We provide an independent view of the property market and the markets commentators. As Buyers Agents who actively inspect thousands of properties a year, we buy around $100 million worth of property on behalf of our clients. Since 1998 we have purchased in excess of $1 billion worth of property. It pays to have good - independent advice...don't you think?
BUYERS agents are emerging as key players in the Australian property market according to a survey conducted by a leading industry body. The survey conducted by the Real Estate Buyers Agents Association of Australia (REBAA) has shown that the collective buying power of its members accounted for more than $800 million of residential real estate purchases across the country last financial year.
According to REBAA President Mr Byron Rose buyers agents are having a significant influence on the Australian economy in general and the real estate industry in particular. “With our growing numbers and with more home buyers and investors realising the value of using a buyers agent, we expect that figure to tip the $1billion mark next financial year,” said Mr Rose.“Buyer’s agents promote and protect the buyer’s interests, keep the bargaining and financial position of the buyer confidential and provide anonymity if needed. “Buying a home or any property for that matter, is a major purchase which is often made after spending as little as half an hour looking at the home.
Mr Rose said in the last 10 years the number of buyer’s agents operating in Australia had increased from half a dozen to an estimated 100 nationally. “This recent growth has lead to the establishment of specialist Buyer’s Agent chapters within Real Estate Institutes in some states and the Real Estate Buyers Agents Association of Australia nationally,” he said.
“These groups have been established to satisfy the need for an independent
professional body to represent buyer’s agents and operate as a regulatory body for this new and emerging industry. The aim is to set high standards and to provide the consumer with access to a recognised group of property professionals with the relevant and necessary qualifications.”
What a lot of people do when they sell with the view to upgrading – and rightly so; is try to sell in a rising market to achieve the best possible sale price. They need to do this (to also realise the best possible tax free profit they can) so they have more purchasing power in the next purchase (buy a more expensive property) often wanting to reduce the debt levels in the larger purchase or at the very least, take in more equity. A rule of thumb is to buy and sell in the same market. But this can still be sometimes costly – when you factor in purchasing costs on top of the purchase price and certainly in a rising interest rate environment like we are in now – at least uincertain!
Conversely, in the current market we are in, there are advantages in selling a property on the basis of a “mark to market transaction”. For example if your property was purchased in 2005 for $1.8 million and today (Dec 2010) it could achieve $2.5 million but back in March 2010 it may have got $2.7 million the seller may consider they have lost equity in their property – not true; they have missed the opportunity to realise a greater profit, that’s all and they will have had to pay a higher price for the upgrade property – more than likely...
Consider this though, if the property you purchased for $1.8 million in 05 sold at a realistic price of $2.5 mill today, you will have realised a profit of $700,000 + the equity (which was probably 20% of the original purchase or $360,000). You will have achieved a ROC (return on capital) of 94% - TAX FREE by the way; and now you can purchase the 'upgrade' property (even factoring in higher interest costs – not so if you are an expat borrowing off shore, and even accounting for the strength of the AUD) which in a heated market would have attracted a price of $3.7 million in March 2010, now, in 2011 - with the competition premium evaporating; the same property on a like for like can be purchased for around $3.3/3.4 million or better (this isn’t myth, these are the adjustments we have and are seeing in the market).
A saving on the purchase of $300-$400,000 + is not insignificant when you factor in Stamp Duty Savings as well and the interest savings (See the Table below). The savings shown below would more than compensate for the strength of the AUD currently for expats, and the uncertain interest rate environment we are in - locally; plus the “time in market” upside (cash in property rather than cash at bank).
Even if you have nothing to sell, have already sold, or are relocating, buying in the current market at certain price points will deliver fantastic savings - and are not insignificant and may represent hundreds of thousands of $$$ as well as well as lower interest costs, saving tens of thousands of dollars year on year...
There are a number of ways for investors to get into property, via REITS or LPT's is one way, or unlisted trusts of funds, another way is direct property where you invest directly in the physical asset usual in a "unit" for example.
Atchison consulting undertook analysis of Direct Property as a part of an investors investment mix (we quote their research often, and again in the following article it is easy to see why). In their research which accounted for 10 year and 20 year returns, cost per $100,000, volatility and risk for reward they noted that - for example; if a an investor had 25-30% of their portfolio in "direct property", the risk of negative returns went from 1 in 10 years to 1 in 44.
