Australia has had a boom and gloom economy over the past year. On the one hand our economy still grew – unlike many others around the world –underpinned by a resources boom.  But on the other hand, consumers and businesses were gloomy.

And it was much the same with property. Some areas fared well through the year, but many didn’t.

However, looking back, 2012 will be remembered as the year the property market turned.

It didn’t crash like many property pessimists predicted. Sure it stalled in some areas, dropped a little in others and prices fell significantly in a few spots, but in the middle of the year things slowly started to change.

So what gives?

Our property markets started the year in a tug-of-war caught between falling interest rates on the one hand and market uncertainty on the other.

There were concerns of a meltdown in Europe that could bring the financial system to its knees as well as worries about the US economy. The European economy is still a “basket case” and will remain so for years, however the major risks to the financial system seem to have been averted and over the year the USA economy has improved, albeit slowly.

However we have something new to worry about – the health of our resources boom has come into question. The Chinese economy, the powerhouse behind our resources boom, slowed down during the year, and falling commodity prices and high costs of production have brought concerns about the future of many of Australia’s major mining projects.

What happened in our property market?

We started the year with more properties on the market than there were buyers as many potential home owners and investors stood on the sidelines, too nervous to make a decision waiting for the market to bottom.

Of course it’s not really as simple as that, because there is not one property market.

Well-priced properties in prime locations and with an element of scarcity in the middle price range (say $450,000 and $850,000) have still been selling well, even though clearly there was less interest from both owner-occupiers and investors than before.

However, “B”- and “C”-class properties have not been not selling well. Nor have expensive properties in our more affluent suburbs or holiday properties. Some dropped in value by up to 10%, and some couldn’t be given away.

Well, it wasn’t really as bad as that, unless you were in some remote regional location, but you’d have to give a very steep discount for someone to buy them.

Then things changed:

Eventually a combination of increasing affordability due to higher wages, lower prices and falling interest rates brought buyers back into the market, heralding an upwards trend in values from around the end of May.

This trend, shown in the following graph from RP Data, has also been confirmed by figures from Australian Property Monitors, Residex and theAustralian Bureau of Statistics.

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How did things finish off?

The latest figures from RP Data up till the end of November show that capital city home values remain 5.6% lower than their historic highs of November 15, 2010, but up 2% from their low of late May 2012.

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More good news

Another positive sign is that the level of confidence among Australian consumers (as measured by the Westpac-Melbourne Institute Consumer Sentiment Index) has been rising since April this year.

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An easy way to interpret this index is that when it is over 100, optimists outweigh the pessimists and when the index is lower than 100 there are more pessimists than optimists.

In November 2012, the Consumer Sentiment Index was showing a value of 104.3.

Coincidentally Comsec reported housing affordability as the best it’s been in a decade, as shown in the following chart:

Consumer confidence is one of the most important leading indicators for the housing market. Put simply, when consumers are lacking in confidence (as they have for the last few years) they tend not to make important and expensive buying decisions such as moving house. And when confidence is high, the number of home sales increases.

And this is already translating into higher levels of finance approvals, which is another important leading indicator, as most home buyers and investors get their finance two or three months before they buy a property.

Where are we now?

What these figures don’t show is how fragmented the markets really are.

We know there is not one Australian property market. There are many different markets in different geographic locations, at various price brackets and for different types of property. There is no doubt that home values are still falling in some areas and they are rising in others, but overall things are improving.  

Buyers are back in the market, but at the right price. Stabilising house prices and interest rate cuts are breathing life into the property markets.

Auction clearance rates are up in and vendors are more willing to accept realistic offers.

Vacancy rates are less than 2% in every capital city other than Melbourne, pushing up rentals. This together with better affordability will eventually bring more first-home buyers back into the market.

At the same time overseas investors are snapping up many of our new apartment projects and baby boomers are buying properties in their self-managed superannuation funds.

We’re in the stabilisation phase of our property cycle.

(c) Metropole Properties

We’ve moved into the stabilisation phase of the property cycle.

You see, the markets don’t move directly from the downturn phase to a property upturn. There is a period of time where buyers return and take up the slack before prices start rising significantly.

And I expect more buyers to return to the market in 2013 year when they realise prices won’t fall any further.

