Let’s check out what determines property price movements. From my observations:

• Short term property price movements (within 1-3 years) are usually determined by human emotion (also known as human insanity ?).
• Medium to long term price movements (3-10 years or more) are more likely to be beyond human insanity, hence they are more predictable and controllable.

Can we really predict human insanity? Some of the most intelligent people have been put to the test and still failed miserably. Economists have the unfortunate job of predicting human insanity, hence they earn the reputation of “having successfully predicted 9 out of the last 5 recessions”.

What is the difference between human intelligence and human insanity? There is a limit to human intelligence ?.

So what does determine property price movements over the medium to long term? In my opinion, amongst many other things, property prices are predominantly determined by two factors:
1. The money supply of a nation.
2. The wealth of a nation.

Let me explain.
 

The money supply of a nation.

Let’s take an extreme example to create a simple demonstration. 

• Let’s say on this little island country called Australia, a few thousand years ago, there were only 10 houses (probably called sheds back then ?), and there was no money being used at that time.
• The island chief decides to issue some money called Australian Dollars for circulation.  For the sake of simplicity, he decides that the money issued can only be used to buy properties and nothing else.
• The island initially issues only $10, so each house is therefore priced at $1 each. (Amount of money available divided by number of houses.)
• A year later, the island decides to increase the money supply to a total of $100 still with the same usage restrictions (can only be used to buy houses).  Without any improvement to the properties, each house is now priced at $10 each. ($100 divided by 10 houses, equals $10 each.)

Now you can see how property prices can go up just by increasing the money supply of a nation. We don’t even need to discuss the supply and demand situation as these only influence short term price adjustments.

If we look at the median property price in Melbourne and Sydney:

• In the 1920s, property was priced at around £30;
• In the 1960s, property was priced at around AUD$10,00;
• In the 2010s, property was priced at around AUD$600,000.

You know that the median priced properties are not better than those from 90 years ago when you compare their land size, location and quality of the building. But the price tag just keeps going up and up with no end in sight. This is the power of money supply increase.

(Take a look at the diagram below to see how Australia has been increasing its Money Supply at around 9% a year compounding non-stop, and how it “coincidentally” aligns with the property prices increase over the same period.)

(Data source for Australian Broad Money Supply: Economagic.com)
 

The wealth of a nation.

Have you ever noticed that regardless of which particular industry caused a nation to prosper at any given time, the wealth of that nation always ends up sitting in its residential properties? It has been estimated that around 70% of an industrial nation’s wealth exists within its residential properties. You can test this yourself, by looking around at 10 of your friends to see where their wealth is. You will quickly discover that the majority of their wealth is in their home, regardless of what line of work they do.

In other words, every 20-30 years you will see new industries come and go, in cycles of boom and bust, but the wealth left behind those industries tends to stay in residential properties. 

Let’s take a look at some of the nations over the past 100 years. Each has had some incredible industries at different times that have tremendously increased the wealth of those nations. For example:

• The automobile industry, steel industry and IT industry each brought America enormous wealth during their individual eras. But where has most of the wealth ended up? In their residential properties.
• The manufacturing industry of China, the oil industries of Dubai and Saudi Arabia and the electronics industry of Japan, all these industries have come and gone, but the wealth they created remains behind in their residential properties.

In 2006, I had the chance to work with a multi-billion dollar international hedge fund to finance a AUD$1.5billion residential property development project. The managing director of this fund happened to be the head of the Asian Pacific division of one of world’s largest investment banks. His rationale for investing around AUD$200Million into this residential development project is too simple to believe, at least for people who don’t handle multi-billion dollars every day.

On the trip to make his final decision to invest into the project, he said to me that it is always safe to invest, not speculate, in residential properties in a country which is becoming wealthier, regardless of which industry was predominantly responsible for creating that wealth. The reason is that the majority of the extra wealth is always going to end up sitting in residential properties anyway, with no exceptions. It’s just a matter of time.

So the question to ask yourself is, will Australia become wealthier or poorer over the next 10-20 years?

With the decline of the US & European economies, we are now firmly in the “Asian Century” as our Prime Minister recently put it. Australia is unusually well positioned to benefit from the growth of Asia, which represents 50% of the world’s population.

Let’s look at what Australia has in terms of resources*:

• The world’s largest resources of brown coal, lead, nickel, uranium, zinc & silver;
• The world’s 2nd largest resources of iron ore, bauxite, copper & gold;
• The world’s 3rd largest resource of industrial diamonds & lithium;
• The world’s 4th largest resource of manganese ore;
• The world’s 5th largest resource of black coal.
(*Source: Geoscience Australia)

Australia is by far the world’s richest country in natural resources per person with an unstoppable demand coming from 50% of the world’s population over the next 20 years alone. According to investment firm Credit Suisse the median wealth of Australians is the highest in the world already, its Global Wealth Report shows the typical Australian adult is worth nearly four times the amount of an American. In fact the research reveals that half of all adults in Australia have a net worth above $216,000.
Unfortunately most people living in Australia do not see that. Like the saying that “fish discover water last” we can’t see what we are in because we are surrounded by it.

Let me give everyone a different perspective so you can see the impact on Australian property prices.

I came to Australia from China in 1988. At that time there were almost 1 billion farmers in China and it wasn’t doing very much business with Australia. 

Now it is 2011 and China has 102 cities with an urban population of 5 million people or more. While Australia has none (Sydney has only 4.5 million people).  China has become heavily dependent on Australia’s resources.

China’s massive urbanisation process, which is continuing to move an incredible 400 million people into cities, is creating the demand for an extraordinary amount of resources such as steel and coal just to house all these people. 