To get exposure to property; which is Australia's largest asset class, you don't have to invest in REIT's and LPT's - and clearly the returns haven't been there for the past 10 years with 2.8% per annum; direct property can be invested in via a manager or preferably, why not buy direct property yourself (by passing the fund or trust) and get the full benefit of time in market, income growth, tax advantage and wealth creation (capital growth). Funding costs are much lower than leveraging into the stock market as well.
Understandably you need to buy an asset that will provide smoothing through cycles and that fits your invest style and risk profile. That's why it pays to invest in property advice, the same advice you will pay for indirectly when you invest in a REIT, LPT, Listed/Unlisted Fund for example.
The benefit of investing in property advice, is that unlike an invest manager working for a fund - whose decisions will usually be driven by technical rather than fundamental analysis and the "numbers" (including gearing and valuations); you will get tailored recommendations and advice that fit your specific requirements and meet your budget, giving you total control over "your direct property investment" and you wont pay on going fees either.
The article taken from the Financial Standard today reads;
A number of super funds including Professional Associations Super, Asset Super, Sunsuper and AustralianSuper have added their exposure to direct property in recent months, Rainmaker research shows.
Direct property is back en vogue as investors look outside listed real estate and lock in higher returns - and a quick glance at the numbers show the reasons why.
Rainmaker analysis of returns over rolling 12-month and 5-year periods noted that direct property has been significantly less volatile than its listed counterparts since the GFC. It also delivered higher returns.
For example, the Financial Standard WS Direct Property Index has outperformed the ASX200 Accumulation Index and the ASX200 A-REIT Index in 2, 5 and 10 year periods to June 30th, Rainmaker figures show.
Over a 10-year period, direct property has returned 8.8 per annum, more than treble the returns of listed property over the same period, with 2.8 per cent.
Meanwhile, the correlation between listed property and conventional equities has increased dramatically since the GFC, undermining claims that LPTs offer investors diversification from equities.
David Hartley, chief executive of $15 billion plus industry fund SunSuper, said that the role of direct property in his portfolio had been validated by its performance during the GFC.
"Our direct property got marked down in value (during the GFC) but the cashflows remained pretty solid,' he explained.
SunSuper has over $1 billion invested in domestic property and all of it direct, with Hartley confirming the fund does not have any exposure to A-REITs.
He said that in the asset allocation process, REITs did not necessarily offer enough of a difference to ordinary equities.
"Why would it be REITs, why not tech, or resources? What's so special about REITs when they have been converted from the underlying property into something quite different?" he asked.
The Wall Street Journal recently covered Rismark’s ongoing debate with investment legend Jeremy Grantham, of GMO, regarding his spurious claims about Australia’s housing market.
Mr Grantham has triggered a tsunami of global media attention by alleging that the Australian housing market is a “time bomb” and overvalued by 42 per cent on the basis of his belief that Australian dwelling prices are “7.5 times family income”. To quote one News Limited report:
“[Mr Grantham] said yesterday Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend. "You cannot possibly miss it," he said. "The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or …7.5 (times). "Australia is having one now. You are at near 7.5 times family income…which suggests you are twice the size that you should be." In Australia's case, Mr Grantham described the housing market as a "time bomb" just waiting for interest rates to increase and become impossible to support…If the Australian housing market did not return to the normal multiple of family income, he said "it will be the first time in history." "Sooner or later, the rates will go up and the game is over."”
In response, Rismark has dispassionately presented the hard empirical data that shows Mr Grantham got his maths wrong. Australia’s dwelling price-to-income ratio is not 7.5 times, as Mr Grantham would have us believe. Based on the best available measures, it is just 4.6 times as at June 2010 (and likely to decline in the third quarter). Furthermore, this 4.6 times estimate has been independently verified by the Reserve Bank of Australia, Goldman Sachs, Westpac, CBA, ANZ, HSBC and other third-parties.
The Deputy Governor of the Reserve Bank has also dismissed Grantham’s claims, commenting, “People feel that house prices in Australia are quite high…But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”
Nonetheless, Mr Grantham is in good company. The Economist newspaper concluded in October this year that the Australian housing market was the most overvalued – by 62.3 per cent – of the 20 countries they track. Morgan Stanley’s Gerard Minack is another comrade-in-arms, arguing that “Australia’s debt-fuelled housing market remains a major macro risk” with house prices around “40 per cent above fair value.”
