Property News - OH Property Group

Residex March Update

Fri, 27 Apr 2012 00:00:00 -1000

Our national housing market is improving (see ‘Monthly Trend – Australia’) however without some form of stimulus we are likely to continue seeing housing values decrease across much of Australia.

Fortunately, it is likely that the stimulus will come in the form of an interest rate cut and I would not be surprised to see the RBA cut rates by 0.5% at its May Board Meeting. In any event, a 0.25% reduction looks all but certain.

There has been comment that the unemployment rate (5.2%) could affect the likelihood of a rate reduction given that it has not been increasing. However, there are some worrying trends in the employment data and I believe the RBA will not be blind to these issues.

What appears to be happening is that the unemployment rate may only be remaining steady as a consequence of people taking up part-time employment and this won’t be delivering quality levels of income. There was an increase of 15,800 people in full-time employment in March and around 28,200 people began part-time employment. In total, the ABS suggests that there are around 626,600 people unemployed. The ‘State Employment’ table presented below points to this issue.

In addition to the inherent weakness in the total full-time numbers, we should also recognise that the figures are developed from a sampling process. What constitutes a person as being unemployed is also important and it should be noted that anyone who has worked as little as a few hours in the last week is considered to be employed.

The remaining indicator, which for our money sealed the fate of the RBA’s rate adjustment, was the CPI rate. In the latest release (24 April, 2012), CPI came in at 0.1% for the March quarter, unchanged from the December 2011 quarter. It rose 1.6% through the year-ending March 2012, compared with a rise of 3.1% to the year-ending December 2011.

Clearly, CPI is now at the lower end of the RBA’s target range and, given its objective of achieving a 2-3%CPI outcome, a rate cut is looking certain.

The pending rate cut begs the question, what will be the impact? I believe most markets across Australia will move into moderate growth over the next three to four months. In saying this however, I do not expect any dramatic upward pressure on housing values once the rate cut takes place. In many capital cities, even with a 0.5% cut in home loan rates (provided the banks pass it on in full), affordability will still be too difficult. Also, there is significant over supply in places like Melbourne and Adelaide, and in cities like Sydney there is a stock shortage which is reducing by the week. An interest rate reduction will improve affordability but the median house for the median income family in Sydney will still be out of reach, requiring about 60% of after tax income to make repayments. Consumers will still find home purchase difficult.

The impact of the continuing difficulties in Europe and the press that the UK has now moved into technical recession again adds to the above disheartening situation and consumer sentiment will be undermined.

Cities that have moved out of the correction phase or are moving to a positive outcome, and where the stock overhang is lower, the position will be better and encouraging. It will be units and the lower cost properties in the house and land market that will benefit most. Construction is slowing, as are approvals, so stock positions will become more difficult and we will see supply issues developing over the next two years.

Looking at the outcomes to 31 March, 2012, it is clear that a number of capital cities have moved beyond the correction phase or are in the process of exiting it. In the table ‘Houses’, we present a summary of Australia’s housing markets for capital city and country areas.

You can see that Brisbane is at last presenting growth for the quarter, due to a significant growth improvement in March alone (1.49%). It is too early to definitely say that the correction phase is over however we can be encouraged that it is from the trend shown in the graph below. Clearly this is a city that will benefit from rate cuts.

The position in Melbourne looks to be improving however I suspect there are more corrections to come, particularly the unit market where there appears to be a significant number of newly constructed properties to be brought to the market over the balance of this year. We are expecting, over the medium term, for Melbourne to be the worst performing capital city in Australia.

In the graph ‘Monthly Trend Houses and Units – Melbourne’ the current position is presented. The trend data for units is significantly better than that of houses and given supply issues, I believe the housing trend is the better indicator of where this market is headed.

Perth is now clearly out of its correction phase as the impact of the resources boom has started to cause housing need imbalances. The graph ‘Monthly Trend Houses and Units – Perth’ presents the current position.

The growth now being exhibited in this market is very respectable and we should expect the rate to slow a little. The growth in weekly rentals of $40 per week in the last quarter is further evidence of a housing stock imbalance.

The table ‘Units’ presents the current position for units across Australia.

It is clear from the tables that housing stock levels in all states are starting to normalise and more markets are achieving a stock balance. Raising dollar weekly rentals support a stock balance situation. The highest increase in weekly rent was in the Perth house market, where prices jumped $40 per week in the last quarter. The highest jump in the unit market was found in Sydney, at $25 per week, where supply has been tight for a number of years.

