PORTFOLIO POINT: This year will bring a clearer picture of house price trends, when the market is clear of shorter-term influences and manipulation.

I’ve seen a jumble of statistics on house prices in the past week. Bureau of Statistics estimates showed that prices of established houses across Australia’s capital cities eased 2.2% over the March quarter and by 6.7% over the previous 12 months. The main contributors to the March quarter slide were Sydney, down 2.9%, Melbourne down 2.3%, Perth down 3.6%, Brisbane 1.1% and Adelaide down 0.8%.

On Friday, Australian Property Monitors reported that median house prices for the past 12 months were also down across Australia’s largest cities, falling 4.1% in Sydney, 0.4% in Melbourne, 6.1% in Brisbane, 2.2% in Adelaide and 7.0% in Perth.

The APM figures came a day after RP Data reported median house prices had actually risen on the eastern seaboard during the March quarter: by 2.4% in Sydney, 2.4% in Melbourne and 1.3% in Brisbane; while they had fallen 0.3% in Adelaide and 0.7% in Perth. RP Data’s results seem to show a more positive market in Melbourne and Sydney, but the ABS figures show a market which has eased over the year.

So whose data should property investors be relying on? The answer is no one’s. These results should not be seen as directive. Instead, investors should view the data as merely informative, providing a broad, generalised view of market trends. Quarterly results should not be the basis of an investor’s decision, a full year of results is much more useful.

Why are the results different? The ABS calculates median prices for clusters, like-areas with similar long-term house prices and socio-economic factors. Sales data from the state Valuer-General and lending institutions is weighted for sale prices and volumes and compared across clusters to determine a city’s median price. But the ABS analysis only includes fully detached houses; it omits apartments, the sector where a lot of the first-home buyer market activity has been focused.

APM calculates its median prices from government and semi-government agencies and corroborates some results with agents and other sources.

RP Data-Rismark’s Hedonic indices are monthly as opposed to the usual quarterly measures based on reported sales and their property sales database. APM and RP Data’s performance numbers report on fully detached houses and other types of structures such as townhouses, while excluding apartments. It seems to me they’re not comparing like with like; no wonder the data sets don’t correlate or corroborate each other!

Matthew Bell, Australian Property Monitor’s economist, says: “They all demonstrate a market showing strength from its bottom in September last year, but RP Data’s number is more positive and the ABS figure obviously less so. Still, even with divergence between them, particularly in Melbourne’s case, I’m confident APM numbers demonstrate that Sydney and Melbourne are in a recovery stage, while Brisbane and Perth, with their weaker tourism and resources based markets, are further behind.”

For residential property investors, the important thing to remember – despite the sensationalist headlines in the press – is that a median is the middle price, not the average price achieved for properties sold in a given period. The median can be swayed by an increase or decrease in sales at the bottom or top of any sector, cluster or strata and tend to be volatile not only from quarter to quarter in the same year but also when comparing the same quarter in consecutive years. To get a more informed direction on market dynamics, we need to look at the other factors that sit around the data and speculate on how they may play out.

First, we need to factor in the workings of large private developers and powerful public authorities who influence or manipulate supply, demand and prices to meet their organisation’s objectives. It’s simply a part of normally functioning property market that investors need to recognise and look past in order to buy the right property with the scarcity value that will perform even in a flat or easing market.

Interest rate cuts and the first-home buyer’s grant have been decisive factors, but by June 30 the market will have absorbed these incentives, which by then are likely to be in decline. From the private sector, there has been a dearth of “lifestyle developments” styled by celebrities for the past nine months, and I expect buyer deposits based only on the first home buyers grants to be slowing.

The configuration of this year’s calendar means investors are about to get the clearest view in some time of the underlying forces at work. The month of May – past the interruptions of school holidays, Easter, Anzac Day, and in most states, Labour Day – will see the first uninterrupted period for a sales campaign since the onset of the global financial crisis in 2008.

After this unbroken period of continuous market activity and the federal budget, several unknowns will be laid to rest. Stock levels have been low in all major markets for the past 12 months, which will play off against the rebound in interest for properties with the right combination of architecture, amenities, floor plan and streetscape.

For property investors, the rest of 2009 is going to be truly educational. When the market is free of interference or manipulation the true performers will stand up and assets in the artificially inflated sectors will show their true colours.

Watch this space carefully. We are about to find out which properties are truly rewarding, regardless of what statistics, government incentives and developers may appear to tell us about housing activity and market directions.


Property Q&A

This week:

• Will cutting grants kill house prices?
• Where should I invest in Adelaide?
• Is it worth engaging multiple agents?
• Does Melbourne’s south-east appeal?