If you have difficulty visualising what all this means to Australia’s wealth, imagine moving Australia’s entire population of 20 million people into a nearby fairly undeveloped country, say Papua New Guinea. Just to enable all these people to live a decent lifestyle would require building millions of new properties and supplying energy to these 20 million newly arrived residents. Then imagine doing the whole process 20 times over within the next few decades.

If you happened to own a business that had the mandate to rebuild the entire Australian nation from scratch 20 times over within a couple of decades, and your business has been selected as the largest supplier of resources needed for the task, how do you think this business would do financially? Some people worried about the Chinese economy slowing down could hurt Australia, but really if they slows down by 10% (i.e. a serious recession), instead of building Australia 20 times over, they are now only doing it 18 times, what difference does it make? Australia still couldn’t keep up with that demand anyway.

The above Chinese scenario doesn’t include the demand coming from other heavily populated countries such as India, Indonesia and Japan. For example, India is currently in the process of building over 300 shopping centres the size of Australia’s largest shopping centre – Chadstone Shopping Centre, it so heavily relies on Australia’s resources too.

Recently BHP Billiton has predicted Australia’s resources industry will need an extra 170,000 workers in the next five years alone, not to mention jobs needed to be created in other industries to keep these workers functioning. Australia is not called the Lucky Country for no reason.
 

Cutting through the noise.

Many Australian property investors have been distracted recently by the events in US & Europe.  Amidst all this noise, many have forgotten the fact that Australia was one of the few developed countries that didn’t go into a recession during the GFC, and still retains the highest credit rating for its government and major banks.
Let’s look at some facts to compare Australia to the rest of the world.

When you look at the US Government’s budget* for this year you can understand why their credit rating was recently downgraded:

• U.S. Tax revenue: $2,170,000,000,000
• Federal Budget: $3,820,000,000,000
• New debt: $ 1,650,000,000,000
• National debt: $14,271,000,000,000
• Recent budget cut: $ 38,500,000,000

(*Source US government budget papers)
 
To make their situation easier to understand, let’s remove 8 zeros and pretend it’s a household budget:
• Annual family income: $21,700
• Money the family spent: $38,200
• New debt on the credit card: $16,500
• Outstanding balance on the credit card: $142,710
• Total budget cuts: $385

Now let’s compare that to the Australian economy*:
• Annual family income: $29,840
• Money the family spent: $34,610
• New debt on the credit card: $4,770
• Outstanding balance on the credit card: $8,460
• Total budget cuts: $2,200

(*Source: www.budget.gov.au)
 
Many people believe that the decline of US property prices over recent years was due to the global financial crisis. I see them more as symptoms rather than the cause, as residential property prices over the longer term tend to reflect the wealth of a nation. 

The underlying cause of the US property price decline is that they are becoming poorer as a nation due to their heavy indebtedness which was mainly caused by a long period of over-consumption, a lack of highly competitive industries in recent times, and a few very expensive wars. 

People ask me why Australia’s property prices didn’t drop like US after the GFC, here is my view on this:

• On the surface, it looks like our banking system is more prudent to avoid properties being over supplied, as Australian banks won’t lend you money to develop new properties until you have pre-sold most of them, whereas you can get finance to build 200 new homes in US without knowing who is going to buy them.
• Below the surface, it is mainly because Australia is getting wealthier as a nation, and US (& many European countries) are getting poorer due to their heavy indebtedness;  To make matter worse, US (& many European countries) are in denial of such situation and trying to use more debt to solve their debt problems. Do you think using more cocaine is the solution for a cocaine addict?

So it is important for property investors to see the new trend where Australia has now permanently departed from the general decline of wealth in the rest of the developed world, and the performance of property in other developed countries bears very little relevance to Australian property performance.
 

In Summary

I believe Australian residential properties are on the verge of a major bull run over the next 20 years, because of 3 major reasons:

• The Australian dollar, as a relatively small currency in size, is at the mercy of the rest of the world’s money supply, and the rest of the world has been on a money supply increase path for the last 100 years. With no mechanism to stop printing more money around the world, Australia’s money supply will have to continually increase, hence the price tag on everything will continue to go up, including residential properties;
• Australia will continue to grow wealthier over the next few decades and property prices will rise to match the wealth created through this process;
• Australia is now aligned with the Asian region which is where the majority of growth will continue to come from and so the negative impacts of US & Europe will soon become less and less relevant.

Here is my prediction: the next 20 years will be a golden era for Australian residential property investors, regardless of what will happen in the short term.

I recommend all our clients to follow good money management principles and put more money into residential properties as early as it is safe for them to do so within their own circumstances.

At a practical level, Australian property investors need to take into consideration the impact on property prices from the baby-boomers’ impending retirement and follow the banks’ lead to park your money where the next income generating group will be residing.

By Bill Zheng

For further great articles by Bill Zheng, click here

But before I explain, I’d like to comment on the debate about Australia’s population growth and our nation’s capacity to house the growing number of new residents arriving on our shores. Some say we should limit immigration, while others argue that we need more skilled workers to boost our economy.

Although immigration has slowed in recent times, the projections for our future population have many concerned about where all of these people will live and how our already strained infrastructure and environment will cope.

The fact is Australia’s population will get bigger under every realistic scenario according to a report by the Centre for Independent Studies, and no matter what politicians do, population growth is going to happen. This is a certainty.

Another certainty is our population is ageing. While ageing has been conspicuously left out of the population debate, in many ways it will provide a greater challenge for policymakers than population growth.

In a moment I’ll discuss the implications of this for you and me as property investors, but it’s worth stepping back, taking our local conundrum and multiplying it by several billion.

