peak since just after the 2004 boom.
Then there are the soaring auction clearance rates, which have seen recent activity up at around 89 per cent in Sydney and 80 per cent in Melbourne.
It seems that wherever you turn, someone has a story to tell about how well they have fared in Australia’s inner city property markets in recent times, even as much of the world still reels in economic uncertainty.
Anecdotally I can share the tale of a Trilogy client who settled on a terrace house in Sydney’s inner city suburb of Paddington in December 2012 for $1.5 million. That property, which is admittedly sitting in the middle of a “yuppie” sweet spot, is now worth $1.7 million. And we have seen similar trends in lower price point suburbs too, such as Newcastle.
This renewed vigor from investors for all things bricks and mortar has of course brought the developers out of the woodwork, with planned high-rise construction in the Melbourne and Sydney CBD’s starting to smack alarmingly of the saturation levels we saw in the mid-noughties.
Between 2010-12, Melbourne’s inner city skyline saw the addition of an extra 22,605 new CBD apartments, which made up almost a quarter of all high density construction across Australia for that period. It is this type of massive boost to apartment numbers that has some suggesting the world’s most liveable city is at risk of losing its lustre as it becomes a generic, concrete jungle.
While a large volume of Australians prospered from the noughties property investment love affair, there were more investors burned by some all too common first timer mistakes.
Scrambling to jump on the real estate bandwagon, many investors fell victim to dodgy, fly by night spruikers and developers who promised instant millions. Of course the only people who profited from these get rich schemes were the ones organizing them!
So here are some of the more important take home lessons that we should learn from recent history and make every effort as savvy, educated investors, not to repeat;
- Beware careful if purchasing “off the plan”. During the noughties, many investors got stung after paying a large deposit on OTP apartment stock, only to find when it came time to settle that the property they had signed a $400k contract for was now only worth $340k, leaving lenders with little choice but to pull the rug out from under them. Not to mention the number of landlords who were virtually forced to give their asset away, as a glut of comparable rental stock came on line all at once.
- Don’t buy it if you can’t afford it. Yes, loans are relatively cheap right now, but that can and will change. Never borrow more than you can comfortably afford to repay, even if rates were to soar to 8 or 9 per cent.
- Don’t get caught up in the investment frenzy by overpaying for properties or getting drawn into an auction bidding war. Many people overpaid just to jump on the bandwagon last time and then found themselves waiting years to enjoy any return on their investment.
- Don’t be driven by fear or greed. Both of these emotions are an investor’s undoing and will cause you to either over-capitalise for fear of missing out entirely, sit on your hands and do nothing when a real opportunity presents or overstretch your financial limitations and get into trouble with the banks.
There are numerous similarities between our property markets of ten years ago and those of today, with the positive news being that housing still holds strong as a reliable investment vehicle for those looking to create long term wealth.
If you want to find out how much you can comfortably borrow to make sure you don’t miss the boat, call one of our team.