Capital cities back on track

PORTFOLIO POINT: Capital city property markets are stirring across Australia, and the likelihood is we’re at the bottom of the price cycle, if not on the way up.

There’s a fair degree of scepticism or disbelief around the proposition that the property market will improve this year. I suppose this doubt is reasonable in the face of 18 months of softer prices and over-blown media rhetoric that a crash is upon us.

But after taking soundings from Perth, Brisbane and Sydney – and layering in my own experience in Melbourne – I’m confident that slowly, tentatively, capital city property markets across Australia are stirring.

Perth is a good example of how the national climate has changed since late 2011 and early 2012. Back at the start of the year, Gavin Hegney, executive chairman of Hegney Property Group, had lamented that depressed sentiment was trumping Perth property fundamentals, such as a low vacancy rate and steep rent rises, leading to a lacklustre market. Today, he says a corner has been turned: “All the major property price indices have shown that the Perth property market grew in the first quarter of 2012. People are seeing that and believing that the market is in recovery.”

Despite the improved confidence being based on a modest foundation – prices only rose by about 1.5% in Perth in the first quarter – Hegney detects a momentum building.
“The recovery is underway. This isn’t a false start. Its source was the interest [rate] cuts of late 2011, which was a clear signal to buyers to re-enter the market. Although the independent hiking of interest rates earlier this year by the retail banks did confuse people and dampen enthusiasm, the May cut should help further.”

Hegney’s view seems to echo consistently in other, larger capital city markets. Meighan Hetherington, director at Property Pursuit, says activity is up in Brisbane and demand is strong. “In the last three weeks, seven out of nine properties we’ve been interested in have had multiple prospective buyers. One property in Stafford Heights saw eight offers.”
Hetherington has noticed a mood change in Brisbane. “The opinion that we’re in a buyer’s market is no longer true – the market is now fairly balanced. People who are active in the market have come to realise that you can’t just grab a bargain anymore.”

Back in Perth, first home-buyer demand appears to be the most dominant driver of the pick-up, according to Hegney. “First home buyers in the market now represent over 20% of buyers, which is a plus for the market. Interest from first home buyers has been driven by strong rental rises and falling vacancy rates.”

Hegney anticipates that the scent of capital growth will see the return of investors to the Perth market. “Investors are already starting to come out of the woodwork. Whilst they are undoubtedly attracted by the strong rental yields and low vacancy rate, their prime driver is capital growth. Many need to see evidence of this before they act, and this is what is happening now.”

With investors and first home buyers often competing for the same stock, Hegney sees the sub-$600,000 property market as the most promising in coming months – which, incidentally, mirrors my view of the Melbourne market.

Similarly, Hetherington sees much of the activity in Brisbane occurring in the range up to $550,000. “This is where the investors are. In contrast, the $650,000 to $750,000 market for houses within 6 kilometres of the CBD is still relatively quiet. But I think that is a temporary affair, but it represents good buying while it lasts.”

All things considered, Sydney has weathered the last 12 months quite well, according to Rich Harvey, CEO of Propertybuyer.com.au, despite a year-on-year decline of 1% up to March, and he sees a good first quarter, allied with long-term fundamentals, as a base for more growth in 2012. “Sydney is extremely well placed: pushing demand higher is a vacancy rate at a low 1.4%, rising rents and consistent population growth. On the supply side, difficult planning laws and limited land in Sydney, along with protracted council requirements and high infrastructure costs, mean the supply is severely constrained.”

Rich sees good buying opportunities in a broad range of locations in Sydney: “It’s all about doing copious amounts of research to uncover the hidden gems. My tips include the inner west, the northern beaches, the eastern suburbs and the north shore.”
Rich suspects there is a good window for buyers in coming months in Sydney: “Declining interest rates will take several months to exert their full effect. This lag provides an opportunity for savvy buyers to take advantage of cooler market conditions and secure the right property.”

Melbourne is showing some of the market attributes of recovering Perth, Brisbane and Sydney, such as greater activity from first home buyers and nascent interest from investors. However, the pace of improvement is perhaps more patchy, especially in fringe suburbs where stock levels are very high.

The clearest sign of recovery in Melbourne has been the 5%-plus improvement in the auction clearance rate, compared to late 2011. If the clearance rate starts to creep up from the current low-60s to the mid-60s over the coming weeks in response to lower interest rates, this will signal a marked shift in the balance of power from buyers to vendors – and capital growth will then be inevitable.

For many prospective property investors trying to read the direction of the market, these signs of recovery appear frustratingly weak and intermittent and this may discourage action until the picture becomes much clearer. Should investors hold off for now?

