Property set to prosper Newsletter 2006

It looks as if the real estate cycle has turned. I doubt if there’s any great hurry to get into property, but if you want to buy start looking now, and if you find a good buy – buy it!. I doubt if it’ll get cheaper.

I’ve been reviewing some of the things I said about the market two and a half years ago and what I said has withstood the test of time surprisingly well. As interest rates were increased in November 2003 I said that talk about a property bubble was overdone, that houses were hugely undervalued at the bottom of the last cycle, and much of the boom reflected catch up. I also said there’d be some softness in the market of around five per cent but that large falls were unlikely other than in overbuilt areas like Melbourne Docklands. That’s pretty much the way it’s turned out.

I suggested that then (late 2003) was a good time to diversify into the stock market which had performed poorly for years – that it was a good contrarian buy. And it sure was, as those who invested in shares – Australian and offshore – learned to their pleasure.

As you know, except in some hot-spots like Western Australia which have risen strongly, Australian investment property has taken a breather over the last couple of years. Most price falls have been small but, taking the continuing effects of inflation into account, it was a good time for investors to take a breather and invest in markets that hadn’t had such a good run.

As generally befits my own ‘contrarian’ view of the world – what goes up must come down – the worst general market was that of Sydney which had previously risen the most. A lot of Sydney property has now fallen in value by around 10 per cent over the last couple of years. Add that to the fact that headline inflation has been bubbling along nearer the top than the bottom of its intended range of 2-3% per annum – and you’ve got real depreciation of around 15%.

But things have been changing In the last quarter, as every Australian capital city experienced a rise in median prices.

Australian Price Monitors (APM) reports house prices in the last quarter of 2005 have risen in each capital city. Perth and Darwin have again topped the charts, rising 4.6% and 3.4% respectively.

Other changes are given in this table:

ANZ now regards Perth which has risen by 19% over the last twelve months as overpriced against fundamentals. So what of the future? Is it safe to go back in the water?

ANZ’s crystal ball gazing suggests that, although this is the mildest real estate cycle in living memory, developers have been scared away (probably fearing something much worse) and that as a result there is looming under-supply of around 2 months of production.

Until next month,

Nicholas Gruen
(AKA Dr Peach)

March 2006

The observations made here are general and indicative. They are not warranted as free from error in any respect whatsoever. We are not financial or tax advisers and you should not rely on any aspect of these comments without taking independent financial advice relating to your own specific circumstances. We suggest you obtain advice on a fee for service basis rather than from someone who earns commissions from investments they recommend.

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