Important Real Estate Information

This article cam in a news letter from Jade Harley-Riddell B.Bus(R.P.V.A.) Registered Valuer and Property Economist and I belief it succinctly explains the real estate property market at the moment. Thank you Jade for putting it so clearly.

When will the property market stop falling??

The property market will stop falling when buyers perceive the market to be affordable. Residential buyers perceive property to be affordable when house prices are four times their income. Commercial and industrial buyers perceive property to be affordable when the cap rate is high enough that it accurately reflects the risk they are taking in comparison to other forms of investment.

The increased stamp duty adds another downward pressure to residential values. With 2% of mortgages in default and 50% of first home buyers in mortgage stress, there is about to be a spate of bank foreclosures that will be sold by auction. This means the buyers have to be cashed up. These buyers will predominantly be investors including self managed super funds. As there are no capital gains to be had, the investors are going to be looking for good rental returns. This means they will buy but they will buy low.

Areas that had low sales volumes in 2008, have high median sale prices, high owner occupancy rates and a large proportion of business owners, professional employees and tenured public servants should expect subdued falls in values.

Areas that had high sales volumes in 2008, have low median sale prices (under $500,000), have high amounts of rented properties and a high proportion of unskilled workers, self employed people, managers and contract public servants should expect dramatic falls in values.

When will the market rise again?

The market rises when demand exceeds supply (there are more buyers than sellers). Positive consumer confidence is the main driver of this. People need to feel wealthy, to feel secure with their employment and to feel that the economy is stable and going in a positive direction. This won’t happen while there are constant job losses, businesses closures and increasing government debt (governments compete with banks for money therefore forcing up the interest rate banks have to pay and therefore pass on to consumers). Things will turn around when governments start paying down debt and having policies that encourage businesses to thrive and therefore hire more people.

Written by Jade Harley-Riddell

Businesses downbeat as natural disasters, weak spending weigh:

Madeleine Heffernan

Businesses are downbeat about the future, a survey shows, with sales and profit expectations falling for the September quarter as cautious consumer spending and the effect of the natural disasters work through the economy.

The D&B National Business Expectations Survey for May shows sales expectations for the three months to September 30 have fallen nine points to five, the lowest result in two years.

Profit expectations for the September quarter have slumped 15 points to -7, well below the 10-year average figure of five.

D&B says the results continue a trend that emerged in the March quarter when expectations for many indices fell from four-year highs, and returned to their long-run averages.

"However, the latest data signals the outlook may be worse than feared with the key indices of profits, employment and capital expectations all entering negative territory. Furthermore, the data illustrates the continued divide between the mining sector and the rest of the economy, with the negative outlook for retailers particularly acute," it said.

D&B chief Christine Christian added that the outlook was likely to remain uncertain until consumer spending picks up and uncertainty over the budget passes.

And despite expectations that the unemployment rate will continue to fall over the next couple of years, the D&B survey showed employment expectations have fallen to -3, from three points, which is the first negative in eight quarters and again well below the long-term average.

Interest rate rises, fuel prices, wages growth and credit access remain key concerns for businesses, the survey found.

For the March quarter, the profits index dropped to -1, down two points.

The market was boosted by stronger-than-expected trade surplus data for March.

The Australian Bureau of Statistics figures show the seasonally adjusted balance on goods and services soared to $1.74 billion, from a revised deficit in February.

This well exceeds analyst expectations for a $500 million surplus.

The ABS said in seasonally adjusted terms, exports of rural goods fell $60 million (2%) to $2,532 million, with cereals and meat both down 5%.

"In seasonally adjusted terms, exports of non-rural goods rose $1,629m (11%) to $16,746m," it added, with metal ores and minerals, coal, minerals fuels and sugar and beverages all recording double-digit lifts.

In company news, steelmaker OneSteel has cited the steep rise in the Australian dollar for its decision to cut its second-half guidance.

OneSteel this morning said its second-half net profit after tax would be broadly in line with its first-half result, which came in at $116 million.

"Today's revision is due primarily to the impact of the rapid appreciation of the Australian dollar, including an adverse impact on domestic steel margins and volumes and on iron ore Australian dollar revenue," the company, a vocal critic of the Government's plans to put a price on carbon, said.

Shares in OneSteel were 4.23% lower at $2.04 at 1105 AEDT, versus a 0.29% fall in the benchmark index.

Household debt should not be a large concern

Household debt should not be a large concern

Paul Bloxham

There are reasons why levels of household debt should not be a large concern. The key one is that 75% of all household debt in Australia is held by the top two-fifths of income earners. If we look even deeper, we find that only a small proportion of households are truly in a vulnerable state regarding their ability to continue to service their mortgages. Vulnerable households – in this case, ones that have a loan-to-valuation ratio of 90% or above and also use more than 50% of their disposable income to service their mortgages – constitute less than 2% of all owner-occupied households with debt in Australia.

Slower housing credit growth in recent years, due partly to lower housing turnover, has also meant that the Australian mortgage book is ageing. This reduces the risk of repayment problems, as households with a longer history of repayment tend to be better risks. The credit fancier model of repayments suggests that these households are now repaying a greater amount of principal and less interest, so that households have built up equity in their homes and could run this down in a crisis.

The structure of the mortgage market and tax system in Australia is also such that most households are ahead of schedule in their mortgage repayments. This would provide a buffer in the case of a negative income shock to households, such as increased unemployment.

In the event of a large negative shock to the Australian economy, there are also a number of contingencies built into the system that would somewhat protect the housing market. These were vividly displayed during the GFC. The RBA would cut interest rates, the fiscal authorities would boost spending, and the exchange rate would depreciate. As we discussed above, with most of the mortgages at variable rates, the monetary transmission mechanism is very powerful, and very low net government debt – it is forecast to peak at 6% of GDP in 2012/13 – means the government also has significant capacity to spend.

Overall, with strong prospects for the Australian economy, on the back of high commodity prices driving a mining investment boom and rising incomes, we expect that housing prices will continue to grow at a modest pace over the next few years. We view the risk of a sharp fall in housing prices as very low.

Paul Bloxham is HSBC's chief economist for Australia and New Zealand, and a former RBA economist. This is an edited extract from a recent research note, Australia's place in the world