Why I Like Property

A recent article from Washington Brown Group is titled "Why I like property". It makes good points, provided that you are looking for a long term investment that can go through periods of being hard to sell (like the present).

Market Commentary from a leading Brisbane agent

"... Countering that has been the deteriorating level of urgency in buyers as plunging confidence in Australia's economic future bites ever deeply into their psyche. This erosion of confidence isn't just making it 'challenging' to get buyers to make offers on property, it is making it doubly difficult to get deals to hold together once agreed.

More broadly and in keeping with Darwin's theory of only the strongest ultimately surviving, current market conditions are systematically cleansing the industry of all but the very best property professionals across all property sectors from Commercial to Residential. Whilst we know we can expect such repositioning of markets every generation or so, it doesn't make the process of enduring them any more comfortable."

My comment: I have seen a number of residential real estate groups impload in Brisbane in recent times. Colliers closed down its Brisbane city residential resale group (but kept project marketing alive), Savills closed down its Brisbane residential group, ReMax city office with Chris Hinds reportedly went bust recently, Open House went bust last year and has been taken over, GoGecko is bankrupt, the list goes on.

Timing the Market

"With this in mind it’s important to note how dangerous it is to paint the whole real estate market with sweeping statements of downturns – or upturns. Every area must be assessed on its merit – hence many suburbs have shown a rise in median value over the first quarter, while other areas have dropped back to 2008 levels.

In short, the only thing we’re waiting for before the market swings upwards once again is the spark that’s going to inject confidence and an element of security into buyer psychology. However, waiting for that spark is not a wise thing for any investor to do if they want to purchase at the bottom! Have we hit the bottom yet? No one can make that call quite so soon – but if we haven’t, it’s not far away."

See Waiting for 6 o'clock

Investors Returning

New mortgage sales figures for May point to investors returning to the Queensland market. More than a third of loans (36.5%) processed in Queensland in May were investment loans, the highest figure for more than a year, according to the latest AFG Mortgage Index.

This is just below the proportion of investment loans processed in Victoria (38.8%) and NSW (37.9%)

Mark Hewitt, general manager of sales and operations at AFG, tells Property Observer the Queensland market has reached a point where house prices have come down in past 12 months, meaning investors are seeing value in the market.

“We are not anticipating a massive rush, but there are positive signs in both Queensland and WA,” Hewitt says. “That there is a lot of stock available, especially on the Gold Coast. Looking at the overall market, Hewitt says property investment has remained at consistent levels throughout the ups and downs of the property cycle, but strengthened significntly in May. It is certainly a buyer’s market right now, and investors looking at rising yields are probably better insulated from the impact of rising interest rates than other types of buyers.”

Property Observer

Losses out West

An interesting blog on how to loose money out West in property.

Opinions Regarding Brisbane Property

Here is a good set of articles from Michael Matusik, regarding Brisbane property:

Opinions

Yardney's Advice

"... I foresee generally flat property prices over the next few months – possibly well into next year. But I also see some great opportunities.

With an improving local economy, strongly rising population growth, rising rents and the ability to buy a bargain from some motivated vendors – the type of bargain that we couldn’t find in the last few years when there was strong competition from other investors – I know some investors will set themselves up for success in this current stage of the property cycle.

My personal strategy is to continue what I have been talking about and doing personally for years:

1. Buy the right type of property – one that has some element of scarcity, which will always make it appealing to owner occupiers (who push up the prices) as well as tenants.

2. Buy in an area that has always outperformed the market.

3. Buy at the right price –this should be below intrinsic value - the type of price that even if values do drop 5 or 10 % (and I don’t think they will in most areas) you will be covered.

4. Only buy a property to which you can add value – during this time of flat growth, manufacture some capital growth yourself through renovations or redevelopment. ..."

See "Is it time to worry.." from Property Update.

How To Lose Money in Property Investing

Here is an interesting article, that discusses the risks of buying off-the-plan.

"Three surefire ways to lose money in property"

Extract from Recent Matusik Email

Australian Property Monitors (APM) – a fully owned subsidiary of Fairfax Media – last month published a study which outlined what houses across Queensland (and by suburb) could be worth in three, five and ten years’ time. Needless to say, the projected growth trajectory is almost exponential, rising on average by 11% per annum across Queensland over the next decade. Prices rose by 11.7% each year, across Brisbane for example, during the noughties. Hopefully, APM did more work than just assume that the past will be repeated. But one wonders.

