How Australia’s changing demographics are affecting the property market for investors

How Australia’s changing demographics are affecting the property market for investors

By Catherine Cashmore
Tuesday, 29 November 2011

The demographics of our cities are changing at a dramatic pace.  While most are distracted by the state of the euro and the possible consequences to the Australian economy, long-term property investors should have their sights set on the emerging trends affecting Australian real estate. While immigration has bought a wonderful diversity of culture to Australian shores, flavouring suburbs with international restaurants and much-loved cosmopolitan delights, the effects on property have been startling.

The biggest increases in population between the 2001 and 2006 censuses were from China (64,000) and India (52,000) – two countries with dense populations and lifestyles very different from that of the typical Aussie family.  As a proportion of our population, ratios of migrants born in Asian countries are on the rise, and it’s suggested that by 2025 they will be the majority.

To give you some idea of current living conditions in these two countries, India’s urban population is growing twice as fast as the rural population and China’s metropolitan areas have mushroomed.  Statistics forecast an expected 350 million people to move into China’s major cities by 2030 and there are reports China will need to build 50,000 new high-rise buildings in the over-populated towns to accommodate the surge.  To the incoming migrants landing on Australian shores, our capitals must seem luxuriously capacious and attractive in comparison.

There is no doubt population growth has had significant impacts on the changing topography of real estate in Australia.  During the 1950s the landscape was sculpted with large blocks land, smaller houses and huge back yards.  Australia held the international image of people who enjoyed an outdoor sporty lifestyle and Victoria was aptly labelled the “garden state”. Since then city borders have been forced outwards under the increasing influx.

Once labelled outer-suburban areas are now seen as middle- and inner-ring suburbs, attracting high property prices and strong demand. The trend for inner-city apartment living has increased and been strongly favoured by investors who lean towards low-maintenance set-and-forget acquisitions – investments that are easy to rent and fall under consistent demand from international students and young migrants.

Melbourne arguably heads the population race and Sydney isn’t far behind. Even though the ABS recently reported a slowdown in migration, Melbourne’s still on track to comfortably reach upwards of 6.5 million by 2030.  As a result, leading demographers have stated that Melbourne and Sydney will need to be “completely redesigned”.  To emphasise the point, take a look at some of the quotes below – they are taken from The Committee for Melbourne’s 2050 Melbourne Beyond 5 Million report

“At the local street level, high-frequency public transport will be threaded through the entire city.”

 

“The development industry has learnt that it is merely a waiting game ofwhen, not if, the UGB (urban growth boundary) line will be re-drawn

 

Density needs to be understood and nurtured, not feared, as it has the ability to assist in shaping and growing Melbourne into an even more liveable city.”

The report highlights the need to plan for the “inevitable” swelling of our borders; however it also takes into account the effects of cultural diversity – something that’s rarely highlighted in property seminars.  In short, when it comes time to sell the family home you purchase today, the buying market dominating the population could have completely different tastes and preferences from that of the typical Aussie family – so much so, it could affect the future potential of your investment.

Well-weathered property buyers understand that residential real estate with good owner-occupier appeal fuels demand and consequently holds the best prospect for positive long-term capital growth.  However, many make the mistake of purchasing what they’d consider attractive and don’t take into account future cultural changes – namely the Asian market.  For example, to the average Australian buyer, period properties hold an unqualified level of appeal and capital growth tends to outshine other more modern styles.  However, to many Asian buyers, period homes are often seen as old and dated and newer properties grab the upper hand.

Other trends also are also starting to play an important role in the cultural hubs of our cities.  For example, properties with the number ‘4’ in the address are considered unlucky and avoided, whereas the number ‘8’ in an address has the opposite effect and in predominantly Asian populated suburbs, houses listed with an ‘8’ will attract a higher price based on this alone.

As a buyer advocate I’m often asked to search for properties that fit a compatible feng shui floor plan with various rooms in different quadrants of the house – (not an easy task.)  Also, homes opposite a T intersection, close to a cemetery, or with a view from the front door straight through to the rear (something that attracts European and Australian buyers) are also frowned upon.  It’s worth taking these aspects into account, because stick around for a while and the trends are not only likely to grow in dominance but – depending on location – they may also start to affect the price of your best and most valuable asset.

