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Thursday, January 10, 2008

Is 2008 Set To Be A Year To Forget?

Unemployment is now at 6.1% nationally - the second consecutive quarter that this has increased. Should we be blaming the new Rudd Labor Government? Should the knives be at the ready? Will interest rates reach the heights of the early 90’s and what does all this mean for property in 2008?

In the last few Marquette Turner e-magazines I have looked closely at what 2008 will bring for property owners and with only 10 days gone in 2008, we can already see the validity of the predictions I made for 2008 at the end of last year.

As interest rates increase and inflation stays above 3%, fuelled by the pressures of high oil prices it’s inevitable that unemployment will increase. Employers are tending to play a waiting game or are battening down the hatches and getting ready for what comes next. But what will come next?

At the end of 2007 I predicted interest rates to hit somewhere between 9-9.5% and with the Banks increasing rates even before the Reserve Bank announces its decision on official rates this is looking very likely.

Is the Rudd Government to blame? The answer to this is no. The Australian economy is now into its seventeenth year of growth which is remarkable and home owners have been able to cope on the most part (only just in many cases) with recent rate hikes. Interest rates increased 6 times under the former Coalition Government and it was inevitable that further increases would occur in 2008 regardless of which party formed Government. The price of oil filters through every area of the economy with the result being higher prices for consumers. Higher prices result in inflationary pressure which means higher interest rates.

What does this mean for property in 2008? Marquette Turner's first open home for 2008 was run in Neutral Bay last weekend and to our amazement we were inundated with over 30 groups of buyers all eagerly searching for property.
Buyers are still very much in the market, however the attraction to fixed interest rates has increased and I am urging all those that ask to lock in rates as quickly as possible - this is by far the best way to bullet-proof yourself and ensure that you are not feeling undue financial pressure as 2008 rolls on.
Rental demand is extremely strong and rental returns have increased but these gains will quickly be swallowed up by increased interest rates with the result being that many landlords will find the situation too tough, forcing them to sell. 2008 is going to be a year where property prices are steady and those that are willing and able to take advantage of distressed sales will benefit greatly.

The property outlook is mixed – rents will continue to be high, housing affordability is now at its worst point in over 20 years and this is likely to become even worse as interest rates and unemployment continue to increase.
The likelihood of a US recession is high and the sub prime (Lo Doc) mortgage market has caused significant damage in the US and this will likely result in tougher lending criteria for Low Doc products in Australia. The Australian economy has stood firm against the Asian Economic Crisis and we can get through a US recession.
With over 40% of our National exports coming out of mineral rich Western Australia and with demand for our natural resources greater than the rate at which we can supply them we may just sneak through when other countries stumble.
My advice for 2008 is lock in your interest rates and be sensible when spending. Ensure there is plenty of money in the tin for a rainy day and do everything possible to cut excess.

Lock Your Home Loan: Shield Yourself From Further Rises

Home owners should look at locking in the interest rates on their mortgages as the banks get set to raise home loan and business rates.

NAB, the Commonwealth Bank and ANZ have all responded to the tightening global credit market by lifting their variable home loan rate in excess of the Reserve Bank's last raise in December.

Federal Treasurer Wayne Swan has urged Australian banks to take into account the financial pressures that people will face as interest rates get set to rise, although he recognises that the rise in variable mortgage rates is a direct result of the US sub-prime crisis and not directly the fault of the banks.

Marquette Turner believes that there is more hurt to come as the US sub-prime crisis works its way through the financial systems, therefore a shift away from variable home loans is a reflection of uncertainty and caution.

The Outlook for Rental Propery in 2008

Increasing demand and lower vacancy rates will cause many rents to increase during 2008.

With the population growing and rising interest rates putting some investors off the residental market, vacancy rates, (currently running at an average 1.7 per cent) are unlikely to improve.

Increases in median rents can be expected in all states, the Real Estate Institute of Australia says in its 2008 real estate market outlook. The likely rise follow across-the-country increases last year with rents for three-bedroom houses increasing by an average of 12.6 per cent to September 2007.

Darwin is now the most expensive rental location in Australia (the median rent for houses is $440 per week and for other dwellings $340 per week) although Sydney and Canberra renters also pay $340 median weekly rent for two-bedroom other dwellings.

The cheapest rental location is Adelaide at $255 per week for a three-bedroom house and $205 per week for a two-bedroom dwelling.

Some investors are being turned off from the housing market as interest rates have risen and are seeking to take advantage of other investment opportunities which have more favourable taxation treatment.

On the upside, however, with a fluctuating stock market, residential real estate in Australia is looking decidely stable!


Australian Property: Some Positive News

Australia's home-building approvals unexpectedly surged in November by the most in nine months as higher employment, wages and immigration encouraged investment.

The number of approvals to build or renovate houses and apartments rose 8.9 percent from October (when they slipped 3.6 percent), according to the Australian Bureau of Statistics.

WHAT THIS MEANS
An acceleration in construction increases pressure on the central bank to raise borrowing costs to stem inflation, already above its 3 percent ceiling. This report also suggests investors may be switching into property amid stock market volatility that is seeing Australia's benchmark index falling.

This will ultimately ensure that interest rate rises continue to creep up this year, so long as such trends remain, comments Michael Marquette of Marquette Turner. He continues that "for those investors concerned about the Australian stock market, the residential housing market looks like a good place to be''.

Approvals to build private houses rose 0.3 percent to 9,340 in November, today's report showed. Approvals for apartments and renovations advanced 28.4 percent to 4,882.
Another report today showed Australia's construction industry accelerated in December, boosted by new infrastructure projects and commercial property building.

The construction index rose 6 points to 59.2, according to a report by the Australian Industry Group and Housing Industry Association released in Sydney. A reading above 50 indicates the building industry is expanding.

It is also the view of Marquette Turner that rental vacancy rates, which are averaging 1.7 percent, are unlikely to improve significantly during 2008.

The Most Expensive Street in the Country

Wolseley Road, Point Piper, is the most expensive street in the most expensive suburb in Australia. It's also a who's who of Sydney real estate.

Wolseley Road is the dress circle where the rich and famous sit high on a thin-necked peninsula jutting deep into Sydney Harbour with mega-million-dollar views back to the bridge, the Opera House and the silhouetted CBD skyline.

Established in 1890 and named after British field marshal Garnet Joseph Wolseley, this wide, hooked street is a row of lavish estates, deluxe apartments and theme-park palaces.

Of the 10 highest-priced house sales in 2007, it is the only street with multiple listings, including $25 million handed over in December by stockmarket trader David Trew for a 1921 harbourfront mansion.

24 houses have traded in the past five years on Wolseley Road at an average $12.33 million - including the $21.5 million recruitment queen Julia Ross paid in 2004 for Villa del Mare, still a non-waterfront Sydney record.

It is also a place where construction never stops, with many residents wanting to display “their legacy”, say Michael Marquette, Director of Marquette Turner. Ultimately, “the more it costs and the more people that know how much it costs, the better”.

Take a stroll and and have a look to see who you can recognise (that is if you're tall enough to catch a glimpse beyond the high security walls and fences!).

Simon Turner simon@marquetteturner.com.au