Our forecast growth outcomes are increasing as our statistical models recognise that the corrections are shallower than what was previously expected. Predictions for Brisbane, Sydney and Perth are now respectable for over the next eight years, having a better than 6% per annum outcome, while Melbourne predictions remain low. The poorest outcome is expected in Adelaide however this city retains a wildcard as its outcome is dependant on the decisions of BHP Billiton with respect to the development of Roxby Downs.

Overall, the position has improved.

Much of the above statistics and data has been extracted from our Residex Reports, which are now available for the March 2012 quarter. For a more in-depth analysis, sales volumes and predictions, please obtain a copy of the state Report to get a better idea and understanding of the suburbs that are likely to offer the best investment opportunities.

As we all move forward, please remember that while the overall position looks better, not all suburbs will perform at the same rate. For example, in the short term, our predicted rates of growth may look overly optimistic. For some suburbs however in the longer term, the rates of growth may be much higher and hence the end result over the total prediction period should be around our predicted outcome.

As we move out of the correction phase, the speed of this change will be helped by rate cuts and the market will offer opportunities and lower levels of downside. The areas that are yet to move into growth in places like Sydney and Brisbane are where the best short term opportunities for capital gains will be found. Perth will also be presenting similar opportunities but the “bargain hunt” will be more difficult.

Notwithstanding all of my commentary, make sure rental returns are front of mind and that property purchases have the location and price to attract tenants in the future, as markets in some cities will become competitive with respect to rental.

DIY website property valuations mostly askew

Fri, 27 Apr 2012 00:00:00 -1000

Buyers and sellers placing belief in free online web valuations when estimating envisaged house price values are more often than not being misdirected – with serious over- and under-estimating being given.

A survey of weekend auction results across Sydney and Melbourne showed value estimates by real estate portal OnTheHouse.com.au were askew 67% of the time.

Of the 80 auction results analysed, 54 valuations were incorrect, with some actual sale prices up to 55% off the pre-auction valuation range given by OnTheHouse.com.au.

Just 26 sales actually fell within the wide valuation band.

Valuations are rated by accuracy as “good”, “moderate” or “rough”. There is a 20% difference between highest and lowest limits of “rough” estimates.

Managing director and chief executive officer of OnTheHouse.com.au Michael Fredericks says the valuations should only be used as a starting point.

“We call it a guesstimate, it’s not a valuation service. It’s designed to be a useful tool to be played with and utilised by members of the public and industry to try and get a better informed view on property prices and values. But it is a work in progress,” he told Property Observer.

“What we seek to do is to provide some transparency to the public around real estate prices and values where it’s a largely uninformed audience, unlike other industries like equities.”

The valuation tab on the website encourages users to “use onthehouse's Property Profile Reports to determine the property value for an individual property, or properties in a particular suburb”.

However the fine print underneath reads: “Displayed guesstimates, agent opinions and user-generated guesstimates are not a valuation of a property”.

According to Google Ad Planner, the website is the sixth most visited Australian property portal for unique users. In March figures showed more than 1 million unique visits to the site, a 850% jump between February 2011 and February 2012.

Free property valuations is one of the main services offered by the ASX-listed company, in an increasingly competitive industry offering real estate data to property consumers.

The founder of property commentary website propertyportalwatch.com, Simon Baker, looked up his house on the website and was shocked to find it 55% undervalued based on his estimates.

“Either I have massively overpaid for the property and the bank has no idea, or the onthehouse.com.au database is not as accurate as it could be when it comes to my property,” Baker writes.

“If you are going to build a business around property valuations, much as Zillow and Zoopla has done, you have to get it right. Not 100% right, but at least in the right ballpark. You only have one chance to impress a user, and if the information provided is questionable, the chances of them returning are low.

“If you say you have property valuations – make sure they are accurate (or as accurate as possible).”

Fredericks concedes that tool isn’t perfect, but he says it provides a starting point for people to start their valuations.

“It’s a broad challenging task, which is a process that can’t be achieved overnight,” Frederick says.

“It’s a tool using available information to be used by members of the public and property professionals to empower them and provide informed views around values.

“The appropriate behaviour for a buyer looking to form a view on what they should pay for a house is go and talk to real estate professionals.”

“The key point to understand here is, particularly in the Australian market, there are holes in the market. There isn’t sufficient aggregated market data to expect accurate estimates across the whole market.”

In Sydney a survey of 44 auction results shows just 14 sat between the valuations given, while 19 sold for more than the highest valuation and 11 sold for less than the lowest valuation.

The most over-valued Sydney property was 5 Dwyer Avenue in Blakehurst, which sold for $700,000. It was valued between $964,400 and $1,228,400. This is a difference of $264,400 from the lower valuation, or 27% below the sold price. The difference from the higher estimate is 43%.

