Fending off a housing glut

An oversupply of housing is likely to keep residential property prices flat in the near future, but solid fundamentals will maintain a floor under the market.

Property Observer

Currently, the Australian housing market is experiencing subdued demand and an oversupply of properties. This means that our property markets are likely to remain flat for much of 2012.

Recently, RP Data reported that based on the current rate of sales and total number of homes being advertised for sale, the Australian residential market has 7.4 months of effective housing supply overhanging it.

I know some commentators are suggesting we have a shortage of properties, but I don’t necessarily agree.

You see, there are two ways to measure supply in the residential marketplace: 'core supply' and 'effective supply'.

RP Data explains that core supply is the difference between base level demand (i.e. population growth) and base level supply (i.e. new dwelling construction). And this is what many commentators are measuring.

Effective supply, which measures the number of months it would take to sell all the properties listed for sale based on the current rate of sales, seems a better way of measuring the actual state of the market.

So what’s really going on?

Across our nation’s capital cities, the effective supply of properties is currently recorded at 5.8 months, and nationally that level stands at 7.4 months. In other words, there is an even bigger oversupply in regional areas.

Digging deeper into the numbers shows that sales volumes are at similar levels to those recorded 12 months ago, which means that supply levels are being driven higher by a greater amount of stock available for sale rather than fewer people buying properties.

How does this compare with the past?

Not surprisingly, things are worse than they were a year ago when our combined capital cities had an effective supply of 4.5 months of stock and nationally there was an effective supply of 5.6 months.

These results suggest that current effective supply levels are well above average.

Since the beginning of 2007 the effective supply level across the capital city markets has averaged at 3.9 months and reached a high point of 6.5 months in January of this year.

Currently the number of homes for sale is at near-record high levels. There are 26.4 per cent more houses for sale this year than there were at the same time last year, and it’s not because more people are putting their homes up for sale.

The increase in listings is almost entirely being driven by rising levels of re-listings, which is indicative of slowing market conditions and the longer length of time it is taking to sell a home.

Around the nation

As expected, the oversupply situation varies from region to region.

In each capital city and state except for Perth and Western Australia the months of supply figure is currently higher than it was at the same time last year, indicating that selling conditions have deteriorated.

Canberra has the lowest current effective supply, at 3.6 months, while Brisbane has the greatest effective supply recorded, at 8.8 months.

Melbourne has 5.3 months’ supply, Sydney 5.1 months’ supply, Adelaide 6.4, Perth 6.1 and Darwin 6.3 months’ supply of properties on the market.

This extra supply of properties, available at a time when buyers are standing on the sidelines waiting to see how matters pan out, suggests that our property markets are likely to languish, at least in the first half of 2012.

The November and December drops in interest rates have boosted consumer confidence a little, but not enough to move our property markets. Not with all the uncertainty about how the problems in Europe will affect us.

Some Australians are still hesitant to buy residential property due to expectations of falling housing prices.

For property prices to start rising, consumer confidence is going to have to increase and the oversupply of properties is going to have to be taken up.

Of course we don’t have 'one' property market in Australia and there are still some areas where prices are moving up slightly, but they are far outnumbered by suburbs where prices are stagnant or falling.

No property collapse in sight

But don’t misunderstand me – there is no suggestion that our property markets are going to collapse. These underlying fundamentals will underpin our property markets:

1. Interest rates are likely to drop once or twice more next year.

2. Vacancy rates are low and rents are rising.

3. Unemployment is falling and wages are rising.

4. Consumer confidence is slowly returning and the spectre of a number of interest rate rises that we expected earlier in the year has disappeared.

Over the next six months we’ll move into the stabilisation phase of the property cycle where values might only grow a few percentage points higher than inflation for a few years, but it’s a time when investors will be compensated by higher rents.

Still, capital city and regional housing markets are performing differently and even in each capital city markets are segmented according to the impact of the various supply and demand dynamics on different price points and in different geographic locations.

As it is a buyers’ market, informed home buyers and investors will be able to pick up great properties below their intrinsic value if they do their research properly and negotiate wisely.

This is also a great time to buy properties to which you can add value through renovations and manufacture some capital growth.

And when buyers look back in a few years they’ll wonder why they didn’t buy more properties while others were waiting for the bubble to burst.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.

This is an edited version of an article that first appeared Property Observer on December 8. Republished with permission.