tip off

Lobbyist bluster can’t hide struggling property market

The performance of property has confounded most optimists who have long claimed that property prices would be cushioned by interest rate drops.

It won’t impress the shrinking legion of property bulls, but Fairfax recently reported that Australian house prices fell for a second straight year during 2012, marking it the “worst run for the national property market in 16 years”. It seems optimism has largely fallen out of the once booming market, with 77% of 9000 respondents to a Fairfax survey stating property prices need to fall further.

The performance of property has confounded most optimists who have long claimed that property prices would be cushioned by interest rate drops (rates were cut by of 2% during 2012).

Melbourne, the epicentre of the recent boom, has led the market down despite the best attempts of the real estate lobby. With thousands of new apartments flooding the market, property values slumped in the southern capital by 2.6% during 2012, while Adelaide dropped by 0.7% (the Sydney market was the nation’s strongest, recording a 2.6% increase).

While Crikey has been warning of a property price slump since 2008 it appears not everyone has got the memo — one example is Dr Roger Donbavand, managing director of Research Company, BDRC Jones Donald.

Appearing on Sky Business earlier this month, Donbavand sought to portray an upbeat view of the residential property sector, despite the apparent gloom. BDRC Jones Donald conducted a survey of landlords (presumably at the behest of the real estate of finance industry), with Donbavand saying that “landlords have more confidence in bricks and mortar [than the stock market] and were actually looking to up their rental yields and also look to expand their property portfolio”.

Of course, asking whether property owners have confidence in property is a bit like questioning Commodore owners whether their next car purchase will be a Ford or Holden. If someone didn’t have confidence in property, they presumably would have sold their holdings, or never bought them in the first place.

But Donbavand certainly didn’t stop there, also observing that “what’s driving [the property market] is the size of the sheer returns that [landlords] are getting from their tenants. In the face of lowering stock market prices, it’s been a tough year for the stock market, actually rental returns have been very good this year. Often six, to some people have had in excess of 10% returns, so it’s been a great year for landlords.”

One suspects someone may have been tipping Kool Aid in the water coolers at BDRC Jones Donald. For a start, the share market, despite a euro crisis and China concerns, rose by 13% during 2013 — compared with the property market which fell. Moreover, the average net rental return (based on the median rental level and median property prices) is around 3% — Donbavand would have had to use original purchase prices to obtain a yield of 10%, apparently unaware that a yield is calculated by using the current, rather than the historical, asset prices.

Donbavand’s enthusiasm didn’t abate though, also suggesting that the property sector was set for a positive year, with “28% of landlords … looking to increase rentals in the next year, possibly by about 10%”. It appears that Donbavand was overlooking a minor factor known as inflation. That means in real terms, 72% of landlords expect their actual yields to fall during the year (that is, the majority of landlords who aren’t expecting to increase rentals). As an aside, what landlords expect is actually irrelevant — all that matters is what tenants are able to afford, but we wouldn’t want to confuse Donbavand with concepts like market forces.

With clearance rates slumping in Melbourne and Sydney to below 60% in December 2012, it appears that house buyers are well aware that even with the recent drops, the property market remains at unsustainable levels. It seems though that “experts”, like Donbavand haven’t quite realised it yet.

4
  • 1
    Mike Smith
    Posted Wednesday, 16 January 2013 at 5:16 pm | Permalink

    Responses to ‘online surveys’ are notoriously known to be hacked.

  • 2
    K.D. Afford
    Posted Thursday, 17 January 2013 at 6:47 am | Permalink

    Recent upbeat developments like the unfortunate one in Mount BarkerSA, will stall or collapse as this been all beat and no drum. No jobs, empty shops, motor car dependent lifestyle cannot justify the $400K all house no block prices and we will see a crash in real estate. We are all caught up in it, one way or the other.

  • 3
    Mike Smith
    Posted Thursday, 17 January 2013 at 10:39 am | Permalink

    SA seems somewhat more dire than the rest of Australia, was just back there a week or so ago for holidays and it didn’t look good. But extrapolating SA to the rest of Australia isn’t valid.

  • 4
    Hamis Hill
    Posted Wednesday, 30 January 2013 at 3:25 pm | Permalink

    Unaffordability aside, the Baby Boomers are retiring as predicted, selling out for a sea or tree change and there are just not enough buyers in the succeeding generations to keep prices high.
    This was predicted fifteen years ago.

Womens Agenda

loading...

Smart Company

loading...

StartupSmart

loading...

Property Observer

loading...