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The Property Cycle: What’s Happening This Time

by Marquette Turner

in Real Estate Radar

In 2000 the NASDAQ stock market collapse in the United States gave rise to Sydney’s biggest and most widespread property boom.

This time it will be different. The cheaper end of the property market simply will not be invited to the party.

A tanking share market is going to have divergent effects in Sydney. On one hand, in our eastern suburbs and the North Shore there is an army of baby boomers and wealthy business owners with high discretionary income and asset wealth. Property will continue to look good in leafy suburbs.

In this demographic, many nervous “mum and dad” shareholders will retreat from the volatile, and less the welcoming share market and head for the safety of property. For some, the tax-free haven of a more expensive family home is a compelling place to park cash. For others, rising rental returns will provide the reason to transfer equity from shares to property.

Fuelling this trend, apartment prices in inner-urban Sydney markets are starting to look cheap compared with other capitals. Typical prices in the top five national apartment markets are within 16 per cent of each other. Undervalued Sydney apartments will be on the shopping list of many investors and capital growth over the calendar year should exceed 5 per cent. House values are also forecast to grow by 5 per cent, propped up by the top end.

While Sydney’s enduring obsession with beach and harbour will ensure the top end of the market continues to record ridiculous prices, there is strong evidence that this year lower- to middle-income mortgage holders and first-home buyers will be further squeezed out of well-located property markets. House values grew by 10 per cent last year in lower North Shore suburbs but Sydney’s south-west had a 2 per cent drop in house values over 2007.

Those pinning hopes of a recovery in outer suburban property markets off the back of a faltering share market will be sorely disappointed. In mortgage land, few will be influenced by the fortunes of shares when they do not even hold any. Rising interest rates and record petrol prices do not leave room for such luxuries.

In 2000 a softening share market, buoyed by cheap interest rates and easy credit, was perceived by some to have triggered the frenzied property market that followed. Meanwhile, aggressive mortgage market competition helped baby boomer mums and dads to become landlords. Low interest rates helped. They competed with droves of first-home buyers, and brokers fell over themselves to lend money.

In 2007 the correlation between inner vs. outer suburbs and wealthy vs. poor strengthened, with stark contrasts between the thriving inner cities and the struggling outer ‘mortgage belts’. Overall, however, the national property market has performed extremely well, and this general trend has begun to flow over to major regional centres.

The biggest factor in rising prices is demand: we are simply not building enough quality detached owner-occupied housing.

The underlying demand in Australia is approximately 170,000 new starts per annum – this equates to 450 new dwellings per day. According to BIS Schrapnel there will be a deficiency of approximately 100,000 dwellings by June 2008, which equates to eight months of construction. This undersupply is causing a surge in rentals and land prices. With current vacancy rates hovering around the 1% mark (a balanced market is 3%) I cannot foresee prices falling in the short term. Our national population continues to grow in record numbers at 1.5% annually, with our population now estimated at 21 million.

Derailers are rising interest rates, rising oil prices and a looming credit squeeze. However, unlike the last property correction, this time we have high employment levels and a strong stock market. The rich appear to be getting richer and have greater propensity to manage any changes in their financial circumstances. Last time it was corporate debt, this time it will be consumer debt, and it will be the many on the bread line in the mortgage stress suburbs who will suffer the most and be least able to cope with even small changes to their financial circumstances.

Simon Turner simon@marquetteturner.com.au

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