The most under-valued Sydney property was 44 Womerah Avenue in Darlinghurst, which sold for $1.7 million. It was valued between $1.15 million and $1.22 million. This is a difference of $480,000 from the upper valuation, or 39% higher. The sold price is 42% higher than the lower valuation.

Agent Chris Chung who sold the house says people need to use other sources.

“Buyers need to look at what else has sold in the area and take other things account. But everyone has their own opinion of what a house is worth.”

In Melbourne a survey of 36 auction results showed 12 sat in the valuation range, 12 sold for more than the highest valuation and 12 sold for less than the lowest valuation.

The most under-valued Melbourne property was 26 Grace Street in Malvern, which sold for $1,815,000. It was valued between $1,040,200 and $1,172,200, which is $642,800 or 55% more than the highest valuation. It is 62% higher than the lower end of the valuation range.

The most over-valued Melbourne property was 39 Reed Street in Albert Park, which sold for $940,000. It had been valued between $1,127,400 and $1,197,400, a difference of $187,400 or 17% from the lower valuation.

OnTheHouse Ltd was listed on the Australian stock exchange in June last year, consolidating the onthehouse.com.au website and software companies PortPlus and Console. After the listing the company purchased a 50% stake in data company Residex.

According to a June 2011 RBS Morgans report available on the website, the site’s “core expertise is the collation, cleansing and linking of data from multiple sources to provide customers with a reliable, convenient and freely accessible means of obtaining extensive property and valuation information”.

“In our view, OTH’s competitive advantage is derived from the size, depth, scope, accuracy and timeliness of its database, which is offered free to consumers.”

Fredericks says the next stage for the website is to encourage more user interaction in the valuation process.

“The next phase is far more engaged tools where property owners and agents can interact and submit content and improve and enhance the guesstimate tool.”

“We’re building windows underneath for owners, estate agents and valuers to provide content from their own view.

“And in the future releases we’re putting education requirements into it with some more explanation around what the product is and how it’s generated.”

Units the way to go for city buyers looking for property under $300,000: Cameron Kusher

Thu, 26 Apr 2012 00:00:00 -1000

Across all capital cities, the greatest proportion of suburbs have a median house price of between $300,000 and $500,000, while less than 9% of suburbs have a median house price over $1 million.

This analysis looks at median unit prices across those capital city suburbs that have recorded at least 10 unit sales over the 2011 calendar year.

Across the combined capital cities, 18.1% of the suburbs have a median unit price below $300,000. The majority of capital city suburbs have a median unit price between $300,000 and $500,000 with almost 60% of all suburbs sitting within this range.

In comparison to the detached housing market, there are many more options for the price-sensitive purchaser within the unit market. Although there are more options across the combined capital cities, there are no suburbs in Darwin with a median unit price below $300,000 and only around 1% of suburbs in Canberra have a median unit price below $300,000. Across every other capital city at least 10% of suburbs have a median unit price below $300,000.

The more affordable price points and ability to own closer to the city centre is a large reason why we believe that demand for inner-city apartment living is increasing.

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Within a 10-kilometre radius of each city centre the opportunities to purchase units below $500,000 are much more abundant than they are to purchase detached houses. Across all cities, 69% of suburbs within 10 kilometres of the city centre have a median unit price below $500,000 and each individual city has at least 20% of suburbs with a median price below $500,000.

Looking at median unit prices below $700,000, 94.6% of all suburbs are priced below $700,000 and across each capital more than 80% of suburb median unit prices fall below this level.

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Across those suburbs located between 10 kilometres and 20 kilometres from the city centre, suburbs with median prices between $300,000 and $500,000 are most abundant, accounting for 64.9% of all of these suburbs. When you look at all suburbs with a median unit price below $500,000 it equates to 78.3% of all suburbs within 10 kilometres and 20 kilometres of each capital city. Across each individual capital city, the proportion of suburbs priced below $500,000 in this area varies from 66.1% of suburbs in Sydney and Melbourne to all of the suburbs in Brisbane, Adelaide, Hobart and Darwin.

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At a distance of more than 20 kilometres from the city centre and less than 30 kilometres from the capital city centre, 88.4% of suburbs have a median unit price below $500,000: Across each individual capital city, the vast majority of suburbs have a median unit price which sits within this range.

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Once you move further than 30 kilometres away from the city centre virtually all suburbs have a median unit price below $500,000. Not only is this a reflection of the fact that the pricing differential between units and houses narrows as you move further away from the city centre but also that the supply of units typically decreases.
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With housing demand strongest within inner city areas and the cost of purchasing developable land restrictive, ongoing densification makes sense.

