Housing markets show improvementAs we predicted, the RBA cut interest rates by 0.5% at its May Board Meeting and each of the big four banks passed on a percentage of this cut.
The noise in terms of economic indicators currently being presented suggests things are improving and any further rate cuts are now a little further off. The main indicator was the reduced ABS unemployment figure released last week (4.9%) however we remain skeptical about its immediate accuracy. We note that the Roy Morgan Poll suggests the unemployment rate is 9.3% and 60% of the polled population believe it is more likely to be right than the ABS number.
The longer term trend in unemployment data is of more importance and it is clearly indicating that the rate is reducing (please see the trend graph provided by ABS catalogue 6202 April 2012).
The continuation of these trends is to some extent dependant on the European (EU) economic situation and its impact on the Chinese and American economies. If the EU should start to be broken up there will be flow-on effects which could negatively impact on our economy and employment situation.
It now looks clear that people in the EU are not going to tolerate significant austerity programs and hence we should expect countries like Greece to be forced to default. This will happen via the election of governments which are prepared to allow the default and a breakaway from the EU.
Fortunately, the EU banking community and governments are of some strength and have had significant time to prepare for a Greece default. While the default and reorganisation of the EU will cause disruption it will not be as bad as it would have been 12 or more months ago however it will impact on the global economic situation and the economies of China and America.
The Federal Budget that was announced last week was, on the surface, a little more than an attempt to buy votes and offset its constituents increased costs as a consequence of the carbon tax. With luck it will be an exercise that helps. The Australian economy may well need some stimulus and the cash payout to families for education just may stimulate the retail sector and hold the employment level. However, this may be coming a little too soon.
The reduction in employment in the Federal sphere (an estimated. 3,000 jobs to be lost) will have a significant impact on Canberra. Every job that is lost has a flow on impact and families will depart Canberra, also causing support jobs to be lost. There is already an oversupply of housing stock in the Canberra market so the impact could be severe. This could perhaps be a good thing as it will help policy makers recognise the difficulties of all who are not in the mining industry.
In its bid to produce a surplus, the government is likely to cause further contraction of economic activity. This in turn will probably lead the RBA to take action and adjust interest rates after June. It is clear that the government, from its various statements, expects the RBA to stimulate the economy to allow it to produce the promised surplus.
Fortunately, the RBA does have some room to move however it would be preferable if we didn’t expend our ammunition when there may become issues to overcome as a consequence of the global situation where countries default causing a slowing in global economic activity. It would be a pity if, after all of the good work done during the medium term, Australia was left in a situation like America where the RBA had all but no room to move on interest rates because it had already moved them to a very low level to allow the government to achieve its surplus.
On the housing front things are continuing to improve, albeit modestly. Auction clearance rates have improved marginally and are now approaching 60% each week. This is still low but a welcomed relief from the mid-50’s of the last few months. It is even more encouraging given the fact that we are now moving to winter, when the markets in the two major auction cities are traditionally slower.
In graph ‘Australian Trend’ we provide the outcome for all houses and all units.

Clearly, we are not out of the woods yet however there are more capital cities moving to quarterly growth. It has been the best part of a year since I was last able to present a number of graphs that were either showing growth or clearly pointing to an improving market. In particular, we are pleased to report that Darwin has moved to growth (see ‘Darwin Units’). Units, being a major component of this market, are presenting a strong and steep upward trend. This is a small market and the recent new resource projects and the location of US troops in Darwin for training will be making an impact. The upward move is very strong and given the size of this market it will tend to exhibit some volatile movement. As a consequence, we should expect a few modest corrections in the short term but this market is again in growth.
Brisbane, Gold Coast and Melbourne have been the main worries in recent times. Each of these markets are now indicating that the worst is over. We still remain cautious about Melbourne as the stock position (oversupply) may not have filtered through sufficiently.
The worst affected market in the correction process was arguably Southport, Queensland however its move toward a positive position is provided in ‘Southport Houses’. While it does appear that the bottom of the cycle has passed, the upward trend is not currently strong enough to make a definitive call.
Brisbane on the other hand is presenting much more positively (see graph ‘Brisbane Houses’). It seems to us that by September, or perhaps even a little earlier, we will be able to report growth in this market again. The rental yield for houses is a respectable 5.1% and our projections as to future median growth, while not outstanding are respectable at 5.1%. This is definitely a market which is now worth exploring for bargains and future quality returns.
In the table below we present growth rates, rental yields, sales outcomes and predictions for Australia and its capital cities.

- Rental yields remain lower than what they need to be to attract significant investment activity.
-The growth over the last 12 months has not been spectacular but it has been higher than inflation.
- Perth remains the standout performer with rentals for the median house increasing by $65 per week and $30 per week for units. This is significant when you consider the amount a tenant must cover by way of a wage rise to meet the increase. On a before tax basis, a tenant has to get an increase in wages of approximately $4,330 to meet increased obligations for house rentals and a more affordable $2,000 for a unit. The unit increase is probably more affordable as it is close to being equal to an inflation increase in wages.
In short, things have improved but there are some new forming “storm clouds” on the horizon. Notwithstanding the potential storm, it is time to start looking at the Brisbane, Perth, Darwin and Sydney markets for opportunity. In saying this, investments at this time should be made with an eye to cash flow and conservative gearing given the potential for some global international shocks. This process will ensure a positive cash flow outcome if any of the potential negative situations eventuate and interest rates decrease, hence even in a poor outcome the investment will look after itself and produce cash while you wait out any storm.
As always, happy investing!
John E Edwards.
Chief Executive Officer and Founder
Residex Pty Limited.
Read more:
http://blog.residex.com.au/2012/05/15/marketwrap-%E2%80%93-april-2012/