So we would ask Mr Grantham to cease and desist from the hyperbolic jawboning. GMO currently manages $US104 billion (slightly less in AUD terms). If you have conviction regarding your predictions about the “time-bomb” that is Australia’s $3.5 trillion housing market, we would ask that you put your money where you mouth is.
This is the deal. Rismark believes it can facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index, which is universally regarded as the most accurate and timely house price benchmark in the market.
Following a torrent a criticism, Mr Grantham appears to have placed tentative conditions on his extraordinary assertions, opining that, “In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable.”
Recognising Mr Grantham’s equivocality, we will give him lots of time – three years, in fact. That is, he would be able to invest his $100 million for a three-year horizon against RP Data-Rismark’s Australian capital cities dwelling price index.
Mr Grantham’s investment would be structured as a very simple “delta-one” transaction: for every 1 per cent fall in the index, Mr Grantham would receive $1 million. Conversely, for every 1 per cent rise in the index, Mr Grantham would pay $1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk.
To be clear, Rismark would need to work pro-actively with Mr Grantham to construct this transaction. We believe we have counterparties that would likely be prepared to contract with him. But it may take several months to facilitate (and cannot be guaranteed).
Before we can proceed, we require a firm, contractually-binding commitment from Mr Grantham that should we be able to facilitate this transaction, if he will indeed act on the advice that he’s offered to the rest of the world by committing a tiny fraction – less than 1 per cent – of his capital to his predictions.
Rismark’s housing forecasts have been consistently accurate. In contrast to The Economist, and other doomsayers, Rismark correctly anticipated the very modest 3-4 per cent peak-to-trough downturn that the Australian market experienced in 2008.
In 2009 we projected that the market would surprise on the upside with the strength of its recovery, as it did. And since the start of 2010, we have been forecasting that the market would stop growing in the second half of the year, which is what has transpired.
Looking ahead, we are relatively bearish over the next circa 12 months on capital growth, and think that if the RBA does raise the target cash rate in line with the consensus economist estimate of 5.5 per cent, Australian dwelling prices will be placed under modest downward pressure. We recently disclosed analysis that showed that on the five previous occasions that the RBA had aggressively lifted interest rates since 1993, dwelling prices had fallen. Rismark does not expect this time to be any different. Through the cycle, however, we believe that dwelling prices will broadly grow in line with disposable household incomes, as they have done in the past. Total returns, including net returns, should be higher again.
Christopher Joye is managing director of research group Rismark International which produces the RP Data-Rismark Hedonic House Price Indices. Rismark also operates a series of funds that invest in residential mortgages.
Our October market report was distributed last week in advance of the RBA announcement. Unfortunately in it, we picked that interest rates would rise on Tuesday, this is where we are in the cycle - interest rates ticking up! Like all cycles, they will also tick down over time. Why is this unfortunate - because I imagine this is what you want to hear.
Our assessment of interest rates rising was loosely based on technicals and majoratively influenced by fundamentals, the RBA's decisions are thought to be based solely on what they see through the rear vision mirror but this is simply not the case. Interest rates can only change once a month and just because adjusted CPI was 2.8% for the year and 0.7% for September (it was 0.6% for August) as far as the RBA were concerned it is at the high end of the target range and on a monthly basis - ticking up on the run into the Christmas period. We think the RBA in part, are concerned about the economies capacity and expected wages growth in 2011,. The RBA saw savings increase for the last quarter, they have seen a restraint in house price growth - and would like to keep it that way for the moment. Now if they get it wrong, we don't go to hell in a hand basket, rates can come down just as quickly as they go up and they don't have to come down in the same increments they went up (usually 25bps). The RBA have proven a willingness to relax rates quickly if required, consumer sentiment responds very quickly to what it perceives as the right message, rates going down would be such a message. For some reason, most people think that because rates are going up they are going to stay up, this is just not true. Most people seem to take a ten year (or longer) view on an interest decision - they go up and down they are not forever, people also confuse interest rate and property cycles with the bourse - neither of the former move up and down with the same volatility as the latter. What people are better to do - in our opinion, is form a view as to whether they see opportunity for them, does your cash flow permit a hold, even with a further full 1% interest increase - with a certain amount of comfort (does it fit your appetite for risk)? What savings can you make on your purchase today due to higher rates as opposed to paying a premium in a lower rate environment with more competition? If you are an investor, how do the yields compare - although capital growth may be constrained today; what does a 5-7 year investment horizon look like (bearing in mind affordability is seeing people rent for longer or delay the upgrade, adding to rental supply compression), does the tax offset work for you? Have you bought the asset well, to manage the down side risk? have you considered a fixed/variable loan, to deliver you more interest rate smoothing (interestingly though, over a 5 year time frame, if you were 100% variable, your cost of funds would have been cheaper than had you fixed)?
