Property markets are driven by an ever-changing set of political, social and economic fundamentals. Macro and micro influences, such as government policy, population growth, employment and wages stability and general consumer sentiment all weigh in on the equation and in turn, push housing values up, down or sideways.
At various points in the now widely recognised cyclical highs, lows and in-betweens of residential real estate, different influences exert more price pressure than others.
Lately, much of the renewed activity around Sydney, Melbourne and Brisbane housing markets, has been aligned with a continuing low interest rate environment that has made property related debt a lot more affordable, particularly for homeowners dipping into their equity to acquire bricks and mortar investments.
However, some are suggesting that we are in dangerous ‘too much too soon’ territory when it comes to growing market activity, which of course has brought out both the spruikers eager to cash in on all the renewed interest, as well as the doom and gloom property protagonists.
Spring has sprung…
Bringing with it concerns from some analysts about what this seasonally traditional peak period could mean for a market that they fear is already in overdrive.
Many economic forecasters were sending subtle (or outright blatant) smoke signals to the Reserve Bank prior to their September meeting, suggesting a rate rise was required to put the brakes on a little.
Recently, Standard Life’s chief economist Jeremy Lawson said factors like our current record low cash rate had driven demand to the point where our housing market is overvalued by as much as 20 to 30%.
Of course, the RBA decided instead to continue their cash rate stalemate, leaving things on hold at 2.50% for an unprecedented fourteenth consecutive month.
The Central Bank’s reasoning for their 2nd September determination was a moderately paced, yet accommodating global economic environment, in which “long term interest rates and risk spreads remain very low.”
But the usually fertile spring selling months have some of the more skeptical analysts warning of bubble-type scenarios and an imminent collapse, as increased levels of stock and competition, fuelled by warmer weather (along with those attractive interest rates) whips buyers into a greater frenzy.
Sydney is a good example of how crazed the increased competition is making some purchasers; with a federation style cottage in the popular inner west suburb of Leichardt recently fetching $1.59 million in a pre-auction offer – $150,000 more than the vendor anticipated achieving the very next day at the scheduled auction.
This fierce competition is occurring right across the Harbour City, with house prices rising by almost 15% for the year to July 2014, according to RP Data. Melbourne came second, with an 11% annual gain, while the Brisbane property sector rose by a more modest 6.9%.
Experts are warning buyers in Sydney to tread carefully and avoid getting caught up in the current escalating wave of residential real estate fever.
At play in Sydney is not just the same low interest rate environment that’s put a bit of fire under most of our cities’ respective property markets. Buyers here are also contending with a chronic ongoing housing shortage due to town planning constraints and lack of investment dollars, that’s seen population growth (and demand) race well ahead of new dwelling supply.
Where to from here?
Most commentators suggest this year has signalled a levelling out of consumer confidence in Australia’s property markets, downplaying any potential for a significant over-correction in prices and hinting that we may have already witnessed the peak of the boom in 2013.
The number of houses sold in Sydney in the first five months of last year soared by a massive 28% from the previous year, whereas this year’s increase was a more restrained 6.2%.
It’s interesting that these times always bring out the best and the worst when it comes to the opinions that float around the national and international analytical ether; those who foretell of impending disaster and those who come out swinging with their latest property investment products to spruik.
The fact is it’s impossible to say in our very wide global economic world what the future holds for Australian residential real estate. Ultimately as an investor, all you can do is weigh up your own position, investment strategy and financial goals at any given time and act accordingly, blocking out the ongoing hype wherever possible.
A good way to move forward confidently when all those around you are making lots of negative noise is to get a better understanding as to the many economic drivers that influence our markets.
At this point, I think the RBA have got it right, given the relative stability of our overall economic position and individual levels of employment and income. These monetary policymakers are well aware of the danger points that could trigger a property crash on our shores and continue managing the risk accordingly.