I would counsel investors who are buying for the long term – as they must with property – that now is probably as good a time as ever to buy, given that we are either close to the bottom of the market or even already on the way up. But the more compelling reason to go early is choice – you’re far better to pick up a high-quality asset now when demand is relatively low, than when the market takes off. And ultimately, asset selection is the number one determinant of investment success.

Property Q&A

This week:

• Should I fire my property manager?
• Buying in Brisbane.
• Rate cut optimism.
• Will removing the FHOB impact the Melbourne market?

Property managers

I’m thinking of sacking my property management company and managing my property myself. I only have one investment property and I’m working part-time, so it shouldn’t be too onerous and it will save me money. It’s not that I’m unhappy with the manager, but they don’t do very much for the 8% commission they take. A good idea?

No, I doubt it will be a good idea! It is really important to have an arm’s length relationship with your tenants. Too often tenants manipulate self-managing landlords – for example, by asking for unnecessary capital works or being slow to pay the rent – which sullies a beneficial situation. Further, are you across tenancy legislation? Are you a handyman or do you have good contacts here? What happens if the tenant calls you at 7pm on a Sunday with a broken hot water service – an essential and emergency repair? Or if the tenant gives you notice to vacate and wants to leave next week in breach of residential tenancy laws?

If you’re not happy with the current managers or the experience is not first-rate, change them. And remember, their fees are tax-deductible, so the savings associated with DIY management aren’t that great. With the right manager, the fees are a small amount to pay given the value of the asset and the objective of maintaining a rental income stream in a consistent manner.

Brisbane

Is it time to look at the Brisbane market again? They have a new state government, they’re recovering from the floods and perhaps falling interest rates will lead to a lower Australian dollar and help tourism in Queensland?

I agree that the Brisbane property market has merits, but not necessarily for the reasons you propose. While all the factors you mention may help economic conditions and, in turn, the property market, it requires serious crystal-ball gazing to be sure. In reality, who knows what outcome the myriad of political, environmental and economic factors will combine to produce? Indeed, the Australian dollar may stay stubbornly high, even in the face of interest rate cuts, given they will remain high compared to that of other currencies. So the relief Queensland tourism seeks may be further off than we hope.

The reasons to invest should always focus on the long-term fundamentals, rather than short-term trends. In this respect, there are established pockets of inner suburban Brisbane that – for the right property – always work.

Rate cuts

Are you being too optimistic about the positive impact of the 50-basis-point cut on the property market? First, the banks are only passing on two-thirds of it. Second, I think people no longer want to take on debt like they did before the GFC. I think people will pay down debt rather than up-scale.

There are undoubtedly property owners out there who will focus on debt reduction, and that’s a good thing! We should all have their mindset. But acquisition and paying down debt aren’t mutually exclusive – you can do both. The acquisition of quality property in conjunction with aggressive debt repayment builds equity quickly through combined capital growth and falling liabilities.

More broadly, 70% of property transactions in the marketplace are undertaken for lifestyle reasons. Circumstances change and people need a bigger or a smaller home, or they need to move suburbs for work or schooling needs. Many of these decisions are put off when market sentiment is poor, which leads to pent-up demand. A drop in interest rates is likely to see much of this latent demand become tangible.

Melbourne FHOB

How do you see the ending in July of the Victorian state government first home owners’ bonus for new home buyers affecting the Melbourne property market? Is it bad news all around or are there investment opportunities?

The Victorian treasurer has decided not to continue with the home-building bonus for first home buyers. From July 1, regional first home buyer builders will no longer receive a $19,500 grant. Their metropolitan counterparts will miss out on a $13,000 grant. Note that the 20% reduction in stamp duty for first home buyers buying properties of a value up to $600,000 remains, and also that the federal government $7,000 first-time buyers grant is not affected.

The likely outcomes of these measures are a small jump in relevant transactions before July 1 and a drop back in demand for new properties. The biggest losers will be property developers and builders, especially in the fringe suburbs where most of these developments occur. The beneficiaries will be taxpayers and the established property market in the areas close to new estates. However, I see little impact for investors, who shouldn’t be looking to buy properties so far out in the first place.

Personally, I’m pleased that the state boost to the federal grant has been axed. These measures artificially distort the market and, most importantly, do not deliver the intended outcome. Rather than making property more affordable for first-time buyers, the additional purchasing power the grant provides is usually translated into higher prices. And it encourages the over-supply of properties in the wrong places, where there isn’t the infrastructure or amenities to meet the needs of new residents.

Monique Sasson Wakelin is a director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au