We think the rate rise presents good opportunities for astute buyers (some will say "you always say its a good time to buy" - and it is always a good time to buy; it just depends on the strategy employed at the stage of the cycle we are in at the time - property and interest rates; and knowing how to capitalise on these opportunities while managing downside risk). Its not about what the RBA do - we have no control over that and conjecture adds no value at all in our view; its how we respond as opposed to react. The following ABS data is interesting, on the one hand it suggests the persistence of the problem (supply) but looked at another way, it provides opportunities - certainly in the near term (rising rates), beyond that - who knows!
The ABS this week released building approval numbers for September 2010. On a seasonally adjusted basis, total dwelling approvals fell by -6.6% for the month, annually total approvals are down by -11.6% and this week’s interest rate hike will likely further dampen building approval numbers in the coming months. Private sector dwelling approvals have fared quite poorly also. Private sector house approvals are down by -2.3% for the month and are -14.1% lower over the year. Private sector unit approvals had been quite buoyant over recent months however, they recorded a sharp decline of -15.7% during September and are down by -0.6% for the year. In summary, under supply persisted - this contributes to rising rents as would be buyers stay put; it constipates the supply chain (people don't move up the chain, its as much a top down issue as a bottom up one) and in many instances vendors need to adjust their expectations downwards. This pressure usually puts upward pressure on prices as demand exceeds supply. At the moment however, as demand has retreated due to rising interest rates, price is coming down, lack of competition has and is eroding the premiums that vendors have been getting. Buyers can therefore expect discounts and the purchase price savings also translate into savings on stamp duty.
Unit yields in certain areas of the prime market are 5.2% + and house yields (terraces, semi's, freestanding homes) are circa 4%. In a normal market, house yields are between 2-3%...
Effective housing supply - how many months of supply is evident across the Australian market
Based on the current rate of sale and total number of homes being advertised for sale, the Australian residential market is currently recording about 4.1 months of effective housing supply. There are two ways to measure supply in the residential market place: ‘core supply’ which is the difference between base level demand (ie population growth) and base level supply (ie new dwelling construction) and ‘effective supply’ which measures the amount of properties that are available for sale in the market place. Effective supply is expressed as the number of months it would take to sell all of the housing stock being advertised for sale in the marketplace based on the current run rate of sales.
Across the combined capital cities, the effective supply of properties is currently recorded at 4.1 months. Despite the fact that property value growth has been slowing since April of this year, there is yet to be a significant increase in the effective supply of properties. As a comparison, the US Census Bureau recorded that based on current rate of sale, the USA had 8.4 months of supply currently available. Since the beginning of 2007 the effective supply level across the capital city markets has been recorded at an average of 4.0 months and reached a high point of 6.0 months in the late stages of the GFC. The number of months of supply figure bottomed at 2.5 months during March 2007. This suggests that currently the capital city effective supply level of dwellings is around average. Between the start of 2007 and August 2010, capital city property values have increased by a total of 29.9%.
Recent listing data highlights that the total number of homes available for sale is beginning to increase as property value growth slows, with an expectation of a lower volume of sales for the remainder of 2010. The consequence of more listings and a lower rate of sale will most likely reflect a higher level of effective housing supply across the combined capital cities. Looking at the quarterly value growth results, the trend seems to be that once the effective supply level has been recorded at greater than four months, typically the rate of property value growth begins to slow or decline. Although nationally the effective supply is recorded at 4.1 months, across various capital cities the results are quite different. The differentiation across markets highlights that the national results are not necessarily reflective of individual capital city markets.
Throughout the major capital cities Melbourne has the lowest current effective supply at 2.8 months whilst Perth and Brisbane have the greatest effective supply recorded at 9.0 and 5.9 months respectively. Perth has consistently recorded the greatest effective supply amongst all of the capital cities since the beginning of 2007. The Perth market has been recording a poor market performance for much of the period following the significant surge in property values recorded in the city between 2005 and 2007. Since that time, sales volumes have been sluggish and clearly a significant volume of properties have been available for sale, resulting in an elevated level of effective supply. The soft market conditions within the city is reflected by the fact that on average there have been 7.6 months of effective supply in the Perth market and property values have only increased by a total of 4.4% since the beginning of 2007.
