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The latest happenings in the Melbourne property market. For our Essays and The Secret Agent Report, see our Research page.


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The Secret Agent Report – EOFY Review

We have just released a special mid-month Secret Agent report! In this release, we take an in-depth look at the property market over the last financial year.

Start reading this report by clicking on the link below:

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EOFY Review 2014/15

 


The Secret Agent Report – 2014 Review

When the number of factors coming into play in a phenomenological complex is too large scientific method in most cases fails. One need only think of the weather, in which case the prediction even for a few days ahead is impossible.”
– Albert Einstein

Urbanisation. We’ve said it once, we’ve said it twice and we would not be able to provide an accurate end of year review without mentioning it again. The top performers for 2014 were in suburbs that were flush up against the CBD highlighting the increasing value of proximity to home buyers and investors.

We also take a look at what we can expect from 2015. This section of the report aims to study the underlying momentum in Melbourne’s inner regions, without all the noise associated with average house prices.

We hope that you enjoy this reflection on the year that has passed and we look forward to providing you with many more exciting stories as 2015 progresses. 

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Year in Review Report

Excerpt:

2014 has been a buoyant year for housing in general. Interest rates did not move a whisker with Australia embarking on some of the most accommodative financing conditions in its history. Will this continue is the big question. Advanced economies have all seen very low interest rates stay, as part of their central bank policies. This effort appears directed at fighting deflationary conditions, since the 2008 crisis ripped through world economies.

The role of expanding credit growth is directly linked to momentum in housing prices. The big question next year will be what happens if interest rates drop a further 0.25-0.5% and how will this impact on the property market. The reserve bank is cautious about stimulating the housing market too much, however may be forced to do so with further rate cuts. Australia’s deteriorating terms of trade and the desire to further devalue the Australian currency may force the RBA’s hand.

The business community seems to be engaging in further investment with higher credit growth starting to emerge again after the long de-leveraging period between 2008 and 2013. This will be good for the economy however the impacts might not be felt for a further few years after this investment has had time to produce fruits. Housing which had also been de-leveraging has showed a bounce back as we’ve seen with market conditions overall quite solid.

Most capital cities have started to see stalling growth with the exception of Sydney. Its growth curve now resembles a hockey stick which will also be worrying the RBA.

Low interest rates are most likely needed to help support regional areas and Australia’s smaller cities. However, Sydney looks to be getting to a danger point of blowing up if this trajectory keeps running its course. The RBA may introduce controls, such as have been done in New Zealand, which would force prospective property buyers to not be able to use the same amount of leverage to purchase a property. This way they can cool the market without cooling the economy which would be a symptom of higher interest rates.

The fastest growing section of the market in 2014 was the investor purchaser. Investors have caught up with owner occupiers for mortgage approvals. Also on the rise has been the foreign investor who is even better placed thanks to a lower Australian dollar. The importance cannot be stressed enough of the value of Australian property to many overseas. The safety in the asset is so highly prized that many investors have looked at Australia as simply a place to store wealth, rather than to create wealth.

The Chinese economy will be the most important economy to watch for Australia in 2015. China continues to get more important to Australia when it comes to exports. It’s hard to believe that in 2008 Australia captured more value in exporting to Japan than it did to China.

The economy of Australia is at a cross roads. Unemployment seems to be on an up trend and average hours worked is decreasing. This is a function of a winding down of the mining industry and technology allowing firms to be increasingly efficient.

The headwinds are a still very uncertain world economy and a slowing Australian economy.

Within the inner city areas of Melbourne the market continued to show strong demand. Houses were the strongest performer and have isolated themselves from the abundance of apartments that have been prevalent in the market. Houses grew in all the four regions we tracked – the inner East, West, South and North. The rush for homes within close proximity to the CBD is being fuelled by downsizers and young families looking to capitalize on the strong ranking state schools that have started to flourish over the past few years.

On the other hand apartments have actually gone backwards this year thanks to an oversupply of new apartments with proximity rich positions. This hasn’t affected the classic Art Deco apartment market however it has had a noticeable drag on buildings that are less than 20 years old and are starting to show wear. The explosion of new construction in the CBD has also created a drag on rents with generally no rental growth over 2014. We expect much of the same in 2015.

The interesting observation is that the top performers for 2014 were in suburbs that were flush up against the CBD highlighting the increasing value of proximity to home buyers and investors.

We hope that you enjoy this reflection on the year that has passed and we look forward to providing you with many more exciting stories as 2015 progresses.


Secret Agent and The 7:30 Report

Secret Agent founder Paul Osborne speaks with ABC’s 7:30 Report regarding Melbourne’s accelerating property values. Other high performing cities, Sydney and Perth, are also discussed. There is speculation that Australia may be headed towards a ‘bubble’ situation, much like the US just prior to the GFC. Click here or below to view the full video on ABC’s 7:30 website. Alternatively you can read the full transcript below.

There are rising concerns a bubble may be beginning in Australian house prices putting pressure on the Reserve Bank over interest rates and raising questions about where prices could end up.

