Good on you Bill [8D]
Admin ok? Here is it then, enjoy!
What’s blown up always goes bang
Author: By David Potts
Date: November 9 2003
Publication: The Sun-Herald (subscribe)
Don’t worry about last week’s interest-rate rise pricking the property bubble.
It was imploding already.
OK, worry about interest rates, too. A 0.25 per cent rate rise is like the sound of one shoe dropping; you know another is coming.
At least it’s reassuring that jacking up interest rates to a level where they’d do a lot of harm would, well, do a lot of harm. So it won’t happen.
While the Americans keep interest rates down and the relevant authority, the Federal Reserve, says it will for a “considerable period” which, in the slow-moving world of central bankers, is even longer than waiting for the plumber to arrive the Reserve Bank has little room to move even if it were so inclined.
It’s generally agreed among analysts and lenders that it would take at least 2 per cent or eight more rises to squeeze the pips out of borrowers. Fortunately, that won’t be necessary.
Although the Reserve Bank maintains that the housing market “continues to be buoyant”, in truth it already has started to crack.
The Melbourne property market peaked almost a year ago in most areas. By the June quarter prices were falling. The median prices at Southbank, Docklands and the fringe of the city dropped 4.5 per cent.
No one likes to admit it, but it appears that Sydney is peaking as we speak. Even before last week’s rate rise, CPM Research reported the auction clearance rate of home units had slumped from 76 per cent in August to just 59 per cent.
Brisbane, in the true spirit of daylight saving, is not expected to peak for a while yet.
“There are fairly definite signs of softening,” CPM Research’s John Wakefield said.
Even some of the median price rises recorded in the September quarter were illusionary distorted by the fact that demand by first home buyers has been drying up, the natural consequence of the earlier spending spree running out of puff and the fact that prices have risen beyond their reach in any case.
As action at the lower end of the market dries up, that naturally makes the average, since all that’s left is middle and higher priced properties changing hands, look higher.
Loans to first home buyers have dropped to only 13 per cent of the total advanced, well below the levels that were prevailing before the first home grants were introduced and indeed the lowest since the 1980s.
In Sydney the annual rate of prices growth has dropped from 27 per cent in August last year to 5 per cent last month.
“There must be spots of price declines already,” Wakefield said.
Sydney city unit prices have dropped 30 per cent in the past 18 months, according to Peter Kelaher of PK Property Search & Negotiators which, unlike real estate agents, represents buyers.
Since the property boom is cracking under its own weight, the question is by how far prices will fall.
The sharemarket’s reputation for volatility and irrational mood swings is well earned, but don’t think the property market is immune. You’d be surprised how quickly sentiment can change.
“The market can change in two to three months from hot to cold,” Wakefield said.
“I can see it dropping 10 per cent; that’s extremely probable” he said, adding that’s about the magnitude of the drop, now forgotten, in the run-up to the Olympics in 2000. Some areas dropped 20 per cent in three months, but we’ve forgotten because they then picked up again.
A crash more than a 20 per cent drop would require forced selling. The only place that’s likely to happen is in inner city apartments in Sydney and Melbourne among buyers who used deposit bonds and haven’t had to pay up yet. By the time they do, they’ll find rents nowhere near what they had bargained for because of the over-supply of these units. When they realise that negative gearing is a mug’s game in anything but a raging bull market, you won’t want to be anywhere near the exit.
But this oversupply also will push up vacancy rates, depressing rents and making it harder for property investors in other areas.
Speaking of supply, we’re in the spring selling season with a lot more properties for sale than normal.
There’s even a threat from left field: the sharemarket.
The bear sharemarket, along with low interest rates, helped create the housing boom to begin with.
It stands to reason that as the sharemarket kicks off, investors will weigh up the two markets and at least some will return to shares. Not that it will be an easy decision both markets are arguably pricey and due for a correction.
“Clearly there is a risk that investors eventually will divert their attention to another asset class, causing house prices to falter as occurred between 1989 and 1992,” said Shane Oliver , chief economist and head of investment strategy of AMP Henderson Global Investors.
“With rental property market conditions becoming tougher, residential property now offers lower yields than Australian shares,” Dr Oliver said. “Given the improving outlook for share markets, the risk that investors start to look elsewhere must be growing.”
An even stranger at first glance effect on properties will be the strengthening dollar. A strong dollar makes it less attractive for expatriates or foreigners to buy Australian property, although you’d have to say the currency still has a way to go before that’s a realistic problem.
No, the more far reaching impact could be on the level of immigration. In the past few years of dollar doldrums, immigration has been running at a record level, as Australia looked cheap and attractive.
Home owners
Unless you lose your job or there’s some other trauma, your house is safe from the rate rise. Or a price fall.
Paying the mortgage will be a bit harder and you should start planning now for at least another 0.25 per cent rise, probably just before Christmas.
If you don’t have to sell, it doesn’t really matter what prices do. You could consider refinancing at a lower interest rate yes, it’s still possible. Most borrowers are on the standard variable rate of 6.57 per cent, about to rise to 6.82 per cent. But did you know there are variable rates which are a good 0.5 per cent below that? Even after last week’s mooted rises.
Or you can fix with your existing lender for one or two years at below the standard variable rate. To avoid the loss of flexibility of early repayments, it might pay to just fix a proportion.
If you used the equity in your home and borrowed extra to buy an investment property you’ll be more worried, but unless you face a cash squeeze you’re almost certainly better off hanging on. If you’re going to sell, do it sooner rather than later.
Investment buyers
If you’re a buyer, time is on your side. Especially if you’re looking at units.
Avoid auctions this is now a buyers’ market so you’ll do better by haggling with the vendor.
The unit market is the one the experts warn will have big price drops. But even then, it depends on the area. Prices in the inner city of Sydney and Docklands /Southbank areas of Melbourne are falling now. Prices in middle suburbia are holding up.
Whether a house or unit will be a better investment depends on the price, the yield you can get and the value of the land component.
Since buildings depreciate but dirt doesn’t, the higher the land value component, the safer, and potentially more profitable, the investment is.
By the same token, a new place has the furthest to drop and is more likely to be trumped by an even newer development.
It also pays to look outside the three main capitals for bargains.
But remember if you treat property as at least a seven-year investment, as you should, then as long as you’re not paying over the top, you don’t need a bargain. More important is the return you’ll get from it the rent and long-term capital gain.
You also need to take into account that vacancy rates are unusually high, about double the long-term average. So consider locking your tenant into a longer lease even if you have to sacrifice some rent. Better that than no tenant.
Home sellers
Well, what are you waiting for? The market won’t be going any higher.
If you sell now, it might pay to rent for a while and wait for prices to cool down or even fall before you come back in.
With interest rates more generous, you’ll also get a better return on your savings after taking inflation into account, which if anything is expected to get even lower.
Investment sellers
Inner city unit owners need to decide whether they should cut their losses before things get worse, or wait for the market to recover. The scariest prospect is negative equity where the size of your mortgage is greater than the value of your property.
It sounds awful, but in fact you’re only in strife if you’re forced to sell.
So hang on like hell. If you’re being squeezed, cut back other expenses first, and shop around to see if you can refinance at a lower rate; perhaps fix part of it.
One consolation for landlords is that rents tend to rise with interest rates as home buyers, priced out of the market, become renters.
Renters
If you’re renting, you’ll be in the box seat for a while yet. Landlords almost certainly will offer long leases; you’ll probably get away with a rent freeze.
But it won’t last. So save like mad to be prepared for something that seemed impossible only a week ago lower home prices next year.
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] How’s the BSS business going anyway Bill?