With lack of experience, investors often get caught up purchasing property with a preconceived set formula; they forget to think about the area they’re purchasing into.  For example if you want to gain from prospective future demand, it’s no good purchasing – or indeed planning – a modern box-style townhouse in a location that predominantly attracts buyers who flock there for the pretty streets lined with Californian bungalows on expansive blocks of land.  Neither is it wise to target a small one-bedroom apartment in a popular school zone in an area that only predominantly holds value for families with school-age children.

Likewise, a simple look at Australia’s future demographics is giving us clues to what will affect property prices in the future – and it’s not as simple (as some would suggest) of  “house and land vs apartment”!  As individuals we can’t control future market movements, however with a bit of insightful forethought we can minimise the risks of our choices – especially when it comes to purchasing real estate.

Catherine Cashmore

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Property Groundhog Day looks set to continue, but there could be tumult ahead:

Property Groundhog Day looks set to continue, but there could be tumult ahead:

By Catherine Cashmore
Tuesday, 22 November 2011

I don’t think many will be upset to see the end of this year.  It’s not been the best of times for the average investor – a term that should apply to us all.  After all, most have some form of investment, even if it’s just a small amount in their super.

Many markets have suffered extreme volatility – our strong Aussie dollar has undermined exporters and tested the tourist sector.  Half the year was spent with bullish predictions about interest rate rises, and then the single call of a potential interest rate cut came from Westpac’s chief executive and proved correct.  All in all nothing could be described as predictable – nothing, that is, except for the real estate market.

Capital city prices are down 3.6% over the 12 months to September 30 according to RP Data, however such movements can only be described as marginal – especially when viewed in comparison with the stock market.  Clearance rates have been stubbornly predictable.  Week in, week out,Melbourne – the auction capital – has averaged a clearance rate of around 53%.  Sales agents, instead of using comparable data sourced from the last few weeks to value a property due to market movements, are able to pull comparisons from results a few months old.

Quoted ranges for auction sales – which in the past have been dramatically underestimated as agents fall afoul of a rising market – now commonly have the final selling price falling within the range.  Weekly property editors are finding it hard to find something new and fresh to write each week, and we seem to be stuck in something akin to the scenario outlined in the film Groundhog Day.

It’s tempting to grasp onto anything that might produce a change in sentiment.  The 0.25% official cut in rates caused such a furore in the press you’d have been forgiven for thinking Christmas had come early.  Not that it was set to produce any perceptible change – conditions in the real estate sector have remained flat.  Much of the responsibility for this is down to vendor expectation, which has continued to be stubbornly resilient against any pressure to meet buyer’s cautionary needs.

A buyer can give every indication he’s interested in a home, and yet when the time comes to make that final commitment, a happy medium can’t be negotiated between vendor and purchaser.  Therefore we’ve seen a large number of re-listings lingering on the market and very few new listings to break the stalemate.  In particular, RP Data reports new listings down 18.6% compared with this time last year.

In the end there’s only one reason a property doesn’t sell in the major capitals where supply is tight, and that’s price.  Every home will sell if priced and marketed correctly, but working out the best path to reach an agreement on that price takes nifty negotiation skills. Only the experienced real estate agents have the ability to educate their vendors to meet buyers’ expectation, and in this risk adverse atmosphere neither party is budging – at least at the moment.

Furthermore, many vendors are not in a position where they feel forced to take a large cut in price. Unemployment is low, and while many may feel financial stress, let’s face it: not at levels felt in either Europe or the US. We have a sound banking system, normal interest rates, a record of good lending practices, extremely low default rates – add to the equation a rising population, and you should be able to see what’s ahead for the housing market – even if it’s going nowhere at the present time.  Long term, we’re on the way up.

In Australia, what really stands us out from the crowd is our passion for property.  We all know the stats commonly quoted when the question of home ownership hits headlines.  About 70% of us own or are paying off a mortgage.  Half that number have little or no debt leveraged against their principal place of residence.  Property brings up ideals wrapped in feelings of security, wealth, and a connection to the land.  Unlike many countries, you have to be a resident ofAustralia to own an established piece real estate – or at the least meet the requirements of the foreign investment review board.

