Homeowners and investors alike had a good few of months to start the year. Collectively, they raked in up to $13.8 billion in profits on property sales between January and March. Roughly speaking, that works out at $230,000 of profit per head. The data, released by CoreLogic RP, reinforces the extent to which investor confidence in the market continues to rise.
As this growth continues, it bears asking where prices are heading in the long run. Is this growth sustainable long term? I think it is, and I’ll explain why in a moment. But first it’s worth taking a closer look at CoreLogic’s data.
Notably, the first quarter figures showed that 91% of owners and investors made a profit on sales. On its own, this figure highlights the current strength of the property market. But it also provides a key lesson for all homeowners.
In the first three months of the year, over 30% of sellers managed to double their initial purchase price. That’s impressive considering this covers all investment periods. Naturally, the length of an investment can determine the profit once it’s sold. To have one in three sellers double their purchase price makes this achievement all the more striking.
At the same time, the length of an investment made a significant difference to profitability.
Those that held properties for an average of 10 years predominantly made a profit. Meanwhile, holding property for an average of 17 years tended to double a return on investment.
However, investor and owners that made a loss on their investments usually held their property for an average of six years. But we shouldn’t be surprised by this. It’s logical that the length of an investment determines the profit margin. That tends to occur in a booming housing market.
The future of the housing market depends on where you live
There’s no question that housing, on a national level, is still growing. You might not feel that way if you live in Adelaide, but you can’t escape it if you’re living in Sydney or Melbourne.
The truth is that Australia’s housing market is diverse. There are no broad strokes when we’re talking about real estate nationally. Every city has a unique set of circumstances that dictates the health of the local market.
But it’s also true that both local and national economic factors play their part in determining the success, or failure, of a city’s housing market.
The housing boom, for all intents and purposes, is confined to a few cities. When we talk about a housing bubble, we’re really just referring to Sydney and Melbourne. They’re responsible for most of the growth we’re seeing in the national property market.
You only need to look at other cities for evidence of this. House prices in Perth, affected by the mining industry’s decline, are stagnating. At the same time, house prices have fallen slightly in Adelaide..
So when we talk about bubbles, the first question needs to be: does Sydney have one?
At face value, it might appear that way. Property values have rapidly risen by 15% in the past year. And last month it was revealed that median house prices are quickly approaching the $1 million barrier. To put this in perspective, Melbourne is the only other city with median prices above $500,000.
But if a bubble is forming, we’re not approaching the end game just yet. Demand remains sky high. Auction clearance rates regularly top 80%, and prices continue to grow. If Sydney does have a housing bubble, it seems likely that it will keep expanding before it bursts.
Does the housing market suffer from oversupply?
Recently, a new theory has emerged that runs counter to what we’ve been led to believe. It’s commonly accepted by economists that Sydney’s market suffers from an undersupply of housing — not oversupply. But according to economists Lindsay David and Philip Soos, the property boom may be masking a layer of ‘stale stocks of housing’.
They claim that the housing boom we’re seeing, in places like Sydney, is papering over what is otherwise an oversupplied market. In their view, any detrimental change in the Aussie economy could expose this by lowering demand. What we’d be left with then is too many properties with too few buyers, putting downward pressure on prices.
Let’s imagine for a moment that their theory has some merit. What would it mean for the future of the property market?
To answer this, we need to look at the outlook for the Aussie economy. The biggest concern is that the real estate market will unravel on the back of weakening economic fundamentals. David and Soos point to potential worsening unemployment numbers to highlight this. Such an event could affect the ability of many investors to service loans. They, unlike owner-occupiers, would stand to lose the most too.
The first thing we’d see is heavy downward pressure on rental prices. The ability to pay high rents is dependent on an economy with strong employment figures. At the same time, the demand for housing would fall, forcing down property prices too. That’d leave investors losing money on both fronts, which could send the market into freefall.
If this theory of oversupply is true, then it would expose many investors that use negative gearing as their primary investment strategy. This approach accepts losses on rental yields — in the short term — to ride on long term rising house price. Unfortunately, it’s also a plan that only works effectively when house prices are rising.
But this remains a theory. Right now, we simply don’t know for sