I am working with some clients at the moment that were initially looking to sell their current home and upgrade to a larger home to match their growing family.  They didn't have not had any luck selling their home (at the price they felt it was worth) so were feeling dismayed about not being able to move in to a larger home. 

With the drop in interest rates and taking in to account what they could rent their current home for in the current market, it turned out they are able to buy the larger new home and still hold the current home.  They are now really excited at the prospect of bing able to buy a great home that they couldn't have afforded before due to its price coming down and holding their current property to sell in a few years time when the market picks up.

They did their sums and are turning the current financial doom and gloom in to an opportunity.

For aussie expats wondering when the best time to buy property in Australia is need to look at the factors that relate to them. 

1. The aussie dollar is around 63c (Fri 21 Nov 2008) to the US dollar.  That makes moving money in to Australia cheap.
2. Interest rates are falling which makes the cost of borrowings cheaper
3. The demand for core* rental properties in Sydney is very tight and putting upward pressure on rents.
4. A large percentage of buyers will be more influenced by their friends, colleagues and the media then actually looking at their own circumstances and doing the sums.  

The perfect scenario is the aussie expat, being paid in US dollars being able to buy a property that should be self funding fairly quickly due to the drop in interest rates and the increase in rents coupled with driving a good purchase price due to lack of competition caused by fear.

Of course this is not everyone.  There are the people who are concerned about job security (even then the figures may stack up) and the people who are already so laden with debt that lenders will not go near you.

*core rental properties refer to properties that are in high demand. For example 2 bedroom properties within 10km of the CBD and close to transport/facilities. Some suburbs such as Mosman have a large expat community so homes are also in high demand.

Over the past 12 months, we have seen, and are still seeing serious global financial issues being played out.  This current global crisis is affecting property prices in many parts of the world.  Some analysts are predicting the same thing will happen in Australia.

One of the main difference between the property market in Sydney and the global property market is the principal of supply and demand.  In a strange way, we can thank the government for keeping immigration levels high and new housing levels low.  This, in effect, has created a major short supply of housing.  This shortage of housing will, more than likely, keep the prices solid.  We are also starting to see a return of the Australian Expat, who will also need housing.

Australians have a huge love of property.  People will do anything to hold on to their homes.  The holidays may go, upgrading the car may be put off but homes will be absolute last resort. 

It is actually a good thing that selling property is a lengthy process.  It stops panick selling like we are witnessing in the stock market. 

An article appearing in the Australian today discussed the fact that the new Premier is facing a budget blowout.  Stamp duty on Sydney real estate has fallen significantly.  "A major factor behind the revenue shortfall appeared to be the fact that sales of property in the state - which includes the most expensive real estate in the country -- have slowed, hence eating in to revenues from stamp duty on property sales".

The interesting thing about this is that stamp duty flows from properties that are sold irrespective of the price they sell for.  Stamp duty has fallen due to the lack of properties being sold not from the price they are being sold for. 

There is still fear in the market but not a lot of forced sales.  The fear is keeping both sellers and buyers away and creating some buying opportunities for those willing to do their research.  If homeowners had to sell, we would have more property on the market, like in the US, and the Stamp duty to the NSW government would continute to flow.  

Over the past 8 months, we have been exposed to a barrage of media coverage about the “global credit crunch” and the impact this has had on the UK and US property markets.  We are also being told over and over again that the Australian Real Estate market will be affected as well. 

So far, we have seen a nervous market that is based on “what could/will/might happen”.  This is more media and fear driven than cold hard stats. 

According to statistical information from SQM research, the vacancy rates in Sydney’s Inner areas are actually increasing:

Vacancy rates in Sydney’s

• Eastern Suburbs           5.4%
• Lower North Shore       7.2%
• Inner West                  3.6%
• Northern Beaches         3.4%

SQM research’s statistics are based on online rental listings and data from the Australian Bureau of Statistics. 

One of the reasons for this increase seems to be based on people deciding the rent their property rather than sell.  This is creating an abundance of properties seeking over $600 per week – not really the true investor’s end of town. For tenant’s wanting to rent properties under $600 per week, the vacancy rates are significantly lower.

Could this be the start of the investor boom in Australia?

Over the past 12 months rents have increased.  12 months ago, I was using an average rental return of 3.5% on a Sydney property, now I am using 5% (adjusted on a suburb and type of property basis) and this increase is not due to property prices falling.  Rents can only increase if demand allows it to.  It does not matter what the level of a mortgage is.  If it did, landlords would be doubling the rent to cover this cost.  

The combination of Generation Y leaving home, strong migration patterns and a weak building sector is intensifying demand. The shortage of affordable accommodation will no doubt add to the growing number of displaced renters who cannot afford to live in well located areas.

The high interest rates and negative media coverage of the property market has dampened buyer demand and with it has been a slight fall in property prices.  The RBA is talking of reducing the interest rate next month.  This will make the investment property market more attractive as the cost to hold a property will fall.  The window of great investment property bargains is possibly about to close. 