To draw a comparison, it’s now being debated in the US whether to stimulate the market by providing permanent residency for anyone able to invest $500,000 in real estate.  That’s something we wouldn’t even think to consider this side of the Pacific –drastic measures indeed.

However, to further understand our obsession with property, you need to witness it.  For example, head to Melbourne on a rainy Saturday during which you’d expect most to be relaxing indoors, and you’ll see – as I did this weekend – spectators braving wet conditions in thongs and T-shirts to watch an auction just for entertainment value.  These aren’t just neighbours, they are people at all stages of the property buying and selling cycle – people animated by real estate.

I don’t choose to invest my disposable income in the share market – I don’t understand it, feel in control of it, or – particularly on recent observation – trust it.  However I understand property, I can see where the population is heading and the type of properties they want to live and invest in. Even in good times, Australia – unlike the US – has avoided building an oversupply in her capital cities.

Like many investors, I’ve ridden the false stimulating measures imposed by policies such as the first-home owners’ grant and changes to tax models that have produced short-term blips to the long-term graphs.  And agree, especially in comparison with many of the world’s falling markets, our housing on the face of it looks extremely unaffordable – but blame for this can be laid at the feet of consecutive governments that have failed to provide for a “big” Australia, and it’s not going to change overnight.  Never let it be said we’re immune from future crashes, no one is – however we’re also not immune from the many factors that have held us solidly on the world stage thus far.

The ebb and flow of the property market may be tumultuous as we head into a new long-term phase of tighter lending regulations and consumer caution, but it will take more than this to stop the property wheel turning in Australia.

Catherine Cashmore

Melbourne auctions offer little more than good street theatre

Melbourne auctions offer little more than good street theatre

By Catherine Cashmore
Tuesday, 08 November 2011

We’re coming to the end of a year many agents will be pleased to bid farewell.  Turnover has been down in most states – and prices ordinary at best. Last month should have been one of the busiest of the real estate yearly cycle, but turned out to be one of the quietest.  This has placed a strain on many of the smaller real estate agencies that need to bank enough commission to last through the quieter Christmas months.

Therefore the majority are celebrating the official drop in interest rates and it was widely spruiked during the weekend auction pre-ambles as being the stimulus needed to re ignite the market. However, a 25-basis-point drop will have no noticeable effect on prices – certainly not in the short term. Although there is hope, it will mark the beginning of a change in sentiment.

The Melbourne market is a mixed bag.  There are plenty of buyers looking, but most are reluctant to step into the arena unless necessary.  Those who need to buy are often struggling to find suitable choices – quality has been meagre across the board all year.  In some respects it’s similar to 2008 – investors who need to sell will shed their poorer assets first, owner-occupiers will only sell if personal circumstance demands – and discretionary vendors will only sell if they can get their “wish price”.

In such circumstances overpriced property will often linger on the market for months at a time, equating to large volumes of sub-par stock, much of which does not fulfil the needs of current home buyers.  Some investors have been brave enough to act against the tide and purchase, but most are cautious enough to wait and see.  If we have a second interest rate drop it may push prices. However it would be premature to make such suggestions while there are still serious global jitters.

Clearance rates in Victoria have been stuck in the 50s for a number of months, but many vendors are still opting for the auction system over private treaty.  In bullish markets it can be a remarkably successful way to escalate the price to levels buyers wouldn’t have otherwise stretched to, however in a flat market the effect is reversed.  If a buyer sees no one else bidding, he will naturally lose confidence and tighten the wallet strings – in such cases it will take a skilled negotiator to fulfil vendor expectation. However whatever the outcome, it’s a daunting experience for any buyer – and of course seller – full of hope, anticipation, emotion, and drama.

Melbourne auctions are advertised as a fair, transparent way to sell real estate, and on the face of the process sounds very simple.  Everyone lines up outside the property and providing the bids reach the reserve, the person still holding their hand up when the agent shouts, “sold” is the winner! Right?  Well, not exactly.

The real estate agent shouting “sold” loudly in your direction and masterfully thrashing the contract into his hand does not complete the sale of real estate.

