Property portfolio Update: Mar 2008

The latest monthly sales figures (February) for the suburbs of our home and investment property have just come out. There continues to be a lot of "noise" in the data, with monthly average sales prices being affected by the mix of properties sold in the month, but the general uptrend in prices still continues and has formed into a mild house price "boom". However the recent series of interest rate rises by the reserve bank and additional increases in home loan rates due to the global credit crunch are starting to dampen house sales, especially at the lower end of the market. The 12-month gain in average price for the two suburbs we're invested in was around 14.5%, compared to only 5.8% a year ago.

The graph below shows that the rate of property price increase in our suburbs took off in early 2007, with the annualised price change going above the long-term rate of 6% and continuing on past 10% pa. My new worth goal for 2008 assumes an increase in our property valuations of 8%, which may turn out to be conservative. However, it looks as though rising interest rates are starting to bite, so the current housing boom may be relatively short-lived and weak compared to previous Sydney property cycles.



Copyright Enough Wealth 2007

Property portfolio Update: Jan 2008

The latest monthly sales figures (December) for the suburbs of our home and investment property have just come out. There continues to be a lot of "noise" in the data, with monthly average sales prices being affected by the mix of properties sold in the month, but the general uptrend in prices still continues and looks as if it may be the start of another house price "boom". The monthly gain in average price for the two suburbs we're invested in was 1.1%, and 16.5% year-on-year. Same time last year the year-on-year price change was only 1.2%, and was climbing throughout 2007.

The recent volatility and substantial "correction" in the stock market is likely to result in a net outflow of funds from the stock market, with residential real estate the preferred alternative investment for "mum and dad" investors. This is likely to give a further boost to residential property in Sydney at the middle and top end. However, another interest rate rise by the RBA in an attempt to pull inflation back within it's 2%-3% target band would temper demand. Recent noises by the newly elected Labor government about controlling inflation through a larger Federal government budget surplus of around 1.5% of GDP ($18 billion AUD) rather than the previous Liberal government's "non-inflationary" surplus benchmark of around 1% of GDP, and the banks unilateral increase in home loan mortgage rates of between 0.1% and 0.2% may forestall another 0.25% official interest rate rise by the RBA in February.

Since we have around half of our property mortgages fixed (rather than at a variable interest rate, which is standard in Australia), a modest increase in inflation would actually be of some benefit as it would tend to push house prices up (as replacement costs increased) while the real value of our outstanding mortgage balance would decline. On the other hand, if inflation moderates as expected in 12-18 months time, and home loan interest rates start to decline, this would fuel demand by first home buyers and investors and start to push house prices up more rapidly. Hopefully not precipitating another severe boom-bust cycle.

The graph below shows that the rate of property price increase in our suburbs has taken off since the start of 2007, and the 6-month average of the year-on-year rate of increase has now shot through the normal long-term rate of 6% and is headed past 10% pa. My new worth goal for 2008 assumes an increase in our property valuations of 8%, which may turn out to be conservative. However, this would only partially offset what is shaping up to be a dismal year for the stock market.



It was interesting to read in the 4th Annual Demographia International Housing Affordability Survey that Sydney ranks as the 11th least affordable housing market (of those surveyed), with the median house price being 8.6x the median household income. I'm not convinced that the reports conclusion that unaffordability is mainly due to artificial government restrictions on city expansion. LA was listed as the most unaffordable city they surveyed, yet it has some of the worst "urban sprawl" on the planet. In the case of Sydney there are some natural constraints to expansion - an ocean to the East, a mountain range, national park and urban water catchment to the West, and national parks and rivers to the North and South. In any case, the median house price in some of the western and south-western suburbs of Sydney is relatively low, yet no-one of median income chooses to live there.

Affordability can also be a transient phenomenon from a house-buyers perspective. For example, the rental property we bought almost ten years ago cost $430,000 which was around 4.5x our household income at the time, which according to the surveys criteria is "seriously unaffordable":

Rating Median multiple
Severely Unaffordable 5.1 & Over
Seriously Unaffordable 4.1 to 5.0
Moderately Unaffordable 3.1 to 4.0
Affordable 3.0 or Less

But after ten years the purchase price is less than 3x our household income (when DW is working full-time), and at the same time the valuation of the house has more than doubled.

By the way, the most affordable city on the list was Thunder Bay, Canada. However, with today's temperature in Thunder Bay being a nippy -29 Celsius I'm not about to move there!

Copyright Enough Wealth 2007

Property Outlook

The US housing market is expected to drop by around 10-15% from it's peak before a recovery starts in late 2008 (unless delayed by a recession in the US). In comparison the Australian residential property market is still doing quite well, and even the Sydney market is expected to increase by between 5-15% this year, except from properties in the so-called mortgage belt that will continue to struggle to find any support due to the on-going crisis of affordability in the mortgage market.

The recent round of bank mortgage rate increases in Australia of between 0.10% and 0.20% was attributed to the global fallout of the US subprime meltdown, and will hit hard the "battlers" and "working poor" already struggling to afford home ownership with housing affordability at record lows. If there is another official interest rate rise of 0.25% by the RBA the Australian property market is likely to remain subdued during 2008. In Australia the economy is still growing quite strongly (as measured by the GDP), but there is concern that inflation will nudge above the official target band of 2-3%.

I take a middling view of prospects for interest rates and the property market in Sydney. My ROI targets for this year assume the value of my Sydney properties will increase by around 8% during 2008, and we have approximately half of our home and investment property mortgages at a fixed rate for five years. As the fixed rate is now around 1% less than the current variable rate, we are likely to end up ahead by fixing part of our loans early last year, even if interest rates peak this year and trend downwards in 2009 and beyond.

In the US the Fed is still cutting rates in an attempt to avoid a US recession. But the danger is that inflation could be given a boost. The last thing the economy needs is a return to stagflation, last seen during the last "oil shock".

Copyright Enough Wealth 2007