Grants and house prices

Now the first-home buyer grants are about to be removed won’t you concede the housing market is about to fall over? What about the prediction from the ANU’s Professor Quentin Grafton that house prices cannot continue to grow at a faster rate than incomes and consumer prices?

I’ve been asked this question several times over the past few months. It seems to me that there are some people, academics included, who have a bit of a death wish as far as the property market is concerned.

First, I would point out that while the government has hinted that the boosted portions of the grants may end, the original $7000 is likely to stay, while the boost is likely to be modified in some way. Second, although I agree with Grafton’s assertion that house price growth and general economic growth should be related, I don’t accept that they should track each other in an exact correlation.

Statistics for the past 20 years show the property market has been one of the best-performing asset classes and possibly the most resilient during economic downturns. There are many structural reasons for this including our increasing population, relatively strong equity in housing and falling construction rates, all of which are likely to see house prices improve over the long term. More importantly for investors, the prices of investment-grade property that have real market scarcity value are likely to appreciate at a faster rate than house prices as a whole. The reality is that as long as demand exceeds supply, property values will remain strong even if they ebb and flow with the general economic and investment climate.


Adelaide focus

Thanks for your coverage of Adelaide in your property articles. I live in Sydney and I am considering investing in Adelaide; which inner eastern and southern suburbs are the best for investment?

It’s an interesting move, investing in a city other than the one you live in. My first question would be how well you know Adelaide. If the answer is “not that well”, then you need to pause. The basis for a property investment strategy may well include other cities for diversification if you already have a portfolio in your own city, but if it is based on an assertion that prices will grow faster in one city because of just one or two factors, then think carefully before you proceed because these strategies are highly speculative. If it’s based solely on the fact that Adelaide’s median house price is lower than Sydney’s, don’t expect growth to be greater in Adelaide because the entry price is lower.

There are some fine investment prospects in Adelaide’s residential property market and many of them can be found in inner-eastern and southern suburbs beyond the parkland ring that surrounds the CBD. You could start by looking at suburbs such as Dulwich, Unley Park, Parkside and Norwood. But I must caution you not to fly to Adelaide, visit 20 properties in a weekend and buy one of them. Many investors made this mistake in Queensland in the 1990s and the experience proved expensive and even disastrous for many of them. Before you invest, make sure you have an in depth knowledge of the structure, pricing and nuances of the local market or find an experienced, independent property adviser who can help you both in a strategic and practical manner.


Multiple agents

Is it good to engage more than one agent with a “general sale agreement” to sell a property if they are willing? Would it encourage competition and a better price?

This is not a strategy I would advise you to undertake. The problem with general sale agreements or “open listings”, as they are often called by real estate agents, is that you don’t get the strong commitment required to achieve the best sale result. General sale agreements mean that the agent who sells the property gets all the commission and the other agent gets nothing. There is therefore reduced incentive for the agents to devote themselves wholly to the task. So rather than compete with each other they tend to ignore the property and commit their time and resources on a property where they are much more likely to earn a guaranteed commission.

If you have the right property, a formal conjunctional arrangement on an exclusive agency agreement with two dedicated agents can work well. This arrangement can be structured so that the proportion of the commission going to both agents is agreed on signing the authority. This proportion would typically allocate a selling incentive; say 65% of the commission to the selling agent and 35% going to the other agent. Both agents are then assured that their efforts won’t be wasted.


Melbourne’s south-east

I am planning to spend about $450,000 on an investment property in the south-eastern suburbs of Melbourne, about 18 kilometres from the CBD. The area has a large university, a hospital, some public transport and industrial estates nearby. Is this a preferred area to invest for capital growth?

While there are an increasing number of unit developments in this area, I would not consider it ripe for strong capital growth. First, the public transport in this area can best be described as merely adequate rather than optimal and there is not an abundance of other community or neighbourhood amenities.

You rightly point to the university as a major influencer of demand, but the profile of tenants tends to be restricted and rather transitory and this has a downside: any future limiting of campus growth would have an impact on property values. Imagine, for instance, what would happen if the number of foreign students coming to Australia declined markedly over the next five years. This would lead to a fall in rental demand and asking prices. Nearby but not adjacent industrial estates may benefit investment properties delivering rental demand from workers, but they can also deter home buyers.

The areas best suited to reap capital growth are those with multiple sources of home buyers, investors and tenant demand. These tend to be located in inner and middle suburbs with supporting infrastructure and close access to jobs, education, shopping and leisure activities. Being 18 kilometres from the CBD makes the area you are considering too far to benefit from high land values and the housing stock there has very little architectural scarcity value.