Melbourne picks up the property baton

PORTFOLIO POINT: Melbourne looks best placed of the Australian capitals, and expect property priced below $600,000 to lead a revival.
Why, in the face of the economic slowdown and dire predictions from other commentators, do I remain optimistic about the property market? Last week we got a brief insight into the key factors driving the property market and they make for some interesting reading.

The Australian Bureau of Statistics, for example, reported that after seven consecutive monthly falls, housing finance increased in October by 1.9%. Then there was the Westpac-Melbourne Institute’s December survey of consumer sentiment, which showed an improvement of 7.5 points. The biggest rise was among mortgage holders, up 11% compared to 1.6% for tenants. Also out last week was the latest national jobless figure, up just 0.1% to 4.4%, indicating a resilient labour market, and that businesses are reluctant to shed staff they struggled to find just six months ago.

The improvement in consumer sentiment in particular reflects that lower interest rates and fuel prices are making households about $580 a month compared with just three months ago. This and the effect of the $1.5 billion first home owner grant is the key to the underpinning of prices in the lower end of the market, and behind my call in early October that the market is bottoming, or is at least very close.

So given this, is the whole property market set to improve? Probably not. It’s the under $600,000 sector market that’s most likely to benefit and the top end likely to be weakest in 2009.

In 2009, indicators point to continuing tough times for higher income earners, unlike the 1990s slowdown when lower income earners bore the brunt. The result is a marked increase in the number of $1 million-plus houses on the market all over the country. Take the blue-ribbon Melbourne suburb of Brighton, for example. In early November 2007, it had 38 For Sale signs posted on properties; one year on the number was 142, some of which could not find a buyer.

In 2009, we can expect this weakness in the top end to continue as newly upwardly mobile couples delay entering this market. The longer this demographic continues the “wait and see” sentiment, the longer the supply/demand equation will remain tilted towards buyers in this sector.

The same applies in resort regions, where I expect an abundance of holiday homes for sale in areas such as the Central Coast of NSW, the Gold Coast in Queensland and Portsea/Sorrento on the Mornington Peninsula in Victoria – along with broad price declines.

For the middle section of the market, between $600,000 and $1 million, the outlook is more robust, but not without a sense of nervousness. The outlook for employment remains fair and many middle-income earners have felt a reprieve due to lower mortgage repayments. If the economy experiences no more than a relatively mild slowdown, this market will remain strong, but large falls in employment will retract demand in this sector and affect prices.

In the inner and middle suburbs, affordable family houses up to $1 million and well-positioned apartments will benefit from first-home buyers and from investors, who I expect to increasingly use their super funds to purchase. Expect small rises in demand and prices in 2009 in these areas.

Reading RP Data’s All Dwellings Results for the year to October, I see some evidence of a nationwide pattern starting to emerge within the context of regional variations. This year, Melbourne looks the best-placed for performance, leading the major cities in auction clearances and average days on market for properties and second in median price performance, up 0.2% in the year to October 2008. The Sydney market, down 1.9% to October 2008, will be a little slower to recover, with the global economy’s negative influence stronger on “trophy” houses and the weak domestic economy more keenly felt in the outer suburban fringe and “exurb” areas of the Central Coast and the Illawarra.

Mining exerts a greater influence in Perth than in any other capital, so this city is likely to see further price declines, as the dramatic rises of 2007 deflate with the resources slump. Perth’s median price was down 4.8% in the year to October. Expect to see the oversupply of $1 million-plus houses continue, dragging down Perth’s median.

Adelaide’s median price was up 3.5% in the year to October, surprising some by becoming the best-performing major city in 2008. Its outlook for 2009 remains robust in all areas except the top end. In Brisbane, the median price is down 1.7% in the year to October, but good buying opportunities should emerge in the mid-priced sector, particularly three-bedroom family houses in the middle suburbs priced from $500,000 to $650,000.

Regional areas offer affordable entry points but at the risk of less predictable price and rental vacancy performance than metropolitan areas. Provincial centres within two hours of capitals, such as Wollongong, Geelong and Toowoomba, should fare solidly in 2009, mostly experiencing flat price and rental outcomes. Centres overly dependent on one or two industries to sustain economic activity are the ones most likely to feel the pinch in 2009. Mining towns, the great beneficiaries of the resources boom, are likely to exemplify this because of the fall in commodity prices and subsequent demand for labour.

In 2009, some investors will succumb to the bargain mentality and invest in trophy houses, holiday homes and penthouse apartments in high-rise developments, ostensibly because reduced prices will make these properties appear good value. They are taking a considerable risk as these properties are likely to fare poorly over the next three or four years.

In a nutshell, 2009 will be a year of cyclical opportunity and bargain price traps for unwary investors. This year’s fall in interest rates from 9.4% to 6.9% has delivered a significant income boost to households on a typical mortgage, something like $6000 in after-tax dollars a year. The real benefits of this will flow through to middle Australia and first-home buyers contemplating their first mortgage.

My well-worn adage doesn’t change! It’s one and two-bedroom apartments priced under $600,000 and compact houses under $1 million in the inner and middle metropolitan areas of economically diverse cities that will provide the best future growth in the context of a fairly flat year.