On the other hand, Melbourne currently has the lowest effective supply amongst major capital cities (2.8 months) and has also recorded the strongest growth in values between the start of 2007 and August 2010 increasing by a total of 51.2%. The strong market conditions over this timeframe have resulted in increasing demand for properties and as a result, those listed for sale are being rapidly consumed by the market. Looking forward, there is an expectation of lower sales volumes for the remainder of the year as the market transitions from a growth phase into fairly flat conditions. As a result, it is anticipated that on a national basis there will be an increase in the effective supply. Markets such as Perth and Brisbane have been underperforming for some time and we don’t expect to see significant further increases in effective supply. The markets which are likely to be at a greater risk of an increase in effective supply are those cities which have below average supply levels currently and those which have recently recorded a significant slowdown in property value growth.
Fidelity banks and property analyst Anita Costa told advisers in Sydney yesterday that while she is concerned over housing affordability levels in Australia, there is no property market bubble.
Speaking at the 2010 Fidelity Investment Forum, Costa argued that Australia's lofty house prices to income ratio, used by many commentators to predict a major plunge in property prices, has been overstated
"The data that the doomsayers use is flawed.
They are comparing capital city house prices with country income. They are using breadwinner income rather than household income, and they are only looking at salaried income as opposed to other earnings including rents and dividends," she said.
Adjusting for these factors, Costa said, gives a house price to income ratio of around 4.5 to 1 for Australia, which, while still considerably higher than levels in the US, is significantly lower than parts of Asia including Japan, Hong Kong, and Singapore.
"For house prices to fall of a cliff we need to see a pick up in unemployment and I don't think that is likely, unless of course China rolls (over)," she said.
Fidelity's head of Australian equities Paul Taylor reaffirmed his belief that a double dip recession in the US is highly unlikely given the strength of corporate cash flows and balance sheets.
Taylor pointed out that in previous major market downturns, such as 1987, 1973 and the great depression, losses had typically been recovered over a three to six year period.
"The recovery is never a straight line, but as the market begins to believe that a US double dip is unlikely, we will resume that recovery phase like in other cycles, and there is plenty of upside left," Taylor said.
A market (stock or property) doesn't always move in the same direction, some segments will always act differently - in other words, perform better than others; but we too often take a macro perspective and base our opinions to act or not on this single view, the property market is no different. Certain segments of the property market are still performing relatively strongly but even these segments are starting to show signs of tailing off as unset demand is taking up supply and interest rates tighten.
The price points in the market that have been performing the strongest, are clearly units and houses up to $1.5 million within the 7km ring of the CBD - the inner west particularly; and certain segments within this market will continue to offer good returns for astute investors over the next 3-5 years, over the longer term this is a market which will perform well. Whilst other segments have shown some robustness (markets other than prime), our focus is always on the prime markets, which we generally describe as being within the 10km ring of the CBD - notable exceptions would be Palm Beach for example.
The primary drivers for the push in the inner west market has been first home and second stage buyers (young families with one child, possibly two or more on the way). This is the price moving demographic (2nd stage buyers - generally 29-39). In a presentation to a Private Client Group in August last year we pointed to the Inner West as the next pocket to be the star, clearly that was the case. This was not luck or crystal balling, fundamentals drove the recommendation and fundamentals still support that as a pocket which represents good buying for the medium term investor or home owner.
Buyers and sellers are constantly trying to track the direction a market is heading, as early as may this year, (in an article for the Sydney Morning herald) we pointed to a buyers market in the second half of this year and it is clear to us that it is here. Consecutive clearance rates below 60% are usually a technical pointer to this trend, but relying on charting to pick the property market usually signals missed opportunities.
The best buying opportunities based on our 13 years of exclusively buying across all property asset classes is buying property on the way up but preferably on the way down or in a "flat" market. We are in a flat market - moving into a tighter market; now and whilst bank appetite for lending is still relatively robust on property purchases up to $1.5 million, softening above $2 million is evident and tightening on properties valued $3 million + is clear. Certain industry segments are more competitive under these conditions. The finance sector is not one at the moment, with bonuses being well lower than they were in 2007/2008, incomes, which in boom times realise large bonuses and weigh favourably on the banks risk of the borrower, the resultant competition drives prices upwards - as we saw through to March 2008. This level of competition hasn't returned as yet due to bonuses being subdued. So the traditional banking markets of Mosman, Bellevue Hill, Woollahra and Paddington have softened in certain price points and tightened in others.