A check on 25 randomly selected Queensland suburbs finds a pretty consistent projected growth pattern, with values expected to rise by 30% in the next three years, then by just 10% between year four and five and then by a whopping 115% between the sixth and tenth year. By 2020, just short of 600 Queensland suburbs are expected to enjoy a median price over $1 million; and 54 areas could be, on average, priced over $2 million. The median Brisbane house price, today, is around $440,000.

What is driving the growth in five years’ time? Why does the growth rate plummet in year four? Surely there is something more than just “demand exceeding supply and strong economic growth, particularly in resources,” as quoted in the accompanying media commentary. Please APM, explain to us your methodology, as it is absent from the published forecasts.

Also puzzling is why Hamilton’s house values are expected to drop 20% over the next three years, whilst neighbouring Ascot’s prices are forecast to rise by 7% over the same period. And why just 7% – isn’t Ascot (and Hamilton for that matter) in a prime spot, with heaps of infrastructure support? Similarly, South Brisbane’s values are to drop by 8% by 2012, but West End’s values will rise by a staggering 33% or $236,000. Ditto for Surfers Paradise, down 36% in three years, versus a projected 20% jump for adjacent Broadbeach. I could go on and on. Please, APM, explain these anomalies as well.

The Gold Coast market, and in particular Surfers Paradise, has been getting a caning of late. According to the latest Queensland government valuations issued in March, ocean-front land has fallen by 30% on the coast, with residential values down 18% in Surfers Paradise since 2007, when land was last valued on the Gold Coast. According to a recent study by the REIQ, median dwelling prices in Surfers Paradise dropped by 30% during 2009.

Now there is no question that the Gold Coast is doing it tougher than the rest, with our data – which is based on cleaned up resales – showing that apartment values fell 9% during 2008 and a further 4% last year. But ocean-front apartment values – in Surfers Paradise at least – and again based on individual resale analysis, actually rose last year. Up by 8.9%!

There are two messages here. Firstly, in order to get a true handle on the residential market it pays dividends to narrow down the sample set and investigate individual resales. Sweeping statements – and especially based on suburb, or worse still, postcode analysis – are nearly always incorrect.

The second message comes in the form of a question. Why does the media (and too many punters, as well) accept these forecasts as if they are gospel? I understand why the Fairfax Media might, but the Murdoch Press? Maybe digging around a bit is too much work for journos these days. A recent study commissioned by crikey.com suggests this is the case, with nearly 55% of the stories published across ten major Australian newspapers late last year being driven by media releases or public relations firms.

So what do I think prices will do over the next decade? In short, my answer is…not as much as they did over the last ten years.

Dwellings are overpriced but not (yet, anyway) oversupplied. The current “boom” is likely to run out of puff within the next twelve months, on the back of rising interest rates and declining affordability. We could “crash and burn” like the US recently did or go through a long, drawn-out adjustment, as happened in the 1990s. The latter means that residential values will be flat until affordability is rebuilt by a combination of gradual increases in household incomes and cyclical declines in interest rates. Given this scenario, growth over 5% per annum would be a strong result.

It’s back to the future, if you ask me.

Source: www.matusik.com.au

Property Risks

Extract from PropertyUpdate

However over the last 9 months or so, some parts of our property market have increased in price by a rate equivalent to well over 20% per annum. That’s boom conditions as far as I am concerned and unsustainable.

This type of property increase normally happens in the boom phase of the cycle when fear, greed and speculation kick in.

Fear drives property booms as home buyers and investors see property prices going up all around them. They are worried that they will miss out on the profits the boom has delivered to others. Many become overconfident, at a time when they probably should be more cautious, and overpay just to get into the property market, pushing up prices to levels that are (in the short term at least) unsustainable.

At this stage of the cycle properties often sell for more than their asking price as eager buyers compete with each other to snap up any property that comes on to the market. Vendors also become greedy, pushing up asking prices and this just feeds the property boom.

