Gilbert Meadowcroft *
No one would argue that the Queensland property market has not faced numerous challenges over the past six years. In early 2008, the first effects of what was quaintly known as the “credit crunch” could already be felt locally: a dramatic fall in the share prices of publicly listed property trusts: a drying up of funding for new projects; a re-evaluation of existing projects on the part of nervous property financiers; and a sharp decline in sales volumes, particularly for new residential property.
By the middle of 2008, the major banks had of course stopped lending to each other altogether, and the prevailing mood in the Australian property industry was also one of mistrust. Banks didn’t trust developers; developers didn’t trust valuers; and buyers continued to distrust real estate agents.
When buyers perceive that any product is overvalued and might soon fall in price, they invariably create the very problem they had initially sought to avoid: the absence of investment confidence. In other words, the fear of a falling market becomes a self-fulfilling prophecy. Because buyers perceive that something will be cheaper next month, their inactivity forces a reduction in price: prices must fall to meet the softening of demand. This deflationary pressure, coupled with buyers’ increasing difficulty in obtaining mortgages even if they wanted one, was sufficient to halt the property market in 2008, even without the help of apocalyptic events like bank collapses, sovereign debt crises or natural disasters.
Yet despite this annus horribilis, the residential property market in 2009 actually enjoyed a modest recovery on the back of two important emerging trends. The first of these trends was a renewed emphasis by investors in property fundamentals, by which I mean affordable properties in metropolitan locations close to transport, shops, schools, and employment centres. Most of the spectacular post-GFC property losses in Queensland pertained to high end property: high rise apartments in tourist strips or discretionary assets like holiday homes. By contrast, affordable, “working” rental properties now seemed a safe bet to many investors, particularly given the volatility in the share market at the time.
The second emerging property trend in Queensland was of course a love affair with mining towns and their promise of pre-GFC capital gains and bold rental returns. It is instructive to compare how these two trends have played out some five years later. Generally speaking, metropolitan investment made below the median house (that is, sub $500,000) have plodded along, with flat prices and slowly improving rental yields, and are now enjoying their first modest capital gains of (depending on who you read) between 3% pa and 4% pa.
Despite significant short term gains and an unprecedented wages boom for resource sector workers, the property performance of mining towns has been mixed. In Mackay this year, median rental returns have fallen significantly ($590pw to $540pw for a four bedroom home, or about – 18%) due to an oversupply of new homes, fuelled by frenetic spruiking of Mackay property and by a shrinking workforce and tenant pool. Land developers and builders have also paid huge sales commissions (in the tens of thousands of dollars) to spruikers and marketeers to reach investment buyers in an acutely competitive house & land market, with many end buyers now finding themselves in a position of negative equity (owing more than an asset is actually worth) simply by virtue of paying too much for their property.
Meanwhile, property in metropolitan Brisbane would continue to tread water for the next three to four years (until this year in fact), with negative price growth in some quarters. To make matters worse, first home buyers and owner occupiers were nowhere to be found, due in part to the twin problems of flagging market sentiment and deflation, as the flip side of the same coin, meaning new properties found it difficult to compete with an abundance of cheap, established homes on market.
Thank God then for State of Origin, although it is worth noting that despite the worst conditions in thirty years, the Queensland property investor enjoyed three loyal and steadfast allies throughout this most challenging of periods: 1) their tenant; 2) their accountant, and 3) the RBA. Rents have continued to grow steadily (about 3.7% pa across Brisbane LGA) and vacancy rates have remained low, an effect of population growth to some extent but moreover as an effect of potential owner occupiers not entering the existing or new housing markets.
Of course new property enjoys tax advantages that established homes may not, and these benefits (negative gearing, building depreciation) can help to create an efficient investment strategy regardless of specific market conditions, provided one is investing for the long term. Negative gearing tax legislation has been a cornerstone of property investment in Australia since the early 1990’s. Over time, rent increases, principal reduction, and tax efficiency can all progress an investment property to being cash flow positive.
Thirdly, in the heady days of the pre-GFC property boom, it is worth recalling Australia’s situation with that of a country like Ireland. Being part of the Eurozone and a shared currency meant that the Central Bank of Ireland had no levers to pull of its own; it could not raise interest rates in order to cool an overheated and inflationary property market. The RBA, on the other hand, was able to respond to inflationary pressure by raising rates and, conversely, has been able ease pressure on borrowers and stimulate investment during an extended period of low consumer confidence (at one successive rate cut for every Maroon series win). The RBA doesn’t always get it right (remember the November 2010 rate hike?), however the current cash rate of 2.5% still allows for further movement, as increasingly unlikely as another cut appears given the strong growth in housing finance this year. (Source: ANZ)
In addition to this increase in housing finance, there are other signs that the metropolitan Queensland property market is finally enjoying a recovery, with respect to price growth as well as rental yield. (Quote: trend growth 1.9%; Brisbane headline growth REIQ Brisbane 3%). Now, if one accepts that property trends might have as much to do with market perception as real economic drivers (a buyer’s perception of missing out for instance), then it is instructive to read the newfound popularity of property alongside such subjective factors: the federal election result, improved consumer confidence, and even calmer weather. Indeed, without consumer and business confidence, property values can go nowhere simply because of the deflationary pressure that negative sentiment brings to bear on prices. If people feel that things are on the move, then the economic data will probably prove them right.
I do wonder however which properties and which investors are best able to cope with the vagaries of market cycles and with all the multiple variables that determine price growth, having touched on only a few of these factors here. Furthermore, I wonder if our fascination with market cycles or so-called “property clocks” might itself be something of a misnomer or a distraction from the fundamental principles of property selection and property investment.
I believe that if an investor adheres to the fundamental principles that I have schematised below, then the question of “a good time to buy” becomes less important and may even be misleading. Just as no time is a good time to buy if one pays too much for a property, there will never be a good time to sell your property if no one wants to buy it. In other words, I don’t believe there is any such thing as “property secrets” or “red hot locations” or “inside knowledge” or “windows of opportunity.”
Having worked in project marketing for over ten years, I can say however that fundamental principles including value for money at the point of purchase; a metropolitan location close to infrastructure, shops, schools and services; a minimum 5% pa rental return; a high capital benchmark; and high quality workmanship in the product itself will go a long way towards a successful investment, provided the investor is prepared to invest for the long term and persevere with an asset beyond individual property cycles.
A property cycle, with its varying degrees of boom and bust, is not unlike any other trend, because it seems so important at the time it is happening. When times are good we can’t imagine how things might be otherwise, and when times are bad we also struggle to imagine how things might be otherwise. My advice to property investors is to worry less about when, and concentrate more on what, how, and why.
*Gilbert Meadowcroft is a sales and marketing consultant at AR Developments. The views expressed in this article are the opinions of the author, and do not necessarily reflect the views of AR Developments, its owners, staff, or affiliates.