Effective housing supply - how many months of supply is evident across the Australian market

Source: RP Data. 22.10.10

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.

"The data that the doomsayers use is flawed" - No Housing Bubble: Fidelity

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.

John McDuling - Financial Standard

Is this the perfect storm for savvy property buyers and investors? Are we in a buyers market?

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...

Are we in a buyers market - again?  We think so.