Market Update:
8th July 2010

Over the past few weeks it's become apparent that the property market is cooling. Price growth has stagnated, auction clearance rates are slipping, and the average 'days on market' is increasing.

Quick Summary:

• Property Prices Cooling
• Interest Rates On Hold
• Affordability Falls. Rents To Rise
• Summary
• Forecast & Application

Property Prices Cooling

The RP Data - Rismark Home Value Index for May (released 30th June) confirms prices are cooling with capital city home values rising by 0.6% over the month, while non-capital city values FELL by 0.9%.

Points of interest in the accompanying commentary included:

a) Subdued price performance is expected for the rest of the year
b) The gap between Syd & Melb property prices is the lowest on record
c) Perth was the biggest underperformer with prices falling 2.1%
d) Average selling time is 39 days (up from...)
e) A similar number of houses are for sale now as were last year
f) Average discounting remains steady at 5.5%, indicating vendors aren't needing to slash prices to make a sale.

Interest Rates On Hold

Despite the RBA announced that its cash target rate will remain at 4.5%, I read with interest in the media commentaries that 'economists' are expecting a rate rise in the fourth quarter (Oct - Dec).

Personally, I'm becoming more neutral than bullish on further rate rises this year. Why? Well, as the mood on world markets becomes more pessimistic, consumers spend less and investors take fewer speculative risks. In such times, inflation is naturally controlled rather than needing rate increases to dampen demand.

Affordability Falls. Rents To Rise

Recent analysis released by BankWest outlined that Australian couples now need to raise $85,800 to pay the deposit on a median priced house - an increase of 9.9% on the previous year.

Expressed in years, it is now taking 4.5 years to save a 20% home deposit, unless you plan live in 'select' areas of Sydney or Melbourne where you'll be saving for a decade.

In the absence of buying, people have to rent because shelter is one of the necessities of life. Economics 101 says that when you have more demand than supply, price increases.

It's already tough to find a good quality rental property, and if you do, the competition is stiff and often there is an all out bidding war which sees tenants pay more than advertised rent and sometimes even offer a lump sum of many months rent in advance.

Summary

The property market has been moving in two speeds for a while now.

Last year the first homeowner market was buoyant on the back of stimulus provided via the Boost the the FHOG. Properties in the $400k price range experienced strong price growth.

However, as the stimulus was phased out, so did the strength of that market, and, since December 2009, finance approvals for first home buyers have been consistently weak.

On the flip side, as first home buyers sobered up, the higher end second house market experienced great growth as investors and buyers became more optimistic and happier to borrow / reinvest equity. The enthusiasm has since ended though... six interest rate rises will do that!

In summary, we are now in a situation where both primary (first home buyer) and secondary housing segments are strangely united in their somber moods as they manage their recent price growth hangovers.

Forecast & Application

Everything else being equal, I agree with RP Data that low price growth is the most likely outcome for the remainder of this year. However, this doesn't mean there isn't opportunity to profit - only that buy and holders who rely on market growth for their profits will have little joy in the second half of 2010.

Now you know the theory, in the next update I'll provide practical ways to position yourself so you can build wealth and reduce risk.