Australian Real Estate Outlook

Real Estate, more than any other area, has always been the area where everyone is an expert. From your best friend to your gardener, your post man to seasoned Property Developers, everyone has an opinion.

Because of this, its hard to see through all the irrelevant opinions out there and find ones which are actually backed by some form of substantial fact. Even experts are divided over what they think will happen with Property Prices. Saul Eslake, Chief Economist at ANZ Bank, seems to think falls will be marginal. Macquarie Bank Economists have predicted similar falls of 40-50% as we have seen in the United States. Lets take a look at some of the facts.

For one, the general sentiment that we will follow the lead of the US on house prices is because we have thus far followed their lead in other areas. The ASX has tanked along with the Dow and basically every international index, and it is no secret that Australian Banks have followed the lead of international institutions and tightened their lending restrictions.

We do however have some key differences to the US Property Market which a couple of economists have picked up on - that is, our lack of housing supply.

In the US, the backlog of homes for sale is at 12 months and increasing. Rental yields have suffered as large developers in Southern California and Florida flooded the market with higher density condominiums and lifestyle developments. The Federal Reserve kept interest rates too low for too long, and with sub prime mortgages coming off of their honeymoon rates and large scale defaults, the market was flooded with housing.

The Australian Property market suffers from a lack of supply. This has kept rental yields solid and with a solid rental yield, land lords will unlikely be liquidating their properties.

This rental yield also puts a floor on how low prices can go, at least at the cheaper end of the market. With interest rates falling and rent remaining stable, these properties benefit from a stronger yield, and properties can only fall to a certain point before they become positive cashflow properties. This is basically how low the property can go - they can't keep falling deeper into positive cashflow territory, because the bank would lend to almost anyone if they have a positive cashflow property.

Interest rates will continue to fall also. As the RBA considers 5% to be neutral policy, we can expect falls of another 0.75 as they attempt to revive the economy.

Recent Government policy, including increasing the new home owners grant to $14k and the new home owners grant to $21k, will also have a positive effect on housing.

So what are the negative issues here? Of course its very hard in any analysis to take into account the human variable of confidence, and one thing is for sure - confidence is low right now. Government initiatives with their grants and the RBA lowering interest rates to stimulate the economy are positive, but the effects of this will take a while to flow on, ditto the earlier efforts to slow the economy earlier in the year.

We have already seen falls in property prices across the board in Australia, and no doubt we will see definite contractions in the market. My view is, the premium market will suffer significantly Australia wide and could quite possibly see falls in excess of 30%, but I still believe the bottom end of the market with their solid rental yields and the stimulus provided by Govt policy will ensure the falls at the lower end are minimal.

Stay away from premium stuff, and take advantage of the market only when you see good prices in the cheaper areas because falls across the board are to be expected - just not as bad as international markets.

DS