Whilst there are always out of step transactions, generally the market is very soft on property priced above $3 million at present. Assets (for example) that may have realised $3.7 million in October 09 (subject to vendor drivers) are possibly transactable at $3.15 - $3.3 million, a discount in the vicinity of 10 - 15% of the vendors "wish price". We don't consider this type of adjustment a fall, but rather a correction, as premiums once paid due to competition, evaporates. A collapse occurs when a loss or widespread price falls results in property values being less than the purchase price for a single property/street or suburb. So it is important to compare price today against the purchase price of the property and many other elements that come into play to discern value for both buyer and seller.
The lending environment has changed significantly, bank LVR's are more risk averse and as such, this impacts on the capacity for many to pay. Given the time of year we are in, we would expect to see more prime residential property on the market - the fact is, it isn't there at the moment, particularly on property priced above $2.5 million across the "prime markets", although more property is coming on line. What will be telling is not then amount of stock available but both the quality and the level of transactions - our sense is that not vendors expectations will be out of step with many or most buyers.
Not all home buyers are the same, some want a property that can be simply moved into, some would like to add personal touches, some prefer to completely rebuild, some want to consolidate holdings. Investors too, look for different things and some markets (price points and locations) depending on the strategy and the type of investor, will deliver different outcomes or offer different potentials be it residential or commercial. As exclusive independent buyers agents and advisers across all segments and most markets, we are experienced in acquiring assets to suit the individuality of the buyer and their strategy. The latest ABS data shows flat new home finance, falling FHB finance and even greater falls or take up of investment finance, and what seems to be holding most buyers back is the uncertainty around interest rates and the stock market - even the AUD. It is a perfect storm again for savvy investors and home buyers though.
Like the super rugby league coach Jack Gibson once said - "kick the ball where the seagulls are", in other words - win, by being different; not playing where the players are (or the masses if you like) think laterally and counter the collective conscience...
The combined wealth of Asia-Pacific's high net worth individuals (HNWI) surged almost 31 per cent in 2009 to US$9.7 trillion, erasing the losses recorded in 2008 and placing the Asian market above Europe for the first time on record, a new survey has found.
According to the 2010 Asia-Pacific Wealth Report released today by Merrill Lynch Global Wealth Management and Capgemini, Australia remains the third largest market in Asia-Pacific for HNWI's, behind China and Japan, with India in fourth place.
Australia accounts for almost 6 percent of the region's HNWI population, with 173,600 HNWIs and a total combined wealth of US$519.4 billion. India enjoyed the second fastest rate of growth in the region, with 127,000 HNWIs and US$477 billion in wealth.
Meanwhile, India, which experienced the second fastest rate of growth in the region had 127,000 HNWIs and US$477 billion in wealth.
Confirming Australia's obsession with property, Australian HNWIs were the heaviest investors in real estate in the region, with 40 percent of Australian HNWI assets held in property, compared to 26 per cent for the region and 18 per cent globally.
"Australian high net worth individuals turned the risk switch off in 2009, with investors perceiving real estate to be less volatile than many other forms of investment," said Peter Opie, senior vice president, investments at Merrill Lynch Wealth Management. "This is a trend that has continued through 2010," he added.
Opie told Financial Standard that Australian HNWIs preference for property could partially be explained by the lack of a domestic market for fixed income. At just 14 per cent, Australian HNWIs allocations to fixed income were significantly lower than their overseas counterparts at 31 per cent, he explained . Property was Australia's de facto fixed income, he argued.
Opie described the finding that Australian HNWIs derived a greater proportion of wealth from salaries and bonuses as a "big outlier" relative to other countries, where business ownership plays a much bigger role.
Author: Smartline Personal Mortagage Advisers. 20.09.2010
Recently there have been some fairly negative comments made by some "international" experts concerning Australia's residential property values. Essentially they feel the Australian property market is overvalued when compared to other developed countries.
As you know, I have been looking at this issue for quite some time and I am more convinced than ever that the Australian property market is in a comparatively strong position.
Here are my reasons:
Unlike the UK and US markets in particular, there is not an over supply of residential dwellings in Australia. In fact, excess demand has been running at about 25,000 dwellings per annum for the last 4 years and Australia has one of the highest population growth rates in the OECD.
