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Time to turn the key to your new property

Is 2013 the year to enter the property market? The signs are there. Sure, prices are still weak in many capital cities, with most recording falls in 2012, but there are indications that markets are stabilising.

In the resources towns of Darwin and Perth, and in Sydney, with its shortage of housing, values were up 8.6 per cent, 3.5 per cent and 0.6 per cent respectively in the year to October 31.

Values went backwards by 1.1 per cent for the eight capital cities combined, but that figure disguises some good news.

For a start, auction clearance rates have been holding steady at about 60 per cent in the major markets and RP Data’s records show the median price for the eight capital cities has risen every month since May, before a slip in October.

In addition, housing finance data has improved over the past year, admittedly from a low level. Plus the Australian Bureau of Statistics reports that residential building rose by 0.6 per cent in the September quarter – which might not sound like much but is the first positive number in a year-and-a-half.

So while the recovery remains precarious, the house price falls of the past couple of years combined with evidence that the worst of the declines is behind us means 2013 could be the year to make the leap.

Mortgages on sale

If you’re still not convinced, this fact might help: aside from a brief spell in the depths of the global financial crisis, property is the most affordable it’s been in more than a decade. Housing became much less affordable between 1997 (the earliest data we have) and about 2004.

The Housing Industry Association-Commonwealth Bank of Australia quarterly affordability index takes the average repayments needed to buy a median-priced home and sets that against the average Australian’s income. (It assumes 80 per cent of the value is borrowed and applies the average prevailing mortgage interest rate.)

Source: HIA-CBA Affordability Report

Of course, the most dynamic variable in the affordability calculation is the mortgage rate, which used to be entirely based on, but is now heavily influenced by, the Reserve Bank’s cash rate target.

So the last time housing was this affordable was the June quarter of 2010, when the RBA had an emergency cash rate target of 3 per cent at the height of the GFC (a year earlier it was 7.25 per cent).

Property prospects

Affordability is one thing; the prospect for price growth is another. Few Australians believe home values will grow at the rate of the debt-fuelled, go-go years of the 1990s and early 2000s.

The exceptions are in postcodes where the tail end of the mining boom still exerts an influence, such as in Perth and areas where liquefied natural gas projects are being built, such as in Gladstone and Darwin, where the $33 billion Ichthys LNG project is located.

Property industry analyst Angie Zigomanis from BIS Shrapnel reckons the stage could be set for a recovery in home prices in some key areas in 2013 and 2014. Increasing affordability and a lack of supply – particularly in Sydney – will push up growth in sales and prices, along with the mining boom.

“In Sydney, Brisbane or Perth I think we’re past the bottom,” Zigomanis says of house prices. “If you’re looking to get into the market [in those cities], or have been looking for a little while, 2013 would probably be the time to do it.”

On the other side of the ledger, it will be tough going in property markets in the non-resources states of Victoria, South Australia and Tasmania, along with the ACT, in the coming few years.

With subdued economic conditions, as the high Aussie dollar takes its toll on local businesses and without the shortage of residential property that applies in Sydney, Zigomanis forecasts that median house prices in Melbourne, Adelaide, Hobart, and Canberra could be weak and decline in real terms in the next three years.

Sydney3-1367183
2011-12 2012-13 2013-14 2014-15 2015-16 Est. capital
growth over
three years
Est. real capital
growth over
three years*
Sydney 3 -1 3 6 7 18 3
Melbourne 1 -5 1 1 2 0 -15
Brisbane -5 0 4 8 6 13 -2
Adelaide -3 -1 1 2 2 1 -14
Perth -4 -1 6 8 6 15 0
Hobart 1 0 -1 1 1 2 -13
Canberra 0 -5 -1 0 2 -4 -19
Darwin -7 11 5 5 3 17 2

*After annual inflation of 3%. Source: BIS Shrapnel

Housing shortfall

The broad economic factors that drive demand for housing are sending mixed signals.

The population has been growing at a faster rate over the past seven years than in the preceding 30. But the rate of growth in new dwellings hasn’t picked up accordingly, and at times has even lagged population growth. At first glance, it looks as if a mismatch between supply and demand would drive prices up.

That hasn’t happened. At least not yet. Why not? The RBA points to the fact that the average size of a household, which had been steadily shrinking over the 20th century, has stabilised. Perhaps higher housing costs mean children aren’t leaving home as early.

Economists like to try to measure what they call “underlying demand” for housing. The head of economic analysis at the RBA, Jonathan Kearns, recently told the Australian Business Economists group that his basic calculations suggest since 2005 new construction and underlying demand have been somewhere between being broadly in balance and there being a shortfall of up to 50,000 dwellings a year.

Despite this shortfall in housing and the tight rental market, average house prices have mostly stagnated, at best. Why? Probably because Australians have recalibrated their attitude towards debt – in particular, how much they think is reasonable to borrow against a house. And it could take some years for that to change.

Suburban dream

They may not offer the best capital growth or rental yield, but the most affordable suburbs in each of the main cities might also offer clues as to where to find great value. But the cheapest locations aren’t in cities. The three most affordable are Queenstown in Tasmania, Peterborough in South Australia and Warracknabeal in Victoria.

Cheaper to buy

The thing that pushes many people off the fence is when rent costs more than a mortgage would.

Sure, you still need a deposit and there are all the other costs to factor in, as well as expenses such as maintenance, council rates and strata fees (in an apartment block). But rent is, in effect, dead money.

While property values in Australian capital cities have fallen 4.6 per cent from their pre-GFC peak, rents have climbed. Over the past 12 months capital city rents have jumped 4.2 per cent for houses and 2.9 per cent for units.

In a recent report, property researcher RP Data identified 388 locations where median rents are higher than mortgage repayments on the median-priced property.

Don’t break the bank

The HIA-CBA affordability index uses the traditional measure to work out how much you can borrow: the limit is reached when 30 per cent of your pretax income goes into the mortgage. Above that, you’re considered to be in mortgage stress. But unless you have a hefty down payment, it’s likely you’ll be committing more of your pay, especially if buying for the first time.

The banks’ online calculators will say you can borrow more – much more. A shadow shopping exercise by Financial Review Smart Investor suggests the big banks will give you a mortgage big enough to swallow 45 per cent of your pretax income, or 60 per cent of take-home pay.

So don’t get carried away with what the online calculators or your bank tell you. Start with a budget and work backwards to figure out what you can afford in fortnightly or monthly repayments. Factor in higher interest rates plus a buffer for the unexpected. From that you’ll see how much you can afford to borrow.

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