Thursday, June 18, 2009

Boom Headlines for property….some very big numbers thrown around this week

392.02% increase in prices in the past decade, or $68,250 in 1998-1999 financial year to $355,000 this financial year for the North East suburb of Hillcrest, not bad! The Advertiser this week reported some impressive growth figures and BIS Shrapnel had plenty to be optimistic about in their report into Adelaide’s property sector. Of course with these record price growth suburbs like Hillcrest, Windsor Gardens and Greenacres there has been influencing factors of urban renewal. Median prices have been the measure (the price of the house sale in the middle of all sales) which can only provide us with a barometer as to market appreciation of property prices rather than being absolutely definitive. Median prices have no allowance for urban renewal (removal of an old house and replacement with new), nor for extensions and home renovations. Developers have been active in first home owner suburbs and unlike the upper end these suburbs have not missed a beat in the past decade.

“So…where to from here for property investors and first home owners? What does the crystal ball show?”

I actually have a crystal ball. I purchased it back in 1987, it sits on my mantle piece in my office and it has been well used over the years. It has let me down a few times but let’s have a go at it again.

The first home buyers have been very busy out there buying up property, moving out of home and getting set up for their future. These first timers have a new found independence in both housing and finances, and in doing so have vacated rental homes and left the safety of their parents’ nests. Investors have lost potential tenants and parents no longer need such a large home.

The next phase is reality. The thrill of home ownership can not be denied, there is nothing quite as special as your first home, but not all will transition successfully. While jobs are secure, interest rates low, relationships sound (partners in life) then there will be happiness. The wild card is the size of the first home bubble that has been created through the Stimulus package for this single category of properties. The level of activity in this one category has effectively seen a boom on top of a boom. Will the bubble burst?

Some underlying fundamentals in the market should ensure we have a soft landing. There remains a tight rental market and we have not gone into oversupply of property as occurred in previous busts. I feel sure that many of the first home buyers will move back home and rent out their properties (or rent out rooms to help with affordability) once they have satisfied the requirement to live in them for 6 months. This will keep those properties off the sale market and stop oversupply while simultaneously boosting rental stocks. South Australia has some extremely exciting medium term prospects with the mining, education and defence industries giving great promise and blue sky.

The cautiousness of recent bank lending has resulted in the last wave of buyers having solid financial credentials for home ownership; this will greatly reduce the risk of a collapse in prices. It is likely prices will soften in spring due to the first home vacuum that will follow the wind-back of the stimulus payments. The stimulus has brought forward purchase decisions of first home buyers which will take time to rebuild. The wind-back of the Bonus on the 1st October will slow things down instantly at the exact time seasonal stock levels peak with the stimulus bonus gone completely at year end. I expect to see recent gains washed out over spring and typically the $355,000 median (say of Hillcrest) adjust back 5 to 10% from where it peaks in September 09. 2010 will see a return to steady growth from the middle of that year with investors re-entering the market as prices soften. ‘At risk’ suburbs will not be the near city locations, they will be in the suburbs where unemployment levels rise most - assuming that eventuates.

Spring 2009 will be a very important time as it is the period when the strength of the property market is always tested.

So in summary, “Reject the Recession” is being played out and property is doing its bit.

Anthony Toop, Managing Director.

© Toop Real Estate Group

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