Sound familiar? Isn’t this exactly what is happening in some segments of our property markets today? Because if we are already in boom conditions, the next stage to come is the downturn or bust stage of the cycle. I am sure that the market can’t keep rising as spectacularly as it has over the last few months. And if it does the Reserve Bank will bring it to a halt with rising interest rates.

What I do see happening is property values continuing to surge strongly in selected markets for the first half of this year and then growth will slow. I see a few issues on the horizon.

Finance will be a big issue for property investors this year, some will have difficulty getting it and others will have to pay more for it as interest rates rise.

I also see more trouble ahead for the world’s economies. The world’s debt binge is becoming frightening. A number of European economies are starting to unravel and the spotlight is likely to return to America later this year, as it appears to be a long way from working its way through its own economic woes. This means that there is a good chance that the US stock market will fall again and so will ours.

Low Clearance Rate a Mega Auction on Gold Coast

137 properties were originally listed for sale at the large Ray White Gold Coast auction held on Sunday. 65 sold prior to or on auction day. That is a 47% clearance rate after at least a 4 week campaign. Not very good. And it seems that pricing achieved was not great, despite the big lead up publicity. In my view, auctioning non-unique apartments is not a smart tactic. Two apartments in Circle on Cavill sold for less than $400,000 each, furnished.

As reported in the Gold Coast Bulletin:

"But not everyone was optimistic about the property market, with two vendors at the auction, who wished to remain anonymous, claiming they fell short by about $130,000 over three Surfers Paradise units they had to sell due to family circumstances.

"I don't think the confidence is in the market," said the vendor."

Mortages and United States Residential Property

"MUCH has been said about the high rate of home foreclosures, but the most interesting question may be this: Why is the mortgage default rate so low?

Enlarge This Image

David G. Klein

Related

Weekend Business: Richard Thaler on strategic defaults and home foreclosures.

After all, millions of American homeowners are “underwater,” meaning that they owe more on their mortgages than their homes are worth. In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them."

Full story

Misleading Market Commentary

There is interesting market commentary from Chris Joye from Rismark, rebutting silly and factually incorrect statements published by the stock spruikers, Morning Money.

See Chris' blog entry, located here.

The Bottom Has Passed?

"Australia's top institutional and private investors believe the nation is well and truly past the bottom of the property cycle and now heading towards upswing, according to new survey findings released by Colliers International.

The second Colliers International Investor Sentiment Survey, conducted late last month, has shown investors around the country believe that if the property cycle were a clock, with the top of the market at 12 o'clock and the bottom at 6 o'clock, Australia moved upwards to 7 o'clock in Q3-09, after the majority of investors believed the same clock sat at 5 o'clock when they were first surveyed in May for Q2-09. ...

The majority of investors, at 52 per cent, believe Australia is not only past the bottom of the property cycle, but 64% also believe the upswing will occur earlier than indicated in the first survey - by Q2/Q3 2010 or even earlier, instead of in Q4 2010. ...

When asked how they would describe their property investment strategy over the next 12 months, the majority of investors, almost half at 49 per cent, identified they were heading into growth mode, with 43 per cent in defend mode or holding steady. Only 8 per cent were expecting to contract holdings.

Investors also signalled the green light to purchase property is now definitely on. 69 per cent now expect to buy property in Australia over the next 12 months, up from 63 per cent in May. Investors also expect it will become easier to buy property with 47 per cent believing access to debt capital will become easier in the next 12 months, versus just 20 per cent in the May survey.

Most investors, at 45 per cent, are looking to buy office property, with the top 5 buy markets identified as Sydney Office (20 per cent), Melbourne Office (15 per cent), Sydney Residential (7 per cent), Melbourne Residential (6 per cent) and Sydney Industrial (6 per cent). ...

Residential was again the standout property sector with the majority of investors believing values had only declined by 1 to 10 per cent since the peak of the market, while 16 per cent believed residential values hadn't changed at all, or even witnessed some growth. The majority of investors believe there will be no further softening to residential values and 8 per cent believe there will now be growth."

http://www.colliers.com.au/site/page.cfm?c=1305

Auction Comment - Ray White CBD

"... last night at our Gala Auction event at the Greek Club, 22 properties went under the hammer for sale and again a large crowd was in attendance and there was great energy in the room. Over 60 buyers registered to bid and there was good bidding throughout the night but it was hard work. The first home buyer market has grown smaller as many have now already bought and the first home buyers grant has now been reduced.

