Can you afford it? Can you afford to ignore it?August 20, 2014 - 12:15AM
David Potts
Our home prices are among the world’s highest and still haven’t peaked.
But if you’re thinking of buying there’s no need to rush, because from here on the rises are expected to be more sedate as the surge in building approvals kicks in and real incomes falter.
At the same time, rents for units are more than keeping up with inflation in Sydney and Melbourne though at best are flat in the other capitals.
Independent property commentators are tipping values will rise an average 6 or 7 per cent in the next year, compared with about 10 per cent last year.
‘‘Normally property prices keep going up until interest rates start to rise. There’s more upside ahead with very low rates, in fact fixed rates have been coming down but the gains will slow down a bit,’’ Shane Oliver, head of investment strategy and chief economist at AMP Capital says.
So when might rates rise?Not for ages. Economists don’t expect the Reserve Bank to lift rates before its US counterpart, the Federal Reserve, which is planning to but hasn’t set a date as such, apart from making it clear that it won’t be until well into next year. In any case the smart money is even gambling that the Reserve has another cut in it.
Despite (or by pushing up prices perhaps because of) record low rates, affordability is a real issue.
Then there’s Sydney, described as ‘‘one out of the box’’ in the past year by Andrew Wilson, senior economist at Australian Property Monitors.
‘‘That has been due to low interest rates and investor activity, which is half the market,’’ he says, predicting 2 per cent price rises in each of this and the next quarter for Sydney.
‘‘Pent up demand has been released through lower interest rates, especially for investors in Sydney. Once it works its way through the system it wanes in impact,’’ Wilson says.
The other places to be in the next year are Adelaide and Brisbane, mainly because they have some catching up to do after last year’s under-performance.
‘‘Melbourne is likely to record half the growth it did last year – so that will be about 4 to 5 per cent,’’ Wilson says.
‘‘Perth is looking flat this year,’’ he says, and it wasn’t a reference to the city's topography.
Just as record low mortgage rates have boosted demand, an unusually long home building slump has limited supply. No wonder prices have been shooting up.
Although there’s a boom in housing construction under way it still has a lot of, um, ground to make up.
‘‘It’s the strongest in more than a decade but isn’t enough to make up for the under-building in the previous 10 years,’’ Oliver says.
In fact the adult population is still growing faster than new homes are being built, especially in Sydney, Melbourne and Brisbane.
St George Bank estimates the housing shortage is running at 101,300 dwellings a year.
Even so, there’s no getting around the problem of affordability.
Affordability trapCaught in the middle between low rates and high prices, both records, are household incomes. Wages fell in real terms over the past year and rising unemployment isn’t about to turn that around for a while.
Over time property prices rise on average by the growth in household disposable incomes.
These rose strongly after the global financial crisis as Australia’s export revenues soared thanks to China’s massive spending program, which concentrated on resource-hungry infrastructure. This filtered down to the neighbourhood as jobs, cheaper manufactures and wage increases.
Those days are over, though property prices have been the last to adjust to the new reality.
That’s why once interest rates start increasing, it seems around 5 per cent annual average rises will be the best that can be expected. That suggests real growth of only 2 per cent a year.
The return for investors will be higher when you add a gross rental yield of about 4 per cent on average. This probably won’t change much because even though prices are expected to rise, which would reduce the yield, rents will also be going up.
But remember costs such as maintenance, council rates and strata levies typically knock 1.5 per cent off this.
Also more than half of recent building approvals have been for units, suggesting a looming localised glut, since new apartment blocks tend to be built near each other. Buying off-the-plan also means you’re paying a developer premium.
Anyway there’s no chance of a property bubble while affordability is so constrained – potential first home buyers are staying away in droves – and bank lending is subdued.
Read more:
http://www.smh.com.au/money/investing/can-you-afford-it-can-you-afford-to-ignore-it-20140815-1032kc.html