At this stage the buyer has offered nothing but a verbal promise, which – in real estate – is not enforceable and does not count as a successful sale.  Until the purchaser and vendor have signed the contract, the property is not sold. There’s good reason why sales agents rush the winning bidders inside to sign the contracts after the auction, avoiding excessive chatter or distractions.  Those who have been through the process will also be aware they won’t meet the vendor until the ink is drying on the paper.  It’s not been unknown for arguments to occur between the two parties and as a consequence, the sale to be thwarted.

In fact if truth be known, the auction process works in the best interests of the sales agency who get their day in the sun performing to the local vendors. With flags on display and a street full of spectators, it provides a fantastic chance to source other prospective buyers and sellers – any agency worth their salt will use the opportunity well.

Auction rules vary across the states, however in Victoria every agent is obligated to state that the auction will be conducted in accordance with the REIV bidding conditions on display before the event. Following this will be an explanation that no late bids will be conveyed to the vendor and at the fall of the hammer the property will be effectively sold to the “winner”. However this information can be somewhat misleading to the inexperienced ear and it’s important for prospective purchasers to understand exactly what is legally required to complete the purchase.

Firstly there is nothing that requires the winning bidder to sign the contract.  In other words, they are allowed to change their minds if they suddenly notice something they don’t like on their walk inside the property before pen hits paper! As I said above, the verbal agreement to purchase only takes effect once in writing.

Secondly – the vendor can also change her mind or sell to a higher bidder.  For example if she overhears someone shout out after the hammer has fallen that they’ll pay $20,000 more there is nothing to stop her instructing the auctioneer to “re-open” the auction – the rules only state that the auctioneer is not allowed to take or convey bids to the vendor after the property has been knocked down.  She can also decide she doesn’t want to sell if she doesn’t like the look of the potential purchaser. Both these situations have occurred more than once, and shouting “unfair” won’t change things one iota.  In other words, the show that has just taken place outside the property essentially offers nothing but  good street theatre.

What about dummy bidding?  Illegal, right?  Technically yes – however in practice no! The dummy bid has simply been re-termed “vendor bid”.  It serves no purpose what so ever except enable the agent to shout out a bigger number.  It’s neither statement of the reserve, a counter offer, or a realistic idea of the property’s market value.   It’s simply the agent attempting to get the bidder to increase their offer in a vain attempt to get to get closer to announcing the property “on market” and reaching reserve.

Considering the information above, what is the real goal of an auction in Melbourne? It’s certainly not to get the highest price – after all, the successful bidder is only going to offer one bid over what the under bidder is willing to pay. It can however be very successful when two buyers have a similar amount to spend – although there is no easy way to assess this before the event. In fact a skilled negotiator will stand a better chance of getting a purchaser’s highest price through a private negotiation process than he will at auction.  Get two potential bidders in separate rooms – each not aware of the other’s budget – and you’d be surprised what good negotiation can achieve!

Auctions can be great street theatre, and on occasion will obtain prices well above expectation.  However as a method of sale, they are nothing more than an elaborate show – publicising the estate agency, and satisfying the vendor that their property has been marketed well enough to attract a range of spectators to the event.  It’s time we started putting more emphasis on other methods of sale and celebrating the many good negotiators in the industry who achieve excellent results without the need for a public show.

Catherine Cashmore 

A high-rise property bubble looms

A high-rise property bubble looms: Catherine Cashmore

By Catherine Cashmore
Tuesday, 01 November 2011

The world’s population ticked over 7 billion this weekend. Australia hosts only around 0.3% of this and is one of the least densely populated countries in the world – and yet we’re struggling to provide adequate affordable housing close to jobs and needed amenities for an increasing number of new bodies.  A recent report from the Department of Infrastructure and Transport entitled State of Australian Cities 2011highlighted some interesting facts.  Around 85% of our population live within 50 kilometres of the coast, and more than 700,000 dwellings are situated within three kilometres of the shore.  According to the Australian Bureau of Statistics the combined population growth of our capital cities increased by 257,800 in 2010 and accounted for over two-thirds of Australia’s population growth – most of that growth was in Melbourne, with Sydney coming a close second.