Still we had some great results with 9 properties selling under the hammer at auction and a further 3 sold straight after the auctions."

Could This Be Happening Here?

"There is also a stash of inventory hovering on the sidelines: new apartments that have not been offered for sale because developers — who put units on the market in phases — fear they will push prices down further.

Mr. Miller estimates that there are 7,000 of these “shadow” units in Manhattan alone and more than 20,000 citywide."

Source: NYTimes

Investor Sentiment - Still Not at the Bottom

"Colliers International’s Investor Sentiment Survey reveals bottom of property cycle now imminent with upswing
predicted to be well underway by 2010. Property investors around the country believe Australia is now approaching the upswing point of the property cycle with the majority of investors believing the industry is currently between 4:00 and 6:00 on the property cycle clock (where 6:00 is considered bottom). This was the major finding of the inaugural National Investor Sentiment Survey conducted by Colliers International. Colliers International surveyed institutional and private clients across Australia to attain their sentiment on the current climate of Australia’s property market, and their views on the next 12 months. The investment calibre of respondents was exceptionally high with 42 percent stating the value of their portfolio was greater than $AUD1 billion. Felice Spark, Director of Commercial Research at Colliers International says the majority of investors believe we are now fast approaching, if not already at the bottom of the cycle, poised for upswing. “36 percent of investors surveyed believe Australia is currently at 5:00 on the property clock with a further 36 percent identifying either 4:00 or 6:00.”
Summary of key findings:
• 72% of investors believe we are between 4:00 and 6:00 on the Property Cycle Clock, poised for upswing
• Residential sector is the standout with values holding steady or possibly growing
• 63% said they were looking to buy property in Australia within the next 12 months"
Source: Colliers
So based on this survey, more than 60% of property investors think that things are going to get worse before they get better.

Top End Not Looking Good

"Discounting by more than 20 per cent is commonplace for some top Gold Coast addresses and many houses and apartments are yet to sell. A property owned by the bankrupt entrepreneur Matthew Perrin sold on Albatross Avenue, in Mermaid Beach, in May for $2.75m after it was purchased for $4.375m in October 2005.

Former Sydney Swans footballer and founder of tourism group Breakfree, Tony Smith, sold his Hedges Avenue house at Mermaid Beach for $28m to IT entrepreneur Daniel Tzvetkoff - less than half the expected $60m. Now the half-finished mansion Mr Tzvetkoff purchased is to be sold after his company BT Projects was placed in administration.

Other prestige properties around the country are set to sell at sharp discounts, with many vendors shaving millions of dollars off the asking price."

See The Australian, photos and chart
The chart shows that people lost money in New Farm, Coronation Drive, Paddington, Hamilton, Hastings Street in Noosa and the Gold Coast.

"The sort of prices that were being paid were not sustainable and now we are back at 2001 and 2002 prices," Mr Fatouros said. He estimated prestige home prices have fallen about 25 per cent from their peak, with another a decrease of 10 per cent to go.

"I don't think we have seen the bottom yet," he said.

But one Gold Coast agent, who declined to be named, said there were more mortgagee sales to come. "The banks don't want to flood the market with pressured sales and are hoping for some recovery in prices," he said.

"They are drip-feeding properties on to the market."

The Australian

Colliers Opinion about Brisbane

"Although Brisbane is at the bottom of the property clock, Colliers International believes still booming population growth will drive a market in which developers try to meet residential product demand. On that basis, the agency considers it a good time for investors in the Brisbane market. It also believes the residential sector will lead a wider property recovery, as it did during the 1990s recession.

The report concludes that Australia seems to be escaping the worst of the global financial crisis. 'In a time of rising unemployment, it's a big call to say the housing market is past six o'clock, but talking to real buyers sums up a mood hope, Dearlove added.

Source: PropertyWire

Time to Invest?

"One thing is for sure, the worst of the credit crunch is behind us now and this environment is very favourable to property investment. This will provide the ballast that keeps housing markets stable through these turbulent waters."
REA