The 730 Report

LEIGH SALES, PRESENTER: If you own a house all the talk currently of record property prices and auction clearance rates is great. If you’re trying to buy not so much. The very strong growth in house prices this year has sparked speculation about whether Australian property is heading for a bubble. It’s possible prices could grow even faster if interest rates fall below their current 53 year low of 2.5 per cent. Today the Reserve Bank left the official cash rate where it was but how long will that last? Here’s Greg Hoy. GREG HOY, REPORTER: Hot property, with interest rates sitting at historic lows the housing market in Australia’s capital cities is roaring back to life. It’s homes in Perth and Sydney in particular that are really under the hammer and already breaking records. KIM JONES, DI JONES REAL ESTATE SYDNEY: We’ve just had our record month in 20 years in a month that’s not normally particularly good. GREG HOY: Selling agents like Sydney’s Kim Jones have enjoyed clearance rates above 80 per cent and rising. KIM JONES: The apartments here, most of them have been sold. There’s only two left and they’re selling between $3 million and $17 million. In the last few years apartment like this, they struggled and it wasn’t so much about the price, it was more about the amount of buyers around that were confident. GREG HOY: Certainly Sydney vendors like Leslie Moor are finding it easy to cash in. LESLIE MOOR: It is back to the good old days and I think that if you look at the number of auction signs that are up and sold signs that are up, that Sydneysiders are really enjoying once again selling and buying property. TIM LAWLESS, RP DATA RESEARCH DIRECTOR: We’ve seen growth rates in Sydney over the past 12 months at about seven per cent. So compared to the capital city average which is 5.3 per cent, Sydney is over performing and we are seeing that rate of growth accelerate. GREG HOY: Sales in the other smaller capitals are lagging but Melbourne isn’t far behind Sydney with 75 per cent of homes on the block cleared at record prices. PAUL OSBORNE, BUYERS ADVOCATE “SECRET AGENT”: Sold pushing the benchmarks. In this area which has traditionally been a first homebuyer market, a couple of years ago this would have been trading around the $700,000 mark. With the low interest environment we’re seeing some prices, or some results overshoot what we would consider to be fair value. GREG HOY: Ask around the auctions and you will find the surging prices are being fueled by investors flooding into the market, seeking greater returns than bank deposits or the volatile share market. PAUL OSBORNE: A lot of self managed super funds have crept into the market in a big way in the last couple of months. So self managed super funds have come in. We’re also seeing a lot of foreign investment as well. So as the dollar has slowly come down, we’ve seen a lot of money come in from China. GREG HOY: This is what makes it very difficult for first homebuyers to compete. Like Melbourne’s Rob Seddon and his family. ROB SEDDON, FIRST HOME BUYER: The good quality property that we have found has gone way over the guide price. So we’ve been looking at 5, 10, maybe even 15 per cent over what the top end of the guide price was which has pushed it over our range. GREG HOY: Or Chris and Tegan Horsley-Wyatt. CHRIS HORSLEY-WYATT, FIRST HOME BUYER: It’s been tough recently and the ones out there are going for more than what we’re able to spend. GREG HOY: There’s increasing concern that rising house prices are forcing first homebuyers to borrow more and more from banks. What percentage of what you hope to pay will be borrowed? CHRIS HORSLEY-WYATT: So it’s about 90 per cent will be borrowed. GREG HOY: And do you worry about what might happen if interest rates then take off again? CHRIS HORSLEY-WYATT: Yes. GREG HOY: Rising house prices are just what the Reserve Bank ordered. Housing is by far Australia’s largest investment asset, worth more than $5 trillion. Dwarfing both the stock market and fixed interest investments combined. Ideally, rising house values boost consumer confidence and spend ing, unless, of course, the housing market gets overexcited, which is precisely what many fear is beginning to happen now. MARTIN NORTH, BANKING ANALYST: I think we’re in a bubble at the moment and my own view is that it’s more sinister than a bubble because it’s essentially a long term systemic problem in the housing sector. PAUL OSBORNE: It is possible within the next six months we could see still continual acceleration in the marketplace but I think if that does happen it won’t be a good thing and that would end in a correction of some sort. GREG HOY: The worst case scenario is the prospect of a collapse of the house price bubble as seen in the US prior to the global financial crisis. The Reserve Bank has recently “pooh poohed” the prospect of an Australian bubble as have others. MALCOLM EDEY, ASSISTANT GOVERNOR, RESERVE BANK: We shouldn’t be rushing to reach for the bubble terminology every time the rate of increase in house prices is higher than average. You’re just going to be unrealistically alarmist by making that call. GREG HOY: But while the RBA denies there’s a bubble building it has warned buyers not to expect the great gains in property prices seen previously and it has warned banks to maintain strict lending standards or risk stricter regulations. TIM LAWLESS: If we do see the levels of growth continue that we’re seeing in the marketplace at the moment or even accelerate, I think that’s where we’re starting to see a lot more danger that will start to see leverage on household and household debt levels starting to rise and that will be quite alarming, particularly for the Reserve Bank whose key objective, of course, is financial stability. GREG HOY: The difficult decision for buyers, however, is when to venture in to the market with some analysts warning, as interest rates inevitably rise, inflated property values will inevitably fall, though not everyone agrees. KIM JONES: I don’t believe the property market is going to burst, not at all. There is not enough property for the demand for people here in Sydney. And it’s proven, like we’ve got expats returning home, there is not enough properties. So there’s no burst of bubble.