On a global scale, our issues appear pretty insignificant, considering that 220 children are born into the world every minute. Last week we passed a population milestone with the birth of the world’s 7 billionth citizen.

And if there weren’t already enough concerns about the capacity for the world and its environment to prosper under the weight of all these people, it is expected that by the year 2050, the world population will be closer to the ten billion mark.

What are the implications of this massive population growth?

I know many are asking how our planet can sustain more human life, with talk of impending shortages of food and natural resources.

I don’t have any answers, in fact I don’t really understand all the implications; but I do know that over the years I have heard many similar global scares that didn’t eventuate, including:

1. The communists are coming to get us – in the 60’s
2. Global cooling – yes when I was a teenager I remember how we were told the world going to end up freezing, not overheating.
3. The world will end because a nuclear war is eminent – in the 1960’s and 70’s.
4. Global famine – we just weren’t going to be able to produce enough food for our growing population.
5. We’ll run out of petrol and fossil fuels – this was a popular theory in the 80’s and brought on a range of more fuel-efficient vehicles.
6. Global warming – but I’ve heard more convincing arguments against this as I have heard for it
7. And of course I couldn’t leave out – property prices are too high and can’t keep going up, because properties are unaffordable. I heard this in the 1970’s. And again in the early 80’s when we had a recession and in the late 80’s before our property markets flat lined for a few years. I heard this again in the nineties as well as after property markets topped out in 2003. And of course we heard this in 2008 during the GFC and we’re hearing it again now.

Yes…over the years I’ve heard lots of scary predications that sounded correct, but didn’t come to pass.

What about our aging population?

Recently Harry Dent caused a stir making his own scary predictions.

He suggested that our aging population and their lack of spending is going to cause the next depression.

The fallout of a Baby Boom gone wrong has been witnessed in Japan, where the number of retirees escalated beyond the number of working age citizens and had a notable impact on their local economy.

This has caused some demographers to suggest that Australia is facing its own demographic tsunami as more of our Baby Boomers hit retirement age.

To me the conclusion is inescapable… we are going to have to populate or perish.

Look at the facts…today 43% of our workforce is made up of Baby Boomers (people born between 1945 and 1964).

This means the first wave of the tsunami has hit, as the first Baby Boomers are now turning 65. Over the next 15 years, Australia’s 5.3 million Boomers are going to reach retirement age and as they leave the workforce they will stop paying tax, many will go on the pension and most use our public health care system.

You see…most Baby Boomers don’t have enough savings or superannuation to see them through retirement. This means many will have to keep working longer than they had anticipated but eventually, when they do retire, they place a massive burden on our financial system.

The Governments will have to find the money for their pensions and health costs while at the same time making up for their lost taxation revenue by either:

Increasing taxes for those in the workforce which would be political suicide. Or…
Increasing the size of the tax paying workforce by importing younger workers.

If we import young skilled adults to fill the increasingly wide gap in skilled labour that we are experiencing, these immigrants will work for some years and, given their skills, will earn high incomes and pay more tax.”

What does the government say about all this?

In its 2010 Intergenerational Report, our Treasury, on seemingly conservative assumptions of net overseas immigration of 180,000 each year in the future, concluded that we would, in fact, have 35.9 million residents living in Australia by 2050.

Economists BIS Shrapnel addressed the question of the sorter term impact of these figures and concluded that Australia’s population will likely increase by 25% to around 28.3 million people by 2026.

Based on this analysis there will be 5.7 million new Australians within 15 years. About 55% of these will be immigrants folks and the balance due to net births.

BIS Shrapnel projects that this translates to about 2.3 million new “households”, with on average 2.5 people per household, by 2026.

What does this mean for Australia?

There is no doubt that our population growth will bring with it significant, social, infrastructure and environmental impacts.

Interestingly Professor Roger Short from Melbourne University, who at 80 has lived through a tripling of the world’s population recently explained that ”We are the most affluent and the most effluent people on earth.”

Currently more than half of the global population lives in an urban environment, with the number expected to rise to 75 per cent by the year 2050, with developing nations set to become home to more than half of the world’s 50 largest cities.

In Australia at present, 87 per cent of us live in urban areas; with an obviously emerging trend toward smaller dwellings and inner city lifestyles more of us are going to be concentrated around our major capital cities.

What will this do to property prices?

While many factors affect a country’s property prices in the short term, in the long term they are driven by 2 main factors:

1. Population growth and
2. The wealth of the nation.

As I’ve already explained strong population growth is a given and as a matter of fact so is our increasing wealth.

I don’t think that anyone would argue that as a nation Australia become wealthier over the next 15 years.

Australia is well positioned to benefit from the growth of Asia, which represents 50% of the world’s population. We have vast resources that will be required by our growing neighbours and we’re at the beginning of the mother of all resources booms.

Sure some companies and their shareholders will become richer, but so will the average Australian. On many accounts the average Australian is richer already than people living in most other countries, however some people living in Australia just don’t see that and complain and protest.

After all the latest figures from the ABS show that about 2.7 million households owned their home outright, with an average value of $541,000. And about the same number have a mortgage on their house that has the average value of $521,000 with an mortgage of $188,000.

In conclusion:

The fact remains that as long as people keep having children and residents from other countries seek to settle on our shores, Australia will not be immune to the population pandemic that’s sweeping the world.

Rather than fight it, we need to embrace it in a positive and sustainable way.

We must also recognise the opportunity this will give us to boost our declining workforce and in turn, our country’s economic wellbeing through revenue raised from income taxes, as well as new Australians buying goods and services. And yes, that includes property.

