Why now is the perfect time for investors to re-enter the property market

Date: 11/05/2011

Australian Property Monitors' (APM) senior economist, Dr Andrew Wilson spoke to Mortgage House about why property investors pulled back post GFC and the circumstances that are making it attractive for them to return to the market.

What Kept Investors Away

Traditionally first homebuyers and investors compete for the same properties - entry level properties both units and houses, essentially outer suburban.

Investors are looking for higher yields so they tend to focus on lower value properties.

The introduction of the First Home Owner Grant did what it was meant to do. It stimulated activity but it also pushed up prices. Sydney went up by 20 per cent, Melbourne by a massive 33 per cent.

Consequently there was almost a feeding frenzy of buyer activity and demand was drawn forward from first homebuyers and investors pulled out because the entry level became prohibitive.

At the end of 2009 and early last year first homebuyers started retreating because prices became too steep: but investors were still not moving because other issues such as rising interest rates were working against them.

At the same time alternative investment options were attracting investors. The stock market was under performing and there were and still are concerns about its stability and growth but banks were offering record deposit rates.

The other thing that kept investors out of the market was that from mid-2010 there was a sense that the market was very heavy.

It started to fall towards the end of last year and investors have been waiting for the bottom of the market before they move and reactivate.

Property market hits the bottom.

The next process will be a recovery.

Ignore all the talk of a property bubble. In Australian Property Monitors' March House Price Report admittedly we did see a reduction in prices. But it was not the level of shakeout that we were expecting.

Notably the data showed that most of the price falls, which were marginal in most centres, occurred through the early part of the quarter and stabilisation began to come through in the late part of the quarter.

We're now getting consolidation in many areas, specifically in auction clearing rates in Sydney and Melbourne, which is indicating that we've reached the bottom of the market.

We're not yet in recovery mode. That will come next.

Having said that we're not likely to see surges in property prices. We'll see a moderate recovery and a modest growth in house prices.

This is based on the fact that income is the primary factor determining the rate of property growth. Lenders base their lending criteria on an ability to service a loan and once property prices move ahead in terms of the income requirement they pause until income catches up.

Therefore investors need to watch carefully the generator of income, which is of course employment.

In terms of demand, the base fundamental is employment growth. When we have employment growth and low unemployment you get upward pressure on incomes. That's the scenario we have now in almost all the capitals and this is what will create the environment to re-generate house price growth. It's an ebb and flow as opposed to a boom and a bust.

The other issue to watch is consumer sentiment.

Investors are trepidatious if they think house prices are going to keep falling.

This is what is happening in the Perth market where falling prices is based on negative buyer sentiment stirred up by the mining tax debate as opposed to fundamentals. Currently it's a buyers bargain paradise over there.

Overall we're moving into a stabilisation phase in some capitals. But the thing to note is that different capitals are operating in significantly different environments. Therefore scenarios vary.

Everyone had a price surge at the end of 2009 and the beginning of last year due to the money that flowed into the first homeowners' pockets and markets have now come back according to their fundamentals.

Brisbane has gone backwards (there are flood issues but essentially Brisbane started to go back around the middle of last year), Perth started to decline as soon as the first Home Owners Grant flushed through the system and Melbourne and Sydney kept rising, which reflects the underlying strength of these two cities.

APM's last report showed that Sydney has only fallen by 0.4 per cent and Melbourne has stabilised. Melbourne had an extraordinary 32 per cent price growth to the middle of last year and surprisingly rather than going backwards it's now steady.

I predict that Melbourne will continue to track sideways because there's new supply coming through.

The other thing that's working in favour of savvy investors who are starting to re-entering the market is we still have a stable interest rate environment. The RBA isn't going to move until we start to see underlying inflation start to climb.

Just because we've had a huge spike in the price of bananas doesn't mean that the RBA is going to go bananas!