What next for Australian property?

There have recently been many articles in the media regarding changing property prices. Unlike shares, which can be accurately tracked day-to-day, property is historically an opaque market with less visibility on price movements. However, over the past few years computers with sophisticated programming have been able to track property markets more accurately and provide an increasing level of transparency. This has led to a range of property research reports providing up-to-date information on the markets and as a result, this information has flowed through to media publications reporting ‘booms’ and ‘busts’ that now rival the extremes previously associated with the share market.

Over the years I have often heard people say, ‘Oh, property always goes up’. So, when this recent downturn occurred it might have come as a surprise to some. In fact, these days we are reading or hearing about people who have purchased property, held onto it for five to 10 years, and seen little or no capital growth. And this isn’t just in one market; it’s in growth corridors, large high-rise developments, in different states and territories, metropolitan, regional … Clearly, the good old days of property being a ‘sure thing’ are now long behind us.

The graph below shows ‘Real Residential Property Prices for Australia’.

As you can see, we have experienced downturns in property for the following periods:

1. Q4 2003 – Q3 2005

2. Q4 2007 – Q1 2009

3. Q2 2010 – Q3 2012

4. Q2 2017 – ???

Interestingly, most of the pullbacks have lasted on average around two years. Historically, each pullback has ranged between –3% to –8%. And as household debt levels have slowly risen over time, so too have the more serious repercussions of the downturn for homeowners. It’s worth remembering that the most valuable lesson in leverage is that it can magnify the upside, but also the downside. Early drawdowns were around 3–4%, while more recent ones have been around 8% as household debt has spiralled upwards.

In recent times, we have been alerted to a reduction in borrowing capacities. This was first reported earlier this year by UBS analysts, as banks slowly changed their borrowing assessment methodology to consider individual spending patterns rather than applying a basic assumption of living expenditure. This has led to a potential reduction in borrowing capacities of around 20–40%, to around 80% of the mortgage market being serviced by the major banks.

So, what does all this mean? Well, a person on a gross income of $150K can now borrow around 34% less than before, and is effectively limited to a loan of around $538K.

Coupled with the impact of a slowing source of overseas buyers, we can see why recent moves in property prices have taken place.

How far will this drawdown go? Well, each state, city, region or suburb is unique in its own price movements; however, I would not be at all surprised if we find these overall figures continue to at least a 10% drawdown before this latest down-cycle is complete.

It’s important to realise that in property, as in all markets, a pullback doesn’t mean there won’t be opportunities. It is likely, however, that simply throwing money into the property market with a view to making a profit is going to be more challenging. We need to be a lot more selective in acquiring property and also the decisions we make around the timeframes for holding periods.

Like all great investment ideas, before you consider purchasing property, it is important that you seek out and obtain profession financial planning advice from a practising financial planner and, of course, I recommend AJ Financial Planning.

What is more important- land content or the square metres when it comes to property?

I was recently staying in Brisbane visiting clients recently and the hotel which I was staying at had sensational views across the river and out to the mountains. However, as I was staring out to the vista, I started to thinking about the below questions….

“What is more important when buying property – the square metres of the apartment or building, or thinking about the land content of the what you are purchasing?”

Upon my return back to Melbourne as I crossed the Bolte Bridge, I noticed the skyline full of cranes. With all the building of high rise apartments going on, it did start me thinking a little further about this notion of land content.

“The traditional premises when thinking about property, has always been that land prices historically appreciates and a building or structure always depreciates.” If this is true, which is more valuable then and which one should you focus more on when looking for property?

The question becomes I think even more critical when you are looking at a high rise block like the one I was staying at in Brisbane.  You might have a land size which the building sits on of say 1,000 or 2,000 square metres with a building of say 100-200 apartments on this land size.   What is the actual land content which you own, and what is the building or structure which you own?

When most people are shopping around for their apartment they think about the size of the apartment is it 50, 70m2 etc.  The new developers have even been quiet tricky when they reduce the size of a 2 bedroom into a foot print of a 1 bedroom, but keep the same number of rooms.  This allows them to squeeze out even more profit out of each project. In the case of building bigger buildings, this also tends to mean less land content.

Does this mean that when you are shopping around for your apartment should you be focused not only on the square meters of the apartment which you are acquiring, but also the land content which you actually own as part of the complex?

In Melbourne, with the large number of high rise building being built, it will be interesting to see this variable between square meters, number of rooms and land content play out.  

The argument can also be extended when you are considering the pros and cons with an apartment to a house for which one is better? Then you overlay new building versus old buildings, the impact of views of a high rise, location etc and the argument gets even more complex.

Like most things about property there is simply not an easy answer. It is a careful balancing act and you need to consider each element when analysing your affordability levels, budget and overall financial goals and objectives.

With all financial planning ideas too, it is important to seek professional guidance to assist in constructing a map with a robust strategy to ensure you are in line with your other financial goals and objectives.  We of course would always recommend our team at AJ Financial Planning!