The benefits of a greater volume of units are clear; you only have to look at the fact that in Sydney 20.5% of suburbs within 10 kilometres of the CBD have a median unit price below $500,000, compared with zero suburbs within the same boundary having a median house price below $500,000.

Units afford residents the ability to live in more desirable areas of the city than they would otherwise be able to if they had to buy a detached house. A good example of this is in Sydney; the median house price over the 12 months to December 2011 was $555,000 compared with $455,000 for units. Based on suburb median prices you could purchase a house in Riverwood (16 kilometres from the city), or you could buy a unit in Chippendale less than three kilometres from the city centre for $100,000 less at these median prices.

Given the strong demand to live close to the city centre, lack of appropriate infrastructure within the outer suburbs of most capital cities, the restrictive pricing for detached houses in inner-city suburbs and limited supply, we anticipate that densification of the inner city will (and should) continue.

Gen Y first-home buyers pessimistic about house prices but eager to get into the market: QBE LMI survey

Thu, 19 Apr 2012 00:00:00 -1000

Generation Y are savvy and sceptical and make up nearly half of the nation’s first-home buyers, according to QBE Insurance’s mortgage report.

The LMI Barometer found that 45% of the first-home buyers it surveyed are under 30 years old, and many borrow money family to help them onto the property ladder. In fact, 20% of this group lives at home while saving, which is up from 18% last year.

While dedicated saving is how 91% of first-time buyers gather their deposits, one in 10 confess to raising money through loans from parents. Indeed, 20% of this group has a guarantor for their loan – usually their parents.

The LMI Barometer found that 41% of first-home buyers have a household income of between $100,000 and $200,000. As a sector, they are also motivated to lenders with low deposit requirements.

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“The average deposit for first home buyer respondents is $60,821, which takes 4.7 years to save and is well below the overall average deposit of $101,767,” the study found.

They are also more pessimistic than other groups, and 83% consider property to be overvalued, which includes 50% who think prices are ‘significantly overvalued’.

But the cynicism does not dampen enthusiasm to spend, with 44% of this group aiming to have bought a property in 12 months. On average Gen Y first-home buyers will borrow $372,259. On their way to that purchase, they do better research and rely on external advice more than other market segments surveyed.

More than half of the first-time buyers’ respondents believe that property prices will be stable or higher in 2012, which is down from the 73% who believed the same in 2011.

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“First-home buyers have a fairly bullish outlook on property over the medium term, with 52% agreeing property prices will increase strongly over the next three years. This is ahead of the national average of 42%,” the report says.

Possibly due to fears about rising property prices, 39% of this group thinks it is more important to enter the market now rather than save for a bigger deposit.

House prices tipped to stabilise as property industry confidence improves: ANZ

Thu, 19 Apr 2012 00:00:00 -1000

Confidence in the property industry is increasing while house prices are likely to stabilise, according to a report published today by ANZ.

The Property Council of Australia-ANZ Property Industry Confidence Survey revealed a more optimistic property industry outlook with confidence increasing by six points in the June quarter to 113 compared to 107 in the March quarter.

The 2,300 professionals polled from the property and construction sector tipped house prices to stabilise and their own forward work schedules to lift.

The index shows improved confidence underpinned by an improved outlook for the economy and construction activity and more optimistic expectations for commercial property capital growth and house prices.

House price expectations in the June quarter indicate the property industry see prices levelling out, with 73% of all respondents expecting house prices to increase or remain unchanged in the next year.

With existing underlying housing market pressures, expectations of further rate cuts and a stabilising economic outlook, house price expectations are improving.

On balance, the property industry expects prices to be largely unchanged in the next year.

The majority of respondents to the survey in all states and territories, except Tasmania, expect house prices to be the same or higher in the next year.

Despite a soft labour market and non-residential building approvals running below long-run average levels, the outlook for commercial building activity looks positive.

Almost 60% of those surveyed expected forward work schedules to increase in the coming year.

The most positive forward work expectations were reported by the NT where 83% expect forward work programs to increase, followed by Western Australia, Queensland and New South Wales.

Tasmania reported the weakest forward work expectations, with only 38% of respondents expecting work to increase in the coming year.

Despite weak employment growth through 2011 and job shedding in manufacturing, finance and retail industries, the property industry reported a positive outlook for staffing levels in the year ahead.

Property industry staffing levels are expected to increase across all states and territories, except Tasmania.

ANZ chief economist, Warren Hogan, says the main message from the index was that confidence in the industry is getting better particularly in the outlook for activity and also concerns around house prices.