JUNE 2008 – Sydney Property Brief

A bit of history

In the last 18 months, the sentiment surrounding the property market in Sydney’s Eastern suburbs and Lower North shore has been on a bit of a roller coaster.  The last big property cycle ended at the end of 2002.  Between then and early 2007, the market was relatively flat.  By early 2007, all factors were pointed towards to start of the next property cycle, interest rates were low, rentals were increasing, and vacancy rates were extremely low.  Supply of new homes was not even close to sufficient to match demand.  A lot of global funds were flowing in to the property market from expats earning big dollars…..we all know what happened next.

By the end of 2007, vendors were listing their homes and achieving high prices on their properties.  The number of buyers well and truly out numbered the number of available homes.

What is happening now…..

Over the past 5 months, we have been affected by the sub-prime crisis in the US, interest rate rises, stock market crash, petrol price rises and the uncertainty of company bonuses.

From the buyers’ perception, many people are holding off “to see what happens”.  Potential buyers are concerned that prices will fall so they are nervous about buying at the moment.  From the sellers’ perception, with a reduced number of buyers vying for their property, they are reluctant to put their home on the market. 

In the markets I work in, namely the Eastern Suburbs and Lower North Shore, I have noticed a significant reduction in the number of homes that are being successfully sold through an auction campaign.  For example if I compare the auction clearance rate in the six months to November 2007 with the six months to May, in Mosman the rate has gone from 63% to 45%; Woollahra has gone from 67% to 45%; and Bondi has gone from 86% to 55%.  This is just one indicator that the demand has dropped significantly.

I am now starting to see significantly more quiet listings, having more conversations with agents about vendors understanding the current market and adjusting their price expectations i.e. reducing their prices. 

With many future buyers sitting tight and not competing for a property, it is a great opportunity to buy a great home at a great price.  Will it get better, from a buying perspective?  It might.  Although what most people will do is wait until everyone else is looking at buying and follow everyone else i.e. once again competing for properties when the market in an upward phase.

It is a very different environment to 6 months ago and a different strategy is required to secure the right home at a good price.

If you, as a buyer have time on your side, why wouldn’t you be actively looking at the market at the moment?  Generally, it is difficult to pick the exact moment when the property is at its peak or trough.  As we are not in a growth cycle, buyers do have time.  If it was that easy, it certainly wouldn’t stay there for long.  We do know however, every 10-15 year's, the property market becomes a Buyer's market, we believe that we are entering this cycle and the next 12 - 36 months will be just that. There are a lot of similarities between the current climate and the recession in the early 90’s.

The Global market volatility will affect every segment of the market – it’s unavoidable, some of course more so than others.  People do not seem to be concerned about the interest rate hikes; they are more concerned about their erosion of wealth through their exposure to the equity market.  This is starting to impact the Eastern suburbs and Lower North Shore and will affect properties above the $3million mark.  Vendors are being forced to sell as margin calls continue.  Some are trying to sell off holiday homes but are competing with too many others also trying the sell off their holiday homes.  Just look at Palm Beach, auction clearance rates are at 9%; the median price has fallen 37%; and days on market has increased from 101 days to 195 days.  They’re pretty scary stats for those hoping to sell off these properties to shore up their position.

It is important now more than ever to really understand what is happening and how it is impacting on prices.  I am coming across great opportunities that can be capitalised on now.  These opportunities won’t stay around for ever but the right strategies need to be in place to make the most of these.

Represented buyers will have better access to these opportunities and will be confident in the pricing to be able to move forward. 

Two of the main differences between Sydney and the rest of the world is that property prices have not been going through the roof over the past few years and Sydney has a major shortage of property. With these two factors, it is probably the best time to buy.  Of course, when I talk, I am talking about the inner areas such as Eastern Suburbs, Lower North Shore, Upper North and Inner West. The mortgage belt is a different kettle of fish altogether.  

 Over the past few weeks, I have noticed a lot of people, who have been exposed to the media are "holding off".  This is dampening demand a bit but not past the point where properties are not selling.  Sellers are also holding off, which makes for increased demand.

 Most people who are holding off and waiting for a "bargain" will end up getting back in when everyone else does.  The thing is that, in most cases, a bargain does not present itself until you start negotiating. Which means, don't hold off but keep a keen eye focused on the properties coming on to the market, both listed and unlisted.  

An amazing transformation is ocurring in the Elizabeth Bay/ Pott's point region.   Over the past few years, many of the areas hotels have closed down and become upmarket apartments.  This has attracted a new crowd and with it have come the upmarket night clubs, cafes and restaurants.

The area suits the couples without kids or the high flying executive.  They want convenience and quality...and they are getting it.

 With these changes will come solid capital growth.

In 2007, the property markets in Adelaide, Melbourne and Brisbane achieved high growth.  Sydney as a whole only achieved moderate growth. 

We are now in 2008 and have entered a time of uncertainty with a volatile stock market, predictions of economic slowdown, record petrol prices and likely further tightening of monetary policy through interest rate rises.  All these factors will slow the rapid growth seen in 2007.

So where is a good place to invest? 

Sydney apartments.

Sydney unit values have achieved very little growth over the past four years and are now cheap compared to other capital cities.  With many investors now looking to diversify out of the stock market, demand for Sydney apartments is set to heat up.

Australian Property Monitors have Sydney apartments as thieir number one pick for growth over the next few years.