The RBA Governor has only recently stated that they will work to "prevent" a property price bubble by setting interest rates at levels that prevent exuberant speculation. Given around 85% of Australian mortgage holders have opted for a variable rate loan, the RBA is able to significantly influence property prices. Remember, only 2 years ago the RBA had us paying over 9% for our variable home loans.
Estimates that suggest Australia has a dwelling price problem are usually based on comparing capital city prices to nation wide incomes data. This is not the correct methodology to use. If based on cities that have a population of 700,000 or more, Australia’s urbanisation rate is higher than in Japan, the US, Canada, NZ and the UK. Higher urbanisation tends to support higher capital city property prices. In addition to this, more than 80% of the Australian population lives near the coast. Coastal properties tend to attract a price premium globally.
Australia enjoys a very low default rate of 0.5% (1 in 200) on all housing loans. This is not a statistic that suggests widespread affordability problems and cruels any arguments that we have a property bubble based on a lack of affordability. Unlike many other developed markets, Australian mortgage holders are liable for debts on their houses should they default. In other words, if we sell a house and the proceeds aren't enough to pay out the home loan, we are still required to pay the difference. American's for example can just walk away (which was in itself one of the reasons for the sub prime crisis).
Low mortgage default rates and low unemployment rates go hand in hand. Our comparatively low unemployment rate of 5.3% and improving private sector wages growth is not something that many other economies enjoy. It should also be noted that low unemployment rates assist in underpinning housing asset values.
Australians tend to spend more of their income on home improvements compared to other industrialised nations and less on consumption goods. So our house values improve and our credit card debts are comparatively low. In other words, we are more likely to take on debt that generates tangible value such as dwelling prices.
One of the easiest ways to spike a property market's value is to provide easy access to cheap credit. However, Australian housing credit growth is well below average and most mortgagees are ahead on their owner occupied loan repayments despite our interest rates being relatively high in world terms.
Recent statistics published by the CBA show that Australia has the largest homes in the world, with the average floor area of a new dwelling (including townhouses but excluding apartments) topping 214m?, up from 150m? just 25 years ago. The average floor area of new free-standing houses also set a record at 245m?. Our homes are much larger than those within Europe and most American cities. In simple terms, our houses are worth more because they are bigger.
I tend to find that many people get spooked by negative headlines and unfortunately it is the glass half empty news that sells papers. Hopefully this email has gone some way in addressing the imbalance.
The following article was authored by Simon Packard (Bloomberg - London) Aug. 17--
Beverley Kirby gave up trying to buy a house on her own in London’s Chelsea neighborhood after twice getting burned by owners reneging on agreements to sell to her.The night before Kirby was due to sign for one 4.5 million- pound ($7 million) house a year ago, she was trumped by an offer that was 500,000 pounds higher. The aborted deal cost her 4,000 pounds in fees and left her with a few months to vacate the apartment she had sold.“I was getting desperate,” said Kirby, who bought and sold seven other homes previously with her former husband.
“There was madness in the market. People had no ethics at all.”
That experience, along with the surge in prices for a dwindling number of top-end properties for sale, led Kirby to hire Robert Bailey, a type of broker known as a buying agent.
Bailey is one of several hundred operators in a field that barely existed in the U.K. 15 years ago. He found her a home that wasn’t advertised. Kirby moved into it in early April after Bailey helped her carry out refurbishments and get planning consent to use the top of the garage as a roof terrace.
The brokers are a response to a flaw in Britain that favors sellers, said Phil Spencer, who hosts property-search shows on U.K. television with fellow agent Kirstie Allsopp. Typically, potential U.K. homebuyers register with “estate agents,” who show them properties but are ultimately paid by the sellers. In the U.S., both buyers and sellers usually hire brokers, though only the sellers pay commission. These fees are shared by both sets of brokers.
‘No Help’
“A buyer has nobody to help them with the biggest financial decision of their life,” said Spencer, 40.
The new breed of advisers charge the potential purchaser a retainer plus commissions of as much as 2.75 percent of the sale price. It’s a cottage industry largely used by the wealthy because it’s too expensive for most people with budgets of less than about 500,000 pounds.
Buying agents have proliferated in the luxury markets of London and southern England as a weaker pound has lured overseas investors. They do everything from locating the home and negotiating the price, to arranging legal and survey work and researching potential pitfalls such as noisy neighbors.