“The other message is consistent with what is happening in the broader economy with quite a bit of regional diversity with the mining states really going from strength to strength, while a couple of the states are lagging, like Tasmania and Victoria,” says Hogan.

Hogan says while Australia’s mining and engineering-construction sectors boom, retail spending, non-mining related manufacturing, public services and tourism will remain under pressure.

“Hopefully it means the housing market continues to strengthen, particularly from an activity point of view as there has been a concern about a shortage of housing in the country,” says Hogan

The property market seems to be in a recovery after some softness last year.”

“Overall the industry is more confident as acute concerns over global economic conditions ease,” said Property Council chief executive, Peter Verwer.

“Respondents are feeling less buffeted than in previous quarters, where the storm in commodity prices, global economic insecurity and domestic political uncertainty contributed to negative sentiment.”

Stamp duty ‘lay-by’ scheme could help first-time buyers get into the market

Wed, 18 Apr 2012 00:00:00 -1000

The Real Estate Institute of NSW has proposed several options to the state government in order to encourage first-home buyers into the market. One such scheme would allow first time buyers to pay off their stamp duty over a three-year period, making it less costly for them at the time of purchase, if adopted.

Since the laps of the stamp-duty waver for first-home buyers at the end of last year, many would-be first timers have been stalled in order to save up to meet their stamp duty obligation, resulting in a drop in first home buyer activity since.

Marketing consultant Michael Willcocks, 28, who missed out on the stamp duty relief late last year could envision getting into a property much sooner, should a stamp-duty ‘lay-by’ scheme be put in place.

“It would cut out several months of saving up the stamp duty and get me into a property sooner,” he says.

With housing affordability a pressing issue for first-time buyers, such a scheme would reduce the initial cost of getting into a property by spreading this out over 36 months. The adoption of a stamp-duty ‘lay-by’ scheme would surely encourage more first-time buyers to get into the market.

Currently, there is only the original $7,000 federally-supplied first-home owners’ grant on offer, which applies only to pre-existing properties and therefore does not push for the construction of new dwellings.

We already have a housing shortage in Australia, which is expected to fall short by over 150,000 dwellings by the year 2020, going by figures released by the Housing Industry Association last year.

Setting out schemes that drive construction of new homes and encourages new buyers into the market would benefit both the construction and real estate industry.

Other schemes presented to the state government by the REINSW look at concessions for buyers over 65 in an aim to make it easier for them to down-size their homes.

Introducing new legislation that works toward the reduction of our housing shortage, increases affordability and hence home ownership, combined with further interest rate cuts would create an up-swing that would strengthen the property market and our economy.

Harry Triguboff’s six steps to apartment affordability – starting with more high rise

Wed, 18 Apr 2012 00:00:00 -1000

There are some very simple steps which could reduce the cost of Sydney apartments by about $60,000 – from, say, $550,000 to $490,000. Many of the steps also apply to Melbourne.

If the steps were taken it would also provide a fantastic boost to the Sydney construction industry, which is now struggling. If we do not take these steps then Chinese buyers will purchase the vast bulk of inner-Sydney apartments.

Here are my six steps:

1) In inner-city areas we need to recognise that five-to six-storey apartments are uneconomical. We must change the culture and build apartment blocks with 12 storeys or more. These large apartment blocks are the only solution to the dwelling shortage because outer suburban cottages require too much land and too much infrastructure. Worse still, the home buyers are forced to spend too much money on transport and too much effort is required to go to work and come home.

2) We need to streamline the approval process, which currently can take can take two to three years even when an application complies with all the controls.

3) The state government advisory document called SEPP 65 stipulates strict requirements for the number of units requiring light into the living rooms, which leads to the incorporation of far too many two-storey crossover units. These are not favoured by the market and add enormous cost to a development.

4) The New South Wales Land & Environment Court takes far too long to hear cases and then far too long to hand down decisions. In any event, the majority of decisions seem to be in favour of councils and against developers. It’s a huge burden on the cost to the buyer.

5) Section 94 contributions, which are charged by individual councils, must be fixed at a maximum of $20,000 per apartment and should include all works required by councils and other authorities to the roads and utilities surrounding a development site. These should be payable at occupation of development.

6) Affordable housing levies, where they exist, should be abolished as this is purely a tax on development and the provision of affordable housing is a burden which should be shared by the entire community, not just the development industry.

Australian buyers are back in the market but they are being forced to pay unnecessary costs. Lower interest rates will increase Australian buyers but supply is artificially being held back and the costs boosted by state and local governments.