While property prices are in a bit of a slump at present, that’s just part of the property cycle. As the cycle moves on, and it always does, the combination of population growth and increasing wealth will underpin the strong growth of capital city property values – as they have done for decades.

Article by Michael Yardley. To read this article on his website, or to browse other articles by him, go to Property Update

Real estate sections in newspapers seem to be getting bigger, despite the fact that print media advertising revenues are steadily declining, along with circulation figures.

Through this investigation, CHOICE has found the distinction between advertising and editorial in the real estate press is largely absent. The industry has argued that the property section is commercial, but this distinction may not always be clear to consumers.

• Vested interests: CHOICE has found examples of real-estate industry professionals portrayed as ‘everyday’ men and women in positive property market stories.
• Perks: including favourable profiles and overseas junkets, provided by newspapers in return for real estate agencies reaching sales targets.
• No room for criticism: The relationship between media and real estate is apparently so cosy in some instances that big spenders are kept happy at all costs.

Mixed messages
If you were browsing the Sydney Morning Herald online on 3 September 2011, you may have come across this article: “Spring property season not off to a great start”.

But while the news may seem bad on the surface for potential home-sellers, you needn’t worry, because as another headline on the same day proclaims: “Spring property market set to bloom late.” You should hurry and “spring into action” to “beat the seasonal rush and put your house on the market early”, according to yet another article.

Another article placates buyers – it’s “Hunting season… if you’re looking to buy a new unit, this spring is a great time…[it] is going to be the best time to buy for the last few years and for the foreseeable future”.

The articles are contradictory: if you’re buying, get in quick because the market is weak and you won’t see prices like these again. If you’re selling, now’s the time!

But how can both be true?

“It’s a complete myth, there’s no evidence of it at all – in fact last year spring was the worst time of the year to sell. But people believe it because they keep hearing it. Now you’ll have a lot of people putting their houses on the market, and you’ll never find any of that challenged in the newspapers,” says Terry Ryder, columnist with The Australian and founder of Hotspotting, a website that sells reports on tracks real estate trends. Mr Ryder is also a former property editor at Brisbane’s Courier Mail newspaper.

“Ad budgets influence editorial. There’s very little or no scrutiny by journalists when they receive press releases from the industry – either the developer lobby or real estate agents. Most of what is written about real estate is a very thin rewrite from press releases,” says Mr Ryder.

Alan Smith (not his real name), a former manager at Australia’s largest community newspaper group, the News Ltd owned Cumberland Courier Newspapers, agrees that “editorial” in real estate sections online and off should never be taken for granted.

Who pays for the real estate section?

“It’s a commercial section of a newspaper… The real estate market works on the basis that the people who advertise their properties are paying for that section. While editorial isn’t necessarily paid for, it’s a symbiotic relationship where the online service will say ‘I’ve got this percentage of space for editorial, submit something to me’, and if it’s good enough it will be published.”

Smith says “real estate journalists will take a feed of guff from the real estate industry any day. Journos can’t possibly write a commercial section all themselves, so they’re going to rely on information from the industry”.

One veteran industry insider and current real estate academic is shocked people still think the real estate press is a credible source of information.

“It staggers me that people still read [newspapers] with the expectation that they’re getting property advice,” he says. “It’s a similar principle to getting marketing material in your letterbox. It’s very rarely a bad time to buy or sell, it’s always ‘buyers wanting more property contact us now’.”

02.Vested interests

The papers are full of real estate success stories. But who exactly is behind those oft-quoted “first home buyers”?

A recent story published in The Courier Mail referred to flood-damaged properties hitting the market. Property editor Michelle Hele wrote about a potential buyer, James Freudigmann who was “undeterred by flood damage”.

What Hele didn’t disclose is that Freudigmann is the Queensland director of property advisory company Capital 360, a company specialising in property advisory, and according to its website Freudigmann uses his “extensive knowledge [of property]” to “exceed his clients’ expectations.” 

When CHOICE contacted Hele for comment, she told us that “this story was about potential buyers of a flooded property and Mr Freudigmann’s stated intention to live in it, not whatever his business may be.”

A similar article, “Deluged Brisbane houses cheapest of the capitals”, published in The Australian in April 2011, stated: “For Brisbane potential home buyer Laura Kavanagh, the low prices have provided a great opportunity. Ms Kavanagh and other buyers said that the doubts over future levels of interest rates were not really a big factor in their decision to enter the market. ‘I don’t think they will go up, but even if they did it’s still a good time to get into the market,’ she said.” 
The fact that Kavanagh is an agent with Place Real Estate, one of the largest agencies operating in Brisbane, is not disclosed.

Andrew Fraser, the article’s author, blamed this on a tight deadline. “The story is based on a report which stated that Adelaide prices were going up while Brisbane prices were going down. I was asked at 4pm to urgently find a house buyer for the story so I contacted a real estate agent. The person they found me worked at the agency but was also a house buyer.”

“I would have put in that she was real estate agent but I didn’t think it was important because she was in there as a buyer. And the story was not about her… the reference to her is in the final three paragraphs.”

Lack of disclosure
The practice of not disclosing vested interests in these ‘everyday’ men and women is widespread. CHOICE has seen examples in the Sydney Morning Herald, while the MacroBusiness blog, which provides alternative views on investments, has uncovered the practice at a number of other newspapers including:

The Courier (Ballarat)
The Australian
The Daily Telegraph (Sydney)
The Courier Mail (Brisbane)
Adelaide Now (website of the Adelaide Advertiser)

“The consumer knows when they’re reading any commercial section of the publication – be it health, cars or real estate – that it’s advertorial,” says Smith. “You put hard news in the front of the paper. It’s preposterous to think that commercial sections would be unbiased! If you were to [have an unbiased section], no real estate agent would submit any editorial.”