Because property is a long-term journey, smart buying next year will provide the platform for maximising growth in the next few years before the cycle moves towards its next upturn. And move, it surely will.

Property Q&A

This week:

• Are we ignoring housing’s fundamentals?
• Should I buy an outer-suburban house or inner-suburban flat?
• How broad is indemnity for the estate agent?
• Is feng shui a factor in property sales?

The fundamentals

Eureka Report’s property coverage misses some fundamentals. We are witnessing the greatest period of wealth destruction in the past 30 years, just ask anyone over 50 about their super. In London 12 months ago, there was a massive undersupply of housing, yet property prices plummeted by 20% with another 15% to go.

Our housing is costing seven times the median wage; it will come back to five, that is a fact. Australia does have a housing shortage, however the biggest financial meltdown of our time will push this to the background as Australia readjusts.

There’s little doubt about it, judging from the emails I’m getting in my Eureka Report mailbox, that this is the question many of our readers have on their minds heading into the Christmas break. In terms of “wealth destruction”, if we stop the clock right now and close down all the investment markets then you’re absolutely right. I think the past six months will prove to be one of the sharper downswings of the investment pendulum but, like 1987, the markets will rebound again in time.

In terms of the property market, I suggest you take “what people tell you” with a grain of salt. According to surveys by UK property groups Rightmove and Nationwide, the actual price decline of London house prices was 5.1% in the 12 months to December 2008, with overall house prices across the UK down around 6.3%. I suspect that predictions of “another 15% to go” may turn out to be an overstatement.

Measuring Australian house prices as a multiple of the median wage is a one way to judge the overall market, but an important fact is often overlooked. When average house prices were three times the average wage in the 1970s, the percentage of women working was under 30%; now it’s 60% and climbing. So really we should be looking at house prices as a multiple of average household income, in which case my back-of-the-envelope numbers show me that while housing is more expensive now, its not as expensive as this median wage/ house price multiple suggests.

House or flat?

I am 22 and have just graduated as a nurse. Now that I’m about to start my first full-time permanent job, I’m looking to buy my first property as both an investment and a place to live. I can afford to buy a small three-bedroom family home in Melbourne’s outer-eastern suburbs or a one-bedroom flat in the inner suburbs. What do you think will be the best buy? I plan to live in it for five years or so.

First, let me congratulate on your graduation and your first permanent job. So what property is best to buy? I think the first thing you need to do is ask yourself whether this is primarily for your lifestyle or for investment purposes. You’ll need to rate one way or the other, 60/40 or better.

From an investment perspective, I would think you will do better in capital growth terms from a well chosen a one or two-bedroom flat in an inner suburb that has good public transport, shops, recreation and the up-and-coming cafes and restaurants. These are the areas where more first-home buyers and investors will be buying over the next few years and so they will prove the most resilient in terms of price predictability, future growth and the ability to recover after a setback.

This underlying demand is the key to capital growth ahead of inflation, making your equity grow faster and more reliably over time. It also means you will achieve financial independence sooner.

Indemnifying the agent

I have had residential investment property for some years, managed by real estate companies, and am concerned about a specific and related risk issue. It seems common practice for the management agreement to include an indemnity clause along the lines: “Whilst the Agent shall use all care and diligence in executing its obligations, the Owner shall hold and keep the Agent indemnified against all actions, suits, proceedings, etc '¦ whatsoever in relation to the actions taken by the Agent on the Owner’s behalf.”

Does “indemnify” mean by way of insurance? My landlord insurance does not include cover for such an indemnity, and anyway it seems to me to be more appropriate for the agent to carry business insurance for this risk. I’d appreciate your experience (case histories?) and thoughts on indemnity clauses.

Management agreements are designed to allow an agent to act for the owner of the property. It is not unusual for them to include an indemnity clause, which protects an agent from claims made against them. The right of indemnity should not be open-ended, but needs to be limited to circumstances where the agent is acting competently and within the scope of their authority.

The entire clause and management agreement would need to be reviewed by a good solicitor to be certain that you are not agreeing to an indemnity that is too broad.

I suggest you run this management agreement by them immediately, as it appears this agreement’s indemnity clause may leave too much room for the agent to pass on costs or responsibility on to you, even if they act outside the scope of your agreement. As a property owner, it pays to use the services of a good managing agent, but you should always ensure any agreements you have with them are checked by your legal adviser.

Feng shui

Do you believe in feng shui when buying property? Have you or anyone you known been adversely affected by purchasing a property with bad feng shui?

Interestingly enough, some of the principles of feng shui sit very well within the context of what we might call “Western” property principles. For example, feng shui emphasises the orientation of the building towards natural light and this is certainly something I am very conscious of when looking at property. Feng shui’s rules also talk about the elimination of obstructions from internal pathways and this fits well with the Western concept of ensuring an investment property has a logical floor plan.

There are some local areas, such as Box Hill in Victoria or Hurstville in NSW, where buyers with a Chinese background make up a significant portion of the market. If you’re looking to invest in one of these areas, it would be wise to have a broad understanding of feng shui’s rules to ensure you don’t buy a property with a feature that will limit your future market. There are many good short courses on feng shui that will give some interesting and keen insights into its principles and practice. A quick Google search would be a good starting point or you can contact the Australian College of Environment Studies about its nationally accredited feng shui course.

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.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

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