As always the real estate market has been driven by the media and interest rates. Other contributing factors were
• lower levels of stock
• shorter time periods on the market for most property
• overseas investment, particularly from Asia
• a drop in the Australian dollar
All this has eventuated in an extremely strong market, but it has particularly affected the top end which has been the strongest we have seen for decades. We have had some landmark sales in just about every suburb surrounding our office in Double Bay, some of these, the most expensive in the country. Overall our average number of sales has risen by 50 per cent and in dollar terms we just fell shy of a billion dollars’ worth of sales in the past financial year. This outstanding result left us all feeling very excited and very proud of the dedicated knowledgeable team we have created.
As we write this review, the undertone of the current market is still firm although seasonally slower. One might say it’s a real market to buy and sell in possibly with the exception of the below $2 million price tag which seems to be occupying a different space and just powering onward and upward. We believe this is the most interest rate driven part of the market.
The ongoing steady flow of sales that we see is certainly supported by Chinese investors and families who have not only pushed the top end market along but have engaged in competitive bidding at auction even at the lower to medium bracket. With this activity our team has embraced our China desk to support and attend our open homes and auctions as needed. This has been a rewarding experience and has resulted in outstanding sales: In the last three weeks of the financial year alone, we effected 23 million dollars in sales using this resource.
The Way Property Sells Has Evolved Over the Past Year…
Internet pages have become more expensive and in some cases taken on but not completely diluted the need for print media. Print still pulls in the latent buyers: So many times we sell to people that weren’t considering buying but find their dream property purely by default whilst reading the local paper at a café.
We also feel this past year marked the pinnacle for the auction process highlighting the transparency for transactions and allowing sellers the opportunity to tap into the maximum return for their most valuable asset.
Another stand out this year was the numerous off-the-plan-sales with many buyers disappointed when 100 per cent of the properties available sold out in minutes of release.
In June we sold 19 units in 19 minutes in Paddington, off the plan and the ‘Advanx’ stage 3 development at Rushcutters Bay has all but sold out as well. Any resales have already capitalised small profits.
Is There Really a Bubble Brewing?
Despite all this steadiness, interest and success the media has all of a sudden started to talk about a property bubble building up. It started in the past few weeks of the financial year and without any apparent trigger event or reason as some of the current prices in the top end are only slightly higher than those being achieved in 2006 and 2007. Hardly a price bracket that I would call a bubble…
But even though the rumours might not be particularly justified, we need to remember that markets and especially real estate markets are driven by sentiment…
So Where Are the Dangers?
At this time we can see that the momentum has swung only ever so slightly to an ease back position or natural adjustment. The Greek economic disaster and regional conflicts across the globe may have taken the wind out of some but the real impact may come from investors over the next few months.
Despite our belief that real estate still stands out as the safest and most tangible way of creating security for the future, the incentive to grow a portfolio of investments or a business has been greatly diluted by general tax disincentives in recent times. Our view on the archaic taxes and a simple solution to create incentives would be to lower stamp duty and land tax, maybe abolish them altogether or regard them to be fairer. We definitively would recommend abolishing payroll tax and increasing GST to 13 or 15 per cent in combination with a flat income tax possibly around the 20 per cent mark. How easy would life be? People would grow their business, buy more property and create more jobs.
But Let’s Talk About the Reality…
Investors are currently faced with high entry costs, making the net return only attractive in combination with low interest rates. Should the rates rise and the loan to value ratio become out of kilter, the drop in returns could be crippling for some.
Those that have experienced and remember 17 to 19 per cent interest payments in years gone by will understand that as much as we want to keep the ball rolling and continue to have record months, we don’t want to see anyone hurt by a change in interest rates which is bound to happen sometime in the future (Although no reason to panic as yet).
How to Handle Your Investment in Times of Rising Interest Rates?
As long as investors lock in mortgages for 5 years and make their calculations with a future rate of 7 and not 4 per cent, real estate should continue to be a reasonable wealth creator. The challenge that investors will have to handle is more how to slowly raise rents without losing tenants so that the cash flow meets the outgoing cost and at least neutralises or even creates a positive return.
This is a skill and has to be done with many considerations. From experience we have learnt that it takes patience and planning. For those that are interested to hear about the formula we have developed, we are available to discuss our strategies for buying, selling and managing property. Just call our office to make an appointment.
So What’s Ahead After Such a Memorable Year?
For the short to medium term a little more of the same: Steady sales, a little more upside and if rates remain low a sustainable period of growth. There will be a point where things pull back intermittently, but as always it’s the long term horizon for real estate. Think about this: 20 years ago a block of 4 older style two-bedroom units sold for $600,000 and rents were $150 to $200 per week. Now the same block is worth $3.6 million and each unit averages $700 to $800 per week.
It’s hard to believe but make sure you keep this in mind for future investments.
We wish you lots of good health and fortune for the new financial year and are looking forward to supporting you with all your real estate needs.
Michael Finger and Diane Wilson