“People believe what they read in the papers,” says Ryder. “If you repeat the lie often enough people will accept it as the truth. Often people aren’t even aware of where their attitudes come from – they just absorb media attitudes because they’re there every day, and they’ll repeat misconceptions as fact.”

To read the rest of this insightful article by Choice, click here http://www.choice.com.au/reviews-and-tests/money/investing/property/real-estate-puffery.aspx

And the calls seem to be getting more outlandish, with the latest prediction being for a 20 per cent drop in Australian house prices between now and the end of 2013 (House price hit yet to come, October 20). What is much more likely is that the property doomsayers are going to call it incorrectly yet again. Indeed, their renewed pessimistic hopes for a property collapse already look dashed as there are emerging signs of a return to price growth in Australia’s largest housing market, Sydney.

The truth is that many of the doomsayers have carved a niche for themselves by decrying Australian housing. However, they should, on occasion, be held to account. Their gloomy predictions are often accompanied by theories of economics such as debt-dynamics and go hand-in-hand with criticism of the top-tier economic institutions (and economists) who still believe in the role of supply and demand in setting prices. The reality is that the property doomsayers are likely to be wrong for a long time yet. It is the long-term trends in underlying demand and supply that drive housing prices.

We may experience wobbles around longer-term price growth and there will be some markets which experience significant dwelling price corrections, such as the Gold Coast at the current time and parts of Western Sydney in the mid to late 2000s. Overall, however, Australian housing is underpinned by very strong fundamentals.

First, at both the national and state levels, we have a substantial and growing housing shortage. Alongside the HIA Economics Group’s estimates of annual dwelling shortfalls and a large cumulative housing shortage are comparable estimates from Goldman Sachs, BIS Shrapnel, most of the trading banks, the National Housing Supply Council, the Reserve Bank and numerous other highly reputable sources. It doesn’t matter which way the numbers are cut, at best Australia adds to the nation’s housing shortage by around 20,000 dwellings per year. The competition from households for far too few dwellings has been a major driver of escalating house prices – and the situation will take years, and potentially decades, to reverse.

Second, despite various attempts to paint Australia’s house price-to-income ratio as growing rapidly, it has in fact been stable over the period since 2003, tracking at an average of just above four. Increases in the ratio prior to 2003 were due in large part to structural changes in the economy which increased the availability of housing credit. More importantly, Australian households remain highly able to service their housing debt, with arrears still at low levels when compared internationally.

Third, Australia’s economy is sound and the labour market relatively healthy. Even with the current volatility in the world economy we need to remember that, despite misconceptions to the contrary, it is China’s domestic economy that has been the Asian giant’s engine of growth rather than its exports. And China’s demand for iron ore has not been on a stable upwards trend but rather it has been growing exponentially. Basically, the amount of iron ore the country sucks in has been doubling every three years. The investment in Australia’s largest resource projects to help meet this and other demand is in the main locked in. In other words, no matter what happens in Europe, we have roughly a two-year period where business investment will contribute strongly to our growth.

Lastly, if all else fails, then Australia’s policy setters have always shown a willingness to adjust monetary and fiscal settings as required. In other words, we don’t live in a policy vacuum. Doomsayers have often used this factor as an excuse when their predictions have turned out to be wrong: the attitude seems to be ‘oh yeah, I would’ve been right but the government put in place a stimulus package”. Using fiscal and monetary policy to stimulate the economy when needed is entirely appropriate and the prospect should not be ignored when expressing a future outlook.

A couple of years ago talk of an impending (at one point the term ‘imminent’ was bandied around) price crash was rife, yet it didn’t materialise. Justification as to why the crash didn’t happen has subsequently been far from convincing. What such talk does achieve is to spook households who value their home not only for its material worth, but for the fact that it is a roof over their heads under which they base their work, rest and play as part of the Australian way of life.

A claim of a 20 per cent fall in Australian house prices (assumedly the prediction refers to a 20 per cent fall in the nation-wide median house price) between now and the end of 2013 is, in the vernacular, ‘way out there’. In economic terms the claim can be shot down on both theoretical and empirical grounds, but there is a risk that doing so gives more oxygen to such a claim when instead it should be doused.

Everybody is entitled to their opinion, but individuals should refrain from frightening people with opinions that by their very nature generate scary headlines, but that fail to transpire. For mine, if Australian house prices do fall by 20 per cent between now and the end of 2013, then you can sign me up for five of them!

Nifsan CEO Sean Wardrop said while most developers were discounting or offering incentives on remaining stock, there was an inherent premium built into them as they would be the last available for some time.

“It’s ironic developers, including ourselves, are offering discounts and inducements to clear what’s on our books, but in reality they are a scarce commodity,” he said.

“Scarcity is the fundamental driver for price premiums but we’re all so immersed in the negatitivity of the market that no one is aware of the inherent value in these properties.

“It won’t take long for what’s left on the Coast to be sold and then, as demand builds…prices will accelerate rapidly.”

UDIA Gold Coast branch president Steve Harrison agreed there would be “lower than required lots on the ground” that, as a result, would have a premium attached.

“That is because of the huge changes to the development pipeline approval process, which is so much more extensive, and costs placed on projects by government,” he said.

“It’s about costs, time frames and funding. And the big four banks treat the Gold Coast particularly harshly and that creates a level of uncertainty in the local market. If council isn’t issuing approvals, it’s hard to get finance and therefore there is less stock.”