When migrants land on our shores they have little choice but to head to the capital cities, where most employers are based and they stand the best chance of securing work.  The challenge our state governments face is where to place a growing number of bodies within our limited city borders without losing the level of lifestyle that attracts so many migrants to our shores.  The report made some bold statements, one of which points out that by in 2031 the projected population of lone-person households will be 28%.  It’s supposedly the fastest-growing type of household in Australia – outstripping the growth of family units and couples without children.  The data is broadly used to justify the accelerated construction of high-density accommodation in the inner-city suburbs – generally high-rise small one- and two-bedroom apartments.  However, a closer look at the numbers uncovers an interesting phenomenon which seems to contradict this prediction.

While it’s expected that loan person households would typically mean a decrease in the number of bedrooms per dwelling along with the number of people living in each property – which is exactly what’s happened in NSW – this trend hasn’t followed expectation in Victoria, Queensland or Western Australia.  In these states there has been an increase in the number of people per household and Increase in the size of dwellings – In other words, there may be more people projected to live alone, but when you break down the data, it’s not quite as cut and dry as presented.

Despite this evidence seemingly showing a reduction in demand for single-person accommodation there has been no slowdown in the churn out of high-rise construction. In Victoria there have been over 20,000 applications approved for high-rise apartments over the past two years – that’s a 35% increase, in Brisbane the government recently stated 1,725 buildings of 29 storeys each were needed before 2031 – it’s a trend being repeated nationwide. Yet who’s purchasing these properties?

When Melbourne’s Docklands were initially constructed selling agents were paid high commissions to flog the developments off to unwitting investors.  The apartments usually came with rental guarantees, which once expired, left the purchasers unable to achieve the same return.  Unit growth charts for Docklands read like a day’s trading on the stock exchange, with sharp rises and plummeting dips proving anything but stable capital growth. Averaged out the growth has been little more than 5% per annum – a level currently exceeded by many long term deposit accounts and a dim shadow of what other properties in Melbourne historically achieve.

How many of these apartments are currently sitting vacant is hard to assess, however SQM have the vacancy rate above 6%.  Considering our population growth and the predicted surge of single-person households, you’d expect these developments would be busting at the seams, however clearly they’re not attracting the level of demand that’s oft been spruiked.

The City of Melbourne’s website describes the new developments as being“relatively small one and two bedroom apartments largely targeted at the student market and owned by investors.” Construction is currently underway for 16,000 of them during the 2006-2031 period.  But with the investor market as the intended recipient, they are certainly not fulfilling the needs of home buyers, or – judging by the number of similar developments sitting vacant – renters.  It seems to me we’ve got the beginning of a high-rise property bubble forming.

Anyone who advocates purchasing one of these off the plan developments will have little – if anything – to prove that asset will continue to  appreciate.  Usually they have a lot of concocted figures based on what they think will happen and if everything goes to plan they are very good at showing the riches you can make in the short term. The question to ask with any purchase of this type is what will it be worth in five years’ time?  In short any option you consider needs to be assessed on its risk profile, and “high rise” has strong evidence to show it’s “high risk”.  There’s good reason why banks go through extra checks and balances before lending for this type of accommodation – an issue which I’ve addressed in previous articles.

We’re heading into a mass over supply for one type of property and not heeding to the real changing trend that’s taking place. New statistics have shown Melbourne’s outer suburbs are growing faster than anywhere else in Australia – suburbs that cater for growing families.  This should be a clear signal to our governments that investment into increasing the liveability and amenities in the outer-suburban areas, as well as easing restrictions on development and decentralising jobs, is a greater need than disproportionally increasing inner-city density.

Australia is a teenager compared with her Western counterparts.  There is no reason why we can’t grow our population comfortably and sustainably while maintaining the quality of lifestyle we’ve all grown accustomed to.  We live in arguably the luckiest country in the world – but if we’re going to flourish, we simply have to learn to spread outwards, and not just upwards.  The growth in high rise accommodation and the disproportionally high numbers owned by investors is creating a dangerous precedent for a bubble that can’t be underpinned by demand.

Catherine Cashmore