House Price Bust: Why Talk of a Bubble Won't Wash

Tue, 17 Apr 2012 00:00:00 -1000

Australia's residential property market defied global trends by avoiding the collapses suffered by other countries during the global downturn. Insulated by a strong local economy, low unemployment, a growing population and government schemes that propped up the first homebuyers' market, Australian house prices slipped only 3% in 2008 as the US and UK recorded double-digit slumps.

However, when it comes to looking at where Australian property prices are headed, opinion is diverse, ranging from gloomy pessimism to almost insane optimism. Meanwhile, Australian house prices have been steadily falling.

According to property information firm RP Data-Rismark, seasonally adjusted home prices dropped 4% in 2011 and are forecast to slide further despite two interest rate cuts late last year. Overall, distressed real estate listings for the country rose 30% in 2011.

Since the beginning of this year, auction clearance rates in Sydney have averaged about 55% – notably higher than the rates recorded at the end of 2011, when agents struggled to sell 50% of the properties being put to auction under the hammer – but nowhere near the high 60s and low 70s that were achieved in Sydney during times of past house price growth.

Will this recent downturn in the housing market continue? Or, is Australia effectively in the grip of a housing bubble that may burst at any moment? Bearish property analysts swear house prices need to drop 40% to return to their long-term levels and those of comparable countries. They suggest the property market would have collapsed in 2008 if it were not for first-time buyers being enticed to dive into the market by inflated government grants.

Yet, others dismiss the idea of a bubble as nonsense, claiming prices are more likely to flatline than crash. They see any major slump as unlikely given the strong economy and Australia's "chronic" housing shortage. According to the National Housing Supply Council (NHSC), the estimated dwelling gap for June 2009 was 178,400 and was expected to increase by 72.6% to 308,000 by 2014.

Anti-bubble believers view softer house prices as an indication that people have simply quit speculating and are becoming more debt-averse.

Philip Soos, a researcher at Deakin University, is in the pro-crash camp. He notes that eight of the nine substantial property price increases over the last 131 years have resulted in a decline. That being the case, he can't see why the largest increase on record would not precede another drop now. Soos does not buy the argument that Australia is suffering from a "chronic housing shortage", saying property prices have continually experienced boom-bust cycles regardless of population growth levels. "Housing prices started to rise in 1996 and skyrocketed from 2001 onwards. Yet, 2007 was the first time since 1951 when population growth exceeded dwelling growth, so housing prices should have started to rise from 2007 onwards, not 1996," Soos points out. Once a bubble bursts, he notes, a huge oversupply of housing is likely to emerge.

Soos argues the rapid rise in residential property prices cannot be explained by economic fundamentals, including the downturn in inflation and interest rates, which began in the late 1990s. "If lower inflation and interest rates were enough to cause a run-up in prices, the 1960s should have prompted an even greater level of household debt. Yet housing prices and rates were the lowest on record. Currently, while nominal rates have fallen by half, the amount of mortgage debt has more than quadrupled, indicating an excessive amount of debt."

Lax lending standards and the fact that land is relatively untaxed have fuelled the run-up in prices, says Soos. "The obvious indicator of a bubble driven by speculation is a large gap between rent and home sales prices – which is the case almost everywhere in the West where property overvaluation has occurred, including Australia."

Measure for Measure

Nigel Stapledon, an economist at the Australian School of Business, agrees with Soos on the overuse of the population growth argument, but he does not believe house prices have somehow disentangled from the fundamentals. He has another explanation for why there is such dissent over property.

Since the early 2000s, many economists have been using house price-to-rent ratios to gauge whether or not home prices are inflated or undervalued. The ratio compares house prices with rental indices. For the ratio to work, these indices should capture identical data. But they don't.

Many house price indices use raw price data whereas the Australian Bureau of Statistics rental index adjusts for quality improvements made over time to a property. A house sales series with no adjustments for alterations and additions, which have boosted the size of dwellings over time, will tend to rise faster than a rent series.

The two indices are measured very differently resulting in a biased measure, says Stapledon. "If you don't allow for the measurement issue, you get a dramatic upward trajectory in the price-to-rent ratio and people see a bubble," he says, "Standardise the indices and that upward slope changes dramatically from an upward trend to a flatter trend, in Australia's case."

Stapledon has attempted to fix this "apples and oranges" problem by creating an index that uses a rental income series to match the house price series. Both series incorporate quality changes such as additions and alterations, thus removing the bias. While there's a divergence between rents and prices, Stapledon reports the scenario is not as scary in 2012 as it appeared in 2003 when soaring prices had pushed the price-to-rent ratio into bubble territory and the market was vulnerable to a sharp correction.