Mr Harrison said that while this was certainly the case for “flat land”, residential subdivisions and communities, vertical product could also be affected. There could also be a potential shortage in high-rise developments as there is nothing on the horizon,” he said. “Theree are no cranes in sight. It leaves us with a position where high-rise product will continue to sell and reach a point where that is at a premium as well.”

Mr Harrison estimated residential subdivisions would reach a premium in the coming 12-18 months and high-rise stock would follow in the coming three years or so.

Mr Wardrop said with only a few new large apartment developments approved in recent months, there was “a real problem looming for the Gold Coast with at least a two-year turnaround to complete if one was started in the next six months”.

Only 11 development approvals were given and moved to construction in August, down from about 800 in the same month in 2005.

Source: Weekend Gold Coast Bulletin 08/10/11

Data to the end of July shows a quarterly rise in median price of 21 per cent for apartments in the Main Beach area, at an average sale price of $600,000.

Units were easily the best sellers, with Benowa coming in next at 18.8 per cent with an average price of $461,000, followed by Casuarina at 13.5 per cent, average $382,500, and Coolangatta at 12.8 per cent, average $455,000.

Houses were next, starting with Palm Beach reaching a growth of 12.1 per cent (average sales price $530,000) and then Kingscliff at 10.1 per cent ($602,500).

Bill Morris, author of the Midwood Report, said about 90 per cent of all sales across all dwelling types were under $600,000.

However, he said residential sales were running at about 30 per cent of the average of 6000 per annum.

“They are running at about 2000 per annum and that’s across the board whether new, used, million-dollar-plus or the mid range,” he said.

He said supply in the apartment market was on its way down.

“At the last count at the end of September there were 611 new apartments for sale compared with 1500 two years ago,” Mr Morris said. “That number is coming down mainly because we aren’t constructing but they are still selling some so it is gradually winding down.

“The supply level is a bit over two years and that’s not really that bad at the moment because it takes that long to obtain a parcel, get approval and get it constructed.”

Mr Morris said while many talked of a turnaround in the property market over the next two or three years, predicting the next boom was not as easy as it seemed.

“It used to be easy because it ran in regular cycles that have been around since the early ’70s,” he said.

“But what has happened this time is that we have a very low supply of capital for lending by the banks and that’s not been seen in Australia since the 1961 credit squeeze.

“I don’t think anyone can forecast when the next upturn will be. It depends on the recovery in the US which still generates 30 per cent of the world’s GDP.”

He said the world changed when the GFC hit, especially with respect to overseas funds being available to the Australian banks enabling them to lend.

“That’s not really the banks’ fault,” he said.

“They can’t obtain funds from the US (their traditional source of funds) so while they are lending on safe mortgages, they don’t need to lend on risky mortgages or high loan-to-value ratios.

“Anyone wanting to borrow more than 80 per cent of the purchase price is unable to get a loan and that cuts out a lot of people.”

The report, prepared by BIS Shrapnel, says the underlying strength of the Australian economy, stable interest rates in the short term, high immigration and a dire shortage of houses in certain areas, will be the main drivers of this growth.

It forecasts the Sydney median house will lift by 19 per cent to $770,000 over the three years to June 2014.

The rise in home prices and shortage of accommodation is also expected to force up rents.

This compares with 20 per cent in Perth, 16 per cent in Brisbane, 8 per cent in Canberra and only 6 per cent in Melbourne.

It also predicts that first home buyers will start to re-enter the market in greater numbers next year as the outlook for the economy improves. This will in turn encourage others to return, especially upgraders, as demand for their properties improves.

”Sydney hasn’t fallen in a hole and house price growth has been minimal but has held up over the last 12 months,” said Robert Mellor, the managing director of BIS Shrapnel.

But he predicts this will jump to about 5 per cent in 2011-12 and 7 per cent the year after, before growth will start to slow as a result of higher interest rates in 2013.

”At some point in the next few years rising interest rates will become a concern and that will bring a slowing in residential property markets,” Mr Mellor said.

BIS Shrapnel chief economist Frank Gelber warned the Melbourne market was “running out of steam” as supply levels for new homes increased to satisfy demand.

Would-be house buyers would be deterred by a likely 100-basis point increase in interest rates over the next few years. Such a rise would take the official rate to 5.75 per cent.

“The property market will stay stronger over the next few years but there will be no huge increase in (residential) property prices over the next five years in Melbourne,” Mr Gelber said, speaking in Melbourne.

“The next big increase in Melbourne property prices won’t be until the next upward phase of the economy.”

Separately yesterday, a report from the Housing Industry Association revealed that in the past year, Australia’s major developers built about 50,500 new houses – down about 20 per cent from the previous year.

Commercial to eclipse residential

Despite the optimistic outlook for home owners in most capital cities, residential property will be outperformed by commercial property over the next 10 years, according to research by ANZ, smh.com.au reports.

Equities will eclipse residential real estate as the strongest performer, but ANZ suggests that when risk is factored in, commercial property will generate similar returns.

?The report, Asset returns: Past, Present and Future, said owner-occupied housing had made annual average returns of 12 per cent over the 24 years since 1987 even when costs and taxes were factored in.

Simple historical comparisons of equities and property are often used by property analysts to demonstrate housing’s superior capital returns but ANZ included costs, taxes, interest on loans and factored in the risk associated with investing.

It found that owner-occupied housing had the highest returns, outperforming investment property, in part because of capital gains tax exemptions.

Investor housing was the next best asset class, performing slightly better than equities over the time analysed, the report said.

They were followed by government bonds, term deposits and commercial property.