By the way, the stabilisation phase is a great time for smart home buyers and strategic investors to get set for the upturn stage of the cycle.

This may be a good time to buy property – I have always found it a good time to buy when everybody tells you that property is a bad investment. Now is the time to get set for the future.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog. Subscribe today and you’ll receive a free video, The Golden Rules of Property Investment.

One of the most common mistakes a property investor can make is to believe that all residential property investments will behave in the same way.  Many people who favour direct property as an investment do so based on a misconception that it is easier to understand than other investment classes, and that strong returns are all but assured.  However, the property market is incredibly complex, and a failure to appreciate the different submarkets at play can lead to very different investment outcomes.

The following tale of three two-bedroom apartments illustrates how investments belonging to different sub-markets have fared in recent years.  The apartments have sold and resold over the past seven years, which is an important time frame that comprises the 2007 share market boom, the global financial crisis, the property boom of 2009-10 and the subsequent property market adjustment of the last couple of years.

Apartment 1

1506/100 Harbour Esp Docklands

Purchased: November 2006 for $460,000

Sold: November 2012 for $460,000

Annual compounding growth rate: 0%

Why?

One of the great marketing tools bandied about the market is to imply that strong population growth in an area is an indicator of future capital growth.  But people who think that population growth is in isolation a key indicator of demand are missing a very important reality.  Strong population growth in an area is a better indicator of a change in supply.  If there is strong population growth there must be a lot of available property for people to move into.

A strong increase of housing supply in an area can drive down prices to a level that entices buyers.  The take-up of excess supply can be qualified as demand for affordable housing.  As long as an area has the capacity for significant increases in supply, any evidence of capital growth in the area will trigger further housing releases, which in turn will water down value growth.

Docklands still has an issue with oversupply. Since 2001 its population has been growing by almost 22%. This growth rate is off a very low base of 700 in 2001.  However,  the Docklands population has still been growing by 6.5% over the last five years. This is well above the 1.5% annual population growth of Victoria.

Over the years the Docklands precinct has generally been a poor performer for investors. Many people suggest it must turn the corner soon and that the next 10 years will be much better than the last 10. However consider this, according to the 2011 census one in five Docklands properties is unoccupied.

Apartment 2

109/92 Kinkora Road Hawthorn Vic 3122

Purchased: June 2005 for $445,000

Under offer: November 2012 for $470,000 

Annual compounding growth rate: 0.86%

Why?

Developers continually fight an uphill battle as they struggle to match rising labour and material costs to produce a product that they can sell and make a profit. The most effective way they can do this it to cram as many apartments they possibly can onto each block of land. To do this they usually compromise the size of each apartment, and the first casualty is the kitchen, as it gets squeezed into the lounge room. Most people would prefer a separate, or at least a properly defined, kitchen area.

Often, developers price their new developments based on the costs to build plus a profit and risk margin.  The traditional method of valuation, where comparable sales are relied on to establish pricing, will only be employed if the subsequent value estimate is higher than the cost method.  Developers can often achieve their pricing through the offer of incentives such as stamp duty savings, rental guarantees, high levels of claimable depreciation, as well as taking advantage of foreign investors.  Such incentives are not available for subsequent purchasers of the property.

When the investor bought this Hawthorn property he or she could have purchased an apartment for less and made more money!

Apartment 3           

2/4 Avondale Road, Armadale

Purchased: June 2006 for $348,000

Sold: May 2009 for $543,000

Annual compounding growth rate since last sale: 16.48%

Resold: Oct 2012 for $642,500

Annual compounding growth rate since last sale: 5.05%

Why?

Armadale’s population has been growing by just over 0.5% per annum over the last 10 years, only one-third of the Victorian population growth rate. The low level of population growth does not reflect a lack of demand to live in there, as Armadale is a highly desirable location. Population growth is held back because of the lack of supply due to unfavourable town planning laws for developers and scarce development opportunities. This lack of supply puts upward pressure on prices.

Further, the apartment was built more than 40 years ago when labour was much cheaper and developers could make a profit by building fewer apartments in any one development.  They did not have to sacrifice floor space, and as a result the property is more desirable and in strong demand. When it was purchased there was no developer premium paid, as it was sold at auction and market forces determined the price.

Xavier Perronnet is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.