A bubble implies prices are out of line with fundamentals. In Stapledon's view, that initial rise in the price-to-rent ratio from 1996 was a lagged response to the earlier decline in interest rates. Stapledon's analysis differs from Soos'. Stapledon thinks that after the pain of high interest rates in the 1980s, which soared to more than 17%, it took some time for borrowers to believe that rates would stay down. That's why there was a reluctance to take on debt

Economists have never been very precise at predicting the timing and magnitude of corrections, notes Stapledon. Through the late 1990s, economists talked about a housing bubble – yet the market rose by 50%. Outstandingly, most US economists did not see their enormous housing bubble until it burst in front of them. But Stapledon insists many analysts in the "bubble" camp have not looked closely enough at the Australian situation. "The reasoning is if the US has a housing bust; then so too should Australia," he says. "This reasoning fails to appreciate the very powerful influence of the resources boom. Australia is not alone in this. There has been no bust in Canada, which has also experienced a resources boom."

Not Enough Information?

Soos is concerned there is too little data in the public domain, a view shared by Michael Sherris, a professor of Actuarial Studies at the Australian School of Business and chief investigator in the ARC Centre of Excellence in Population Ageing Research (CEPAR). Furthermore, the publicly available data can be hard to follow."It is very important that we have better data and that indexes are reliable," says Sherris.

One problem is that indices for the broader market do not provide information for an individual house relative to others, leaving homeowners without insights on the market value of one of their biggest assets. For example, the sale price of a two-bedroom house with a garage in one area cannot be extrapolated to another house in a different area in a consistent and reliable manner based only on market indices.

"We need better more refined publicly available indices to understand what's going on in the residential property market allowing for how house prices vary according to their characteristics," says Sherris.

While privately collected and analysed data might eventually be dispersed to private customers such as banks, the public remains largely unable to access the analytics around individual house price characteristics and risks, which means the available data – regardless of how well it is analysed – is less than helpful.

RP Data-Rismark's Ben Skilbeck says his firm overcomes the problem by using 'hedonic' methodology, which takes into account the characteristics of homes bought and sold. Typically, this includes the number and size of rooms, the number of bathrooms and how far the residence is from a major road and schools, along with special features such as swimming pools and tennis courts.The hedonic model uses such variables to understand their relative value contribution to a property. Once this is understood, changes in the composition of houses selling in one period relative to another are controlled, enabling the underlying market movement to be determined.

The firm tracks the rental market in a similar way. This eliminates the "apples and oranges" problem that exists for many reported rental yield numbers, claims Skilbeck. Median advertised rents are commonly divided by the median house sale prices to quote rental yields, he says, which leads to inappropriate conclusions because the rental houses are often very different to the properties sold.

Spot the Difference

The problem with using a median price to calculate a housing price index is that the composition of houses sold in one quarter may differ to those sold in another, indicates Skilbeck. "Suppose that over a particular period, there were more sales of larger houses in more affluent suburbs. Simply looking at the sale prices would give an inflated view of market movements. Conversely, if in the next period there were more sales of smaller houses in less affluent suburbs, looking at only the sale prices would lead us to believe market returns were lower than reality."

Skilbeck points to the increased activity in the property market in early 2009 when the federal government doubled the first homeowners' grant and state governments provided various first home buyers with stamp duty concessions and grants. At the same time, the central bank, the Reserve Bank of Australia, slashed official interest rates by nearly 4% between September 2008 and April 2009 from 7% to 3.75%. The disproportionate number of lower-end properties selling during that period artificially dragged the median house price downwards when in reality the market was responding strongly to the economic stimulus. When the grants were phased out and first homeowner activity decreased dramatically, the median indices showed the market was rising because fewer lower-end first homeowner properties and more higher-end properties were transacting, but the market was actually pulling back. "Our indices showed the true state of the market, whereas the figures from the Australian Bureau of Statistics simply showed a change in the composition of the type of houses being bought and sold," says Skilbeck.

Trying to gauge the sales price of houses based on bedrooms, swimming pools, views and other commonly valued characteristics is not easy.

Louis Christopher, head of Sydney-based property research and advisory company, SQM Research, warns of inherent weaknesses in a model that tries to measure house price movements by taking into account quality differentials between various homes. "Overall, it is a good theory, but in practice it still has its flaws," he says. For a hedonic index to work, it needs a vast amount of data on individual properties." The index does not look at all housing features such as the slope or the shape of the land, renovations or improvements, which are major contributors to value, as Stapledon's research shows.

Valuing a portfolio of assets, which are all different and most of which do not trade in any period, is a complex problem. "No method can exactly estimate the true value of every property. Even professional valuers can't do it," concludes Skilbeck.

