Hot Property in Melbourne ???

I try to always keep this thought in mind when reading about the Real Estate market/industry in the newspapers:-

The real estate industry has an enormous stake in the major newspapers’ income by way of the advertising they do. The real estate industry even give out awards amongst themselves for whoever can generate the most revenue from their advertising.

It is fair to say that because of this relationship, the newspapers will tend to be swayed by what the real estate industry would like the public to hear about the state of their industry. Given the recent state of the market, the real estate industry would like us to believe that things are going to get better, things are fine – no need to panic. The Age article speculated that rents would rise as much as 20%. This is a total joke – I would love it to happen; I could retire, but the reality is if they did rise that much there would be thousands of people on the streets. David Morell says the high end is flying; this market is totally exclusive to the mainstream population. 90% of the people are middle class or less and these are the majority of residential property sales. Affordability for these people is very low right now.

They (r/e’s and papers) need consumer confidence to keep their machine rolling, and the newspapers want those lovely advertising dollars. It is in neither of their interests to relate bad news and gloom and doom for too long. Of course, this doesn’t mean they only tell you good news and never bad, but it is important to keep this in mind when reading media reports from newspapers. What is the real truth?

The statistic you mentioned is the ‘medium’ house price. This is the dollar cost of a house halfway between the most expensive and the cheapest. Three cheap properties which rapidly increase in price will be negated by one expensive property sold at a decent discount. So, you could have one cheaper local market experiencing a boom, and one one expensive local market experiencing a slow down and the figures will reflect no change.

It’s the same with ‘median’ prices – this is the figure put on the house which is exactly half way between the total number of all properties sold from cheapest to dearest. The same thing happens here – a lot of cheapies are sold all of a sudden, thus the median price drops. It is not an accurate description of the market. Another stat often thrown in is ‘how many’ properties sold in a given period compared to past sales. This can also be misleading – few properties sold can be due to interest rates being high, the time of year, consumer sentiment. Lots of properties sold could be because of a boom, or lots of distressed sales and a downturn as interest rates spiral upwards.

The factors which determine whether house prices rise are affordability, interest rates and rent returns, general state of the economy. At the moment the affordability rate is very low, so not many people can afford to buy. The high end of the market hasn’t been affected as much as the lower “mum and dad” or first home-buyer end of the market.

Interst rates are still low, but have been rising of recent times, thus decreasing affordability and consumer confidence. Keep in mind that most people are living pay check to pay check, so any upward movement in interest rates will affect those people more.

Sales dropped and many investors disappeared as the rent returns dropped during the boom, and even though rents are starting to move up again, the returns in many areas are still too low to entice them back yet, and it will take quite a while for the rents to increase enough to catch up to the fantastic cap growth of recent years. Many experienced investors will be waiting on the side-lines for this to occur of course.

What does all this mean for Melb? I think that overall the market will be slow this year for growth, as affordability is still poor in many areas and rent returns are still low. But there will be those little pockets that will still go well as the first home buyers will be able to afford the properties in that area.

The irony will be that as house prices rise again, rent returns will stay down, so the investors will stay away, and this will cause a rental housing shortage which will force rent ups. Then you have a situation where renters can’t get ahead enough to save for a deposit on their first home; affordability suffers again and prices stagnate.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”