The Australian property market recently saw its first month-on-month fall in property values in twelve months, prompting many observers to speculate that the Australian property market is weakening. In his most recent article in Property Investor, Century 21's smart book for investors, Century 21 Australasia Chairman and Owner Charles Tarbey explains why this isn't the case.
The month of May saw the first month-on-month fall in property values since May 2013, a result which many casual observers might suggest indicates a weakening in the Australian property market.
This sentiment couldn't be further from the truth – the fall in property values is an indicator of the strengthening of the Australian property market. For some time now we've been talking about the negotiating market and how sellers will have to return to the negotiating table to work out a fair price for their property.
This 'negotiators market' has well and truly arrived and sellers are now entering the sales process with the expectation that they will need to negotiate with buyers. This structural change in the way property is priced has slowed down the momentum and excitement in the market, paving the way for long term sustainable price growth in many areas.
There are several other pertinent issues for all participants in the property market which I've outlined below.
A DROP IN CONFIDENCE
Federal budgets always have an impact on people's decision making, and the recent budget has certainly put a dent in consumer confidence. However, I don't believe this should have a lasting impact on the property market.
Why? Because despite recent media hype to the contrary, housing affordability is still quite strong with the HIA-CBA Housing Affordability Index recently posting its most favourable result in 12 years. The continued affordability of housing will ensure that first home buyers are still able to enter the market and others searching for property can still afford to purchase.
AN INCREASE IN SUPPLY
Another cause of the recent drop in dwelling values across Australia is the impact of new supply.
Melbourne experienced the largest drop in dwelling values nationally, with a fall in dwelling values of 3.6 per cent over the month of May.
Despite this drop in values, the Melbourne market still sits 9.9 per cent higher over the past twelve months and 12.3 per cent higher than the previous market trough. The cause of this drop is likely the new supply being brought on to the market, lessening the impact of the supply constraint which has been responsible for driving prices up across many different regions.
CHOOSING THE RIGHT PROPERTY
There's been a significant amount of discussion recently about small, one bedroom apartments, and whether they make a suitable property purchase. This discussion is interesting, because a long time ago you wouldn't even have considered buying a one bedroom apartment – it just wasn't appropriate.
Now, as the market suffers from a shortage of medium density development, banks have changed their rules a little and will lend for these types of purchases. Banks still hesitate to lend for some of the smaller properties, which is a similar issue that buyers of discretionary lifestyle properties can run into – banks are cautious about these types of dwellings as there will almost always be a minimal number of purchasers interested in purchasing them.
It's for this reason that I believe you should buy at the top end of the first home buyers market and the bottom end of the second home buyers market. This is because by purchasing a mid-range property, you've got multiple layers of buyers who could buy the property from you should you choose to sell.
THE IMPACT OF INFRASTRUCTURE
Infrastructure has an incredible impact on property prices. Take for example, the M7 motorway in Sydney.
There are now some fantastic areas that you can get to quickly on the M7, meaning people can buy a brand new or high quality home in an area with very easy access to all the necessary amenities. As a result of infrastructure being built, many people who would have previously described these areas as too remote or hard to get to are now considering them to be desirable locations to live.
It's important to remember that both new and established infrastructure has an impact upon property prices. While there's been a lot of speculation in the media about the impact of major infrastructure projects in capital cities such as Melbourne and Sydney, many other regions in Australia already have infrastructure in place to rival that planned by these respective state governments.
In my experience, many speculators miss out on capital growth as they're effectively placing a bet that planned infrastructure will cause a short term price movement. The reality is that infrastructure is often the first step in the gentrification of an area and the resulting price movement in the suburb may take months or even years to be fully felt.
Regardless of your intentions when entering the property market, I believe every buyer should be focused on the long term capital growth they're able to achieve from their property purchase. Too often I see short term speculators abandoning a purchase which is likely to experience strong growth over the next ten years, because the price dropped slightly over the past two months.