‘Pay as you go’ stamp duty scheme needed for first-home buyers: REINSW

Mon, 16 Apr 2012 00:00:00 -1000

The Real Estate Institute of NSW (REINSW) is urging the state government to allow first-home buyers to pay off their stamp duty over three years rather than in one upfront lump sum.

The REINSW says its staged payment plan would reduce the burden of upfront stamp duty on top of the required house deposit for first-home buyers.

Under the proposal, government revenues would be protected with the stamp duty obligation guaranteed against the property in exactly the same way as unpaid land tax and council rates.

The proposal is one of three initiatives the institute is proposing to the O’Farrell government two months ahead of the next state budget on June 12 aimed at stimulating the property sector.

The other two proposals are for the overall rate of stamp duty to be cut and that urgent reform of planning controls should be undertaken to reduce the cost and red tape of new residential development to help alleviate the current undersupply of housing.

“Housing supply and affordability are the key issues facing NSW and which need to be tackled head on in the upcoming state budget”, says REINSW president Christian Payne.

“Convoluted planning controls are delaying the delivery of new housing stock, which is urgently needed to meet the growing demand of thousands of people flocking to live in Sydney.

“As a result, housing affordability is being squeezed with many are simply unable to afford their own home.

“Add to the already high price of real estate in Sydney the significant additional burden of stamp duty and you have a market which is pushing the Australian dream beyond the reach of many.

‘It is only through innovation that we are going to make inroads into these problems," he says.

“To that end, the REINSW stands ready to assist the NSW Government in developing further a range of initiatives which we believe could make a real difference to housing supply and affordability without threatening government revenues from taxation,” says Payne.

The stamp duty proposals follows the NSW government ended its first home plus scheme on December 31, which provided exemptions or concessions on transfer duty for people buying their first home in NSW.

It has been replaced by the first home — new home scheme, which limits the exemptions and concession to new homes or vacant land only.

Research carried out by the REINSW shows that when property transfers taxes (stamp duty) were cut in Western Australia and the Northern Territory, government revenues actually increased.

“Between 2003 and 2006, Western Australian cut property transfer duties by 0.9% yet related revenues rose by $706 million.

“Similarly in the Northern Territory property transfer rates were cut by 0.45% that resulted in an increase of $20 million in related revenue, a rise of 20%,” says the REINSW.

Chinese buying hits unprecedented levels in Sydney, Melbourne and Brisbane, providing an iron hand under housing: Robert Gottliebsen

Mon, 16 Apr 2012 00:00:00 -1000

In the last three weeks a dramatic event has taken place in the Australian residential apartment market – the mainland Chinese have suddenly increased their “off the plan” buying of inner Sydney, Melbourne and even Brisbane apartments.

The Chinese have been the main buyers of Sydney and Melbourne inner-city apartments for some time (they were not normally Brisbane buyers) but, according to Australia’s largest apartment developer, Harry Triguboff, the level of buying over the last three weeks is without precedent.

It underlines the fact that substantial parts of the Australian residential market are dependent on what happens in China. Some of this avalanche of Chinese apartment buying will spill over to wider residential markets, although, because so much of it is off the plan, it effects construction activity rather than the pre-owned residential market. There are a substantial number projects in the pipelines, so this buying will avoid what was potentially a glut in all three cities.

It seems that Chinese apartment investors have been quietly told that the Chinese government wants a subdued Chinese apartment market and that they would much prefer the investors to buy offshore (which also helps keep the Chinese currency down).

In recent months there have been substantial swings in Chinese demand for Australian apartments.

Last November, Chinese purchases of inner-Sydney and Melbourne apartments off the plan suddenly halved (The sting in a China property tale) – a move which, if it had continued, would have had a major effect on apartment prices. At that time, the severity of the funding squeeze in China greatly increased the risk of Australian purchases by mainland Chinese because their investments in China could be jeopardised.

Over the Christmas break the China credit squeeze eased and in January the Chinese returned to inner-city apartment buying (Will China trigger a property revival?).

Although the Chinese have been the main buyers of inner-city Sydney and Melbourne apartments in the past the buying was spasmodic. Most of the buyers were those educated in Australia.

The latest buying is much more concentrated. Given that the Chinese are buying the apartments off the plan, it means that apartment building is going to be strong well into the future irrespective of the level of Australian interest rates. Nevertheless, the recent lower Australian rates and the expectation of further falls has kindled interest by Australian buyers.

So the market has become much stronger.

In the past the Chinese concentrated their purchases in Sydney and Melbourne, but this time the force of the buying is so much stronger that it has spilled over to Brisbane, where the prices are cheaper. It has not extended to the Gold Coast.

The Chinese find that Australian yields from apartment rents are much higher than those in China.