Bub­ble not close to burst­ing

Herald Sun - Property - - OPINION - GREVILLELE PABST

IT’S one of the most re­cur­rent of prop­erty mis­con­cep­tions — fear­ful claims of a bub­ble when prop­erty mar­kets ex­pe­ri­ence strong growth. But the truth is, not only is Mel­bourne bub­ble­free, but the up­swing has only just be­gun for many sub­sec­tors of the es­tab­lished residential prop­erty. Here’s why.

By def­i­ni­tion, a bub­ble pre­sup­poses prop­erty val­ues are over in­flated and a cor­rec­tion is im­mi­nent. While bub­bles can oc­cur from time to time — and let’s not con­fuse this with eco­nomic down­turn or cor­rec­tion — they don’t typ­i­cally af­fect all prop­erty types si­mul­ta­ne­ously. The as­sump­tion all prop­erty is over­in­flated fails to recog­nise not all prop­erty per­forms the same, with each sub­sec­tor and in­di­vid­ual prop­erty sub­ject to unique driv­ers.

This is ob­vi­ous when we com­pare the vastly dif­fer­ent per­for­mance of Aus­tralia’s cap­i­tal cities, but un­for­tu­nately seem­ingly less poignant when dis­cussing cap­i­tal city per­for­mance in iso­la­tion. So, let’s way­lay the mis­in­for­ma­tion and get to the heart of mat­ter.

But first, a caveat. The fol­low­ing ap­plies to Mel­bourne’s es­tab­lished prop­erty mar­kets, not new or off-the-plan prop­er­ties. We’re talk­ing gen­er­ally about es­tab­lished prop­erty in greater Mel­bourne, par­tic­u­larly the in­ner and mid­dle-ring sub­urbs.

Now, for the facts. Mel­bourne’s es­tab­lished residential prop­erty mar­ket is per­form­ing strongly over­all, with year-to-date auc­tion clear­ance rates at 78 per cent — a sig­nif­i­cant in­crease from av­er­age clear­ance rates in 2014 (71 per cent), 2013 (70 per cent) and 2012 (61 per cent).

History shows cap­i­tal growth oc­curs when auc­tion clear­ance rates are at or above 65 per cent, so it’s no sur­prise prices are on the rise. In fact, sta­tis­tics demon­strate cur­rent mar­ket per­for­mance is well above the long-term av­er­age of 6.3 per cent com­pound cap­i­tal growth per an­num, grow­ing at an es­ti­mated rate of 10 per cent per an­num. But, how far can prop­erty prices rise?

This can be an­swered by analysing past mar­ket per­for­mance. The cur­rent up­swing be­gan in Septem­ber 2012, with prices ris­ing 16.9 per cent in the two and a half years to March 2015. This marks the fourth pe­riod of growth for Mel­bourne in the last two decades. There was the growth pe­riod from De­cem­ber 2008 to June 2010 in which the mar­ket

grew by 29 per cent; the pe­riod from Septem­ber 2005 to March 2008 in which the mar­ket grew by 36 per cent; and, the pe­riod from Septem­ber 1996 to De­cem­ber 2003 in which the mar­ket grew 142 per cent.

Dur­ing this time there’s also been cor­rec­tions — not a bub­ble burst. The most re­cent down­turn was dur­ing the GFC, from June 2009 to Septem­ber 2012 in which the lo­cal mar­ket fell 7 per cent; then there was March 2008 to De­cem­ber 2009 in which mar­kets fell 4 per cent, and fi­nally De­cem­ber 2003 to Septem­ber 2005 in which mar­kets fell 10 per cent. What’s clear is not only are the down­swings less fre­quent, but they’re shorter in du­ra­tion, ex­pe­ri­enc­ing mod­est price falls.

The data demon­strates the cyclic na­ture of prop­erty mar­kets, and re­veals Mel­bourne’s up­swing is far from over. What’s driv­ing the mar­ket and what are the risks?

First, there’s lend­ing af­ford­abil­ity. This has led to a grow­ing wave of home­buy­ers and in­vestors en­ter­ing the mar­ket. Naysay­ers be­lieve mort­gage hold­ers are too highly lever­aged and an in­crease to in­ter­est rates would re­sult in cat­a­strophic im­pact to mar­kets. While it’s true the av­er­age mort­gage is larger to­day than be­fore, cur­rent in­ter­est rates are see­ing ex­ist­ing bor­row­ers re­duce their debt lev­els faster.

Of course, if in­ter­est rates rise, over­lever­aged prop­erty own­ers may ex­pe­ri­ence pres­sure to sell. But, with in­ter­est rates used to man­age eco­nomic sta­bil­ity na­tion­ally, they aren’t likely to rise dra­mat­i­cally any­time soon.

Lower in­ter­est rates also mean the fund­ing gap be­tween mort­gage re­pay­ments and rental yields have fallen, cap­ti­vat­ing in­ter­est from the in­vestor mar­ket.

Then there’s sup­ply ver­sus de­mand. There’s a sup­ply short­age of es­tab­lished prop­erty in Mel­bourne’s in­ner and mid­dle-ring sub­urbs, par­tic­u­larly fam­ily homes. Cou­ple this with the fact Mel­bourne’s pop­u­la­tion is grow­ing faster than any other city and you have an im­bal­ance re­sult­ing in strong com­pe­ti­tion and prop­erty price growth.

It’s im­por­tant to recog­nise prop­erty growth is cyclic, sub­ject to peaks and troughs, and mi­nor re­ver­ber­a­tions. So prop­erty in­vest­ment is best viewed as a long-term strat­egy.

And not all prop­erty per­forms the same. Although most es­tab­lished prop­erty ex­pe­ri­ences growth dur­ing an up­swing, growth tra­jec­tory is unique to each prop­erty, re­in­forc­ing the im­por­tance of strate­gic se­lec­tion.

Gre­ville Pabst is WBP Prop­erty Group chief ex­ec­u­tive

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