HOUSING’S STATE OF PLAY

Median house prices projection over next 3 years:

Brisbane $435,000 to $505,000 +16.1 per cent
Sydney $644,700 to $770,000 +19.4 per cent
Melbourne $590,000 to $623,000 +5.6 per cent
Darwin $515,000 to $600,000 +16.5 per cent
Canberra $525,000 to $565,000 +7.6 per cent
Perth $470,000 to $565,000 +20.2 per cent
Adelaide $410,000 to $440,000 +7.3 per cent
Hobart $370,000 to $395,000 +6.8 per cent

Business investment in Queensland (non-dwelling construction, machinery and equipment purchases, and engineering construction) grew faster, in aggregate, than any other state in the year to March 2011.

The rise in mining related investment is expected to continue in late 2011 and into 2012, particularly in LNG and CSG (coal seam gas) projects, including associated rail and loading facilities such as Abbot Point and Gladstone.

Despite the growth in business investment, the Gross State Product (GSP) fell by 5% over the year to March 2011. Sectors such as residential dwelling investment and net exports dragged back the gains made in business investment to the extent that the fall in GSP was the largest in the 25-year history of Treasury records.

Dwelling approvals in the state fell by 10% and commencements, by 18.3% annually. By comparison, in NSW, commencements grew by 4.4% over the same period, so Queensland’s dilemma is not simply the post-GFC national problem.

There are endemic problems in Queensland’s residential building industry, principally oversupply at current levels of take-up, particularly apartments priced above $600,000.

New Apartment Sales & Stock

According The Midwood Queensland Investment Report’s latest new apartment sales survey for the August 2011 quarter, new high-rise apartment stock increased in Brisbane by some 50% in the August 2011 quarter compared to the previous corresponding period. This was primarily due to the release of Meriton’s Soleil (414 apartments in Brisbane’s CBD) and Infinity (289 apartments in Herschel Street).

Gold Coast high-rise apartment stock fell to its lowest level for over three years, due mainly to no new high-rise projects being released to the market during that time. Prior to that, stock levels had risen to 1,500 apartments compared to the current level of 618 apartments.

Unconditional sales of new high-rise apartments decreased in all major Queensland regions in the latest three month period ending 31 August 2011, compared to the corresponding quarter last year. This is due to a market perception that price decreases may have some way to go at the upper price levels.

All new apartment sales for all categories totalled 276 in the August 2011 quarter, compared to 493 in the August 2010 quarter, despite an increase of aggregate new apartment sales in Brisbane (from 166 to 192 sales).

The main point of difference was reflected in the Gold Coast where the August 2011 quarter sales dropped to just 71 compared to 202 in the previous corresponding period.

The new apartment market in Queensland, generally, is suffering not only from price volatility, but also spiralling body corporate fees which adversely affect investment returns. Accordingly, the investment market has deteriorated quite dramatically.

Gold Coast Vacant Land & Packaged Housing

According to the latest Prodap Report, a research report surveying all active and passive land and new packaged housing sites in the Gold Coast City Council region, aggregate sales of vacant land and new packaged housing totalled 278 lots and dwellings in the June 2011 quarter. This is significantly below the 363 aggregate sales recorded in the March 2011 quarter and the 496 sales recorded in the previous corresponding period (June 2010 quarter).

Whilst aggregate sales have shifted to an even lower level in the second quarter of 2011, the State Government’s $10,000 stimulus for new home buyers starting on 1 August 2011 is expected to improve sales volumes in the latter half of the year.

The Gold Coast is likely to see a spike in both vacant land and new dwellings sales as the stimulus is open to all purchasers, not just first home buyers.

Aggregate stock levels of vacant land and new packaged housing on the Gold Coast continue to fall due to the low level of stock being introduced to the market.

Aggregate stock available for sale as at 30 June 2011 was 1,223 lots and new dwellings (678 vacant land lots and 545 house and land packages), compared to 1,259 in the March 2011 quarter and 1,193 in the December 2010 quarter. The current  level of stock represents only one year’s supply at the current low take-up levels.

Forecast production of lots and new dwellings over the next 12 months totals 2,884 lots and dwellings (2,247 vacant lots and 637 new house and land packages), which is more than twice the current level of demand. However, scope for the effect of the State Government’s stimulus package should be allowed, and so the expected production is not unreasonably high.

Development on the Gold Coast continues to concentrate in the northern suburbs of Coomera and Pimpama, as well as at Waterford, where Delfin’s Woodlands recorded the highest volume of vacant land sales in the quarter.

See www.prodap.com for more information.

Gold Coast & Brisbane Office Market Update

The Gold Coast office market continues to be a basket case, at 22.4% vacancy and low net absorption of 6,587sqm for the six months to July 2011. 

The solution lies in some government departments taking up empty building at bargain leasing rates. There will never be a better opportunity to enter into long-term leases for new and existing tenants. Alternatively, the State Government could purchase The Rocket building in Robina, which is a modern commercial building.

The Brisbane CBD office vacancy rate is low at 7.4% assisted by negative net supply and high net absorption of 38,108sqm iin the six months to July 2011, equivalent to a new 40-storey building.

Brisbane fringe is just as well balanced with 8.8% office vacancy and 7,053sqm net absorption in the same period.

Brisbane doesn’t need a new wave of so-called “mixed use” developments, which often incorporate substantial office space within a principally residential building, mainly to obtain leverage under the Town Plan, which limits residential density on a particular site. Austcorp’s Vision project was a prime example.