Interest Rates Fall Again

The reserve bank has lowered interest rates again with the cash rate now sitting at 3.25%.

Lower than expected inflation figures,  China running at moderate growth,  European weakness and a stagnant hosting market have all played a role.

In fact if we look at interest in Real Estate in general since 2010 – we see a decline overall.

Below’s chart shows the amount of search queries for realestate.com.au and domain.com.au since 2004.  You can see the surge in searches taking place in 2009 and 2010 with a recent decline.  This has happened even as more people adopt online channels as their preferred searching methods for Real Estate.

We’ve used the two portals above as they are the most dominant Real Estate websites in Australia.

The last time we had a cash rate at 3.25% was October 2009 – just when the Real Estate market started to hit it straps with an incredible period of surging values.

The question remains – could this stimulate the housing market again?

The answer is most likely a yes.  However the effect might be – stimulation in areas that need no further stimulation such as North Fitzroy,  Collingwood,  North Melbourne etc, while helping many outer suburban areas improve only slightly – before they continue to stuggle again.

Providing ease of credit improves,  this period of “cheap money” will jump start conditions in the short term.  However the effect long term might not be as great as one would hope.

Dropping rates is like adding adrenaline to a system.   The idea is not just a relief mechanism to those that are struggling – but an incentive to kick start spending again.  The effects are likely to be good and bad.

Later this week we will be releasing the property turnover figures for 2009, 2010, 2011 and 2012 – for the first nine months of each respective year.  This should give a good feel as to the differences we’ve experienced over the past 4 years, and will shed some light on why the reserve bank has decided to cut rates.


Reserve Bank

The cost of borrowing has a huge impact on demand for property. What it gives, in terms of confidence – is the “maybe” buyer a gentle nudge to committing to a buying decision.

While we’ve only seen a week go by after the announcement. Clearance rates were slightly improved over the weekend. The short term “adrenaline” is noticeable, the long term effects are not so clear.

Many in the property industry will be happy to see this happening now, well before the Spring market – which is the busiest time of year.

One effect which is counter intuitive is that while the initial impacts may be positive – it has a side effect. This helps give confidence to owners to sell their property, under the impression that the market will be getting stronger over the months ahead. This means more stock coming on to the market, increasing supply and choice to buyers.


In what do we trust?

In the wake of the global recession, societies the world over have suddenly turned to the Japanese model of conservationism, choosing to place their trust in banks and the interest returns they offer. Australia has been blessed in it’s ability to stand steadfast amidst this financial crisis, even trumping the revered US dollar, a feat not seen since 1983.

However, the strange phenomenon that is sweeping across Australia is that whilst the dollar is strong, investments in property have dropped drastically. There might be a willingness to spend on everyday items but long term, ‘liability heavy’ spending is at a minimum.

The mentality governing this phenomena is that everyone is waiting for the prices to bottom out before buying; the problem is where will that bottom be and between then and now, what could or would those funds be doing otherwise? The banks offer safe but meager returns on interest, term deposits can only do so much and most unmanaged super funds are not as super as they seem.

If share prices begin to go in reverse, property prices plateau, and if the trusted interest on term deposits fall, what will be left to fall back on?


Rates – On Hold

Interest rate remain on hold after the meeting by the reserve bank today.

The statement released shows added caution due to world events beyond Australia’s control.

For further reading,  you can find the statement here


The Reserve Bank; The tone has shifted

The latest statement by Glenn Stevens shows a much more careful Reserve Bank.

We all know that you can read ‘too deeply’ into these statements.  Yet what grabbed me was the following statement :

“At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate”

By acknowledging rates being mildly restrictive,  in my opinion they are saying things are firmly on hold for some time.

The mention of the two track economy is evident.

If we see some poor economic data come out over the next few months,  we could even potentially see a small cut in rates later into the year.

Mid way through 2011, I think it’s clear that many things remain uncertain.


The Reserve Bank and Rates; the great balancing act

The reserve bank has some tough decisions in front of it at the moment. The great balancing act of taming inflation while not sending the housing market into further troubled waters by raising interest rates.

My current belief is that we are not going to see a rate rise for some time yet. I think the threat of raising rates has been a strategy of the Reserve recently and it’s been doing a pretty good job.

While it’s almost a certain that they will go up at some point, just at the moment with a lagging housing market and the Greece situation – hesitations will most likely prevail. If we see world markets panic, then the Reserve bank could actually go into reverse and drop rates. The next six months are going to be interesting.

I wouldn’t expect to see an aggressive Reserve bank interest rates for the time being.


Rise is looming

Although we dodged a bullet this month with interest rates put on hold, it seems another rise is looming.

Despite the fact that many Australian households appear to be struggling, the RBA has warned that rates must rise in the future to keep inflation in check.

Something to keep an eye on over the coming months.