They are prized largely for speeding up the process to reduce the chance of getting “gazumped,” a British term for being trumped by a higher bid before signing contracts.
Agents Quadruple
“Over the past five years especially, there has been a quadrupling in the number of buying agents in the prime central London market and their numbers increase all the time,” said Noel de Keyzer, head of house sales at broker Savills Plc’s Sloane Street branch.
There are fewer luxury properties for sale in prime London neighborhoods even as demand is rising. Residential purchases in the Westminster and Kensington & Chelsea boroughs, where average house prices exceed 1.3 million pounds, are down 23 percent from the average since 1996, according to London Central Portfolio Ltd., which buys and manages prime rental property investments.
About 100 properties worth at least 20 million pounds have been purchased since 2006 -- a category that’s less than 10 percent of the prime central London market. Most deals of that size are now handled by buying agents, de Keyzer said.
The scarcity of prime homes for sale lifted prices in central London by 23 percent since a yearlong slump, triggered by the worst recession since World War II, ended in March 2009, Knight Frank LLP estimates. Property values in the U.K. as a whole rose about 12 percent, according to the Nationwide Building Society.
Jackpot Deals
Agents have to court private banks or wealth managers to generate new leads to sustain the deal flow. Dozens of individuals, many former brokers, have set up on their own as overseas buyers flocked to London.“All you have to do is two or three deals a year and you earn as much as you did before,” said Johnny Turnbull, who has worked independently since 2006 after heading the London arm of Prime Purchase, Savills’s buying-agent arm.
Competitors include Property Vision, a unit of HSBC Private Bank since 1991 -- and the biggest with a staff of 60 -- and Knight Frank’s The Buying Solution. Some independent buying agents say rivals owned by brokers have a conflict of interest because their companies represent both the buyer and the seller.
“They’re trying to milk the fees at both ends,” said Francis Long, who set up buying agency Hanslips 12 years ago covering London and southeast England.
‘Chinese Walls’
Savills and Knight Frank say there are “Chinese walls” and enough transparency to avoid conflicts, and that few customers have problems with the arrangement. Buying agents rely on relationships with brokers, developers and owners to get their clients first in line for a home. Providing a superior service is vital if they want steady business, said Bailey, who helped Madonna buy a home in Mayfair in 1999 and also works with hedge-fund managers and bankers.
Agents research an area and prepare reports that may reveal whether a rock-star neighbor has loud soirees or whether planning authorities are hostile to tennis-court floodlighting.
“What worries me is that people don’t deliver and start to give the rest of us a bad name,” said Bailey, who has covered the prime London market for 25 years.
One morning in early July, Camilla Dell and Grant Aitken, of Black Brick Property Solutions LLP, dodged workmen refurbishing a three-bedroom apartment in the Knightsbridge district to see whether to make an early offer.
Feng Shui
Dell, 32, set up the London-based company in 2007 and has generated business through regular trips to visit potential buyers in countries including India and Nigeria.
“It helps us to understand them, to see them in their home and their culture,” said Dell, whose requests from clients have included properties with feng shui compliance.
Competition for high-end homes within commuting distance of London is also fierce. Here the agent’s research has to be even more exhaustive, said Mark Parkinson, who helped set up Middleton Advisors LLP in 2008 covering country homes in southern England. The efforts aren’t always appreciated. “You prepare a detailed report -- down to reminding the buyer of an old rectory that the church bells chime every 15 minutes -- and they probably don’t even read it,” said Parkinson, 37, as he drove a sport-utility vehicle that allows his customers to see properties over hedgerows.
Spencer and Allsopp
Spencer and Allsopp have encouraged buyers with smaller budgets to use agents, said Jo Eccles, who set up Sourcing Property four years ago and has handled about 70 purchases or rentals in London worth about 40 million pounds combined.
Not all the agents will survive, according to Andrew Giller, who heads London searches for The Buying Solution.
Competition and the slump in deals since the financial crisis mean individual operators, in particular, may struggle.
Spencer’s own London search company filed for insolvency in February 2009 after a four-month deal drought left it unable to cover the costs of running an office, marketing and staff.
He’s no longer involved in the business, parts of which were bought by Garrington Country, a company created from its former regional arm. Garrington has since expanded in northern England, said Managing Director Jonathan Hopper.
“The market is an emerging one,” Hopper said. “Who you are dealing with is key -- there’s a mixture of very capable, experienced agents out there and then there are those who are just going out to spend other people’s money.”