Blast from the Past – Property Issues in Queensland August 1991

- Giant Gold Coast shopping centre Pacific Fair chalked up a 7.9% lift in sales in May compared to the same month in 1990.
- The uncompleted Grand Mariner apartment tower is officially the Gold Coast’s tallest building.  At 142 metres, it has surpassed by four metres the previous tallest, The Peninsula.
- Robina welcomes its 10,000th resident! In May 1991 alone, Robina Realty sold 33 Residential A blocks and another 15 properties for a total value of $5.6m.
- Brisbane is Australia’s cheapest capital city in which to develop commercial property and by a considerable margin. 
- Townsville has the highest proportion of public servants of any Australian city outside Canberra. Public sector employees now account for 38% of the city’s workforce.
- Low-set masonry block three-bed homes in Airlie Beach are priced from $105,000-$120,000 whilst high-set timber homes are from $115,000-$120,000. Executive homes in hill suburbs with a view are $190,000-$220,000 and a two-bed masonry unit is $60,000-$90,000.
- Cairns is now Australia’s 16th largest city. Officials predict that by 2001 it will become the 14th largest.
- Cairns Airport took over Gold Coast Airport in June 1991 to become the 7th busiest domestic airport in Australia.
- Extensions to Carindale Shopping Centre in Brisbane are now complete. The centre was originally completed in 1979 with 60 shops and a total GLA of around 20,000sqm. It now has 180 shops with a GLA of 60,699sqm.

On-Line Shopping and Retail Property

According to US based market research company Jupiter Research, US on-line shopping volume is expected to exceed $39b in 2011-12.

Australia’s spend was $12.6bn in 2010-11. A draft report by Australia’s Productivity Commission estimates that this represents only 6% of total retail sales.  However, volumes are increasing rapidly.

The Productivity Commission’s response to this clear trend is to extend trading times to 24 hours, and to reduce overheads such as shop assistants’ wages by including commissions on sales in the salary package.

However, if the market share of on-line sales increases beyond 6%, there is likely to be an impact on conventional retail turnover, and hence rents and , of course, property values, particularly in fringe locations and B Grade buildings.

If property values fall in response to dwindling sales volumes, it is reasonable to assume that a 10% rise in on-line sales could result in a 10% fall in property values in fringe retail locations.

Information supplied by Midwood Australia. To read the full report, click here to go to Midwood Australia

Good article courtesy of the Sydney Morning Herald:

There are plenty of research resources to help work out how much a house is worth.

The latest property values in Australian capital cities make headlines that are discussed around dinner tables and barbecues around the nation.

But the average price of a house in Melbourne or Sydney may be a poor guide to the market value of that little terrace you’ve got your eye on.

When you decide to buy or sell a house or apartment there is often a large gap between what you think or hope it is worth and the price it sells for. The bigger the gap between expectation and reality, the more chance there is of paying too much or turning down a reasonable offer and having to settle for a lower price months later.

If you discount gut feeling, the most common ways to value a property are real estate agents, professional property valuers and online sales data.

The first port of call is often a real estate agent who knows the local area and recent sales but they should not be your only source of information. Estate agents work for the vendor so they have a vested interest in maximising the sale price but they also want a high turnover of properties to maximise their commissions.
This means an agent may inflate a valuation to get you to list your property with them then gradually reduce your expectations, or suggest a low valuation to prospective buyers to get them to view a property in the hope that increased competition will push up the final sale price.

You can get a more objective view from recent sales in your target area. You can buy online reports from providers including Australian Property Monitors (owned by Fairfax Media, the publisher of this paper) or RP Data. For example, APM offers recent sales in your street ($29.95), the full sales history of an individual property ($49.95), or an instant message of the last sale price of a property sent direct to your phone ($6.60).

RP Data offers an estimated property valuation ($49) based on recent sales of similar properties, an online valuation carried out by a registered valuer without a site visit ($196), or a full valuation by a registered valuer based on a site visit ($300-$800).

But there’s a third option. You can arrange a professional valuation yourself. Like the online services, valuers base their appraisal on comparable sales in the area. But Tony McNamara, professional standards manager at the Australian Property Institute, says they also check the property title and look for issues such as contamination, zoning, heritage orders and flooding. “A valuer is not a building inspector but they should pick up observable defects,” McNamara says.

Valuers must be licensed in NSW, Queensland and Western Australia but there is no licensing requirement in Victoria. Even so, McNamara urges people to use licensed valuers only.

Even if you do get a full valuation, that should not be the end of your research. McNamara advises people to talk to several real estate agents and look at other properties in the area. He says, online valuations offer a ballpark figure but they can be way off the mark.

McNamara says the cost of a valuation on an average residential property is about $350. You can find a valuer in your area on the API website (api.org.au) or the Fair Trading department, or its equivalent, in your state.

Tips from a professional property investor:

Property investor and author Margaret Lomas prefers to use a registered valuer when she needs to know what her properties are worth. ”I truly believe it is the only form of true valuation,” she says.

While banks automatically arrange a full valuation when you seek a loan, Lomas says that should not deter people from getting their own valuation. What’s more, by choosing a valuer who is on your bank’s panel, you may be able to deduct all or part of the fee from the cost of your loan. Banks can negotiate lower valuation fees than individuals but Lomas says even if you pay more you can negotiate a partial deduction with your bank and you get to keep the valuation.

”If you have a good relationship with one bank you can say, ‘I want a few valuations’ and the bank will arrange the valuations at their price,” Lomas says.

While Lomas arranges a valuation of her existing properties when she needs to secure finance for additional investments, she doesn’t bother with valuations on properties she is thinking of buying.

Instead, she saves time and expense by adding a condition to the sale contract stipulating that the property must be valued by her bank at the purchase price or more. ”If the value is lower than I’m offering to pay, then I can pull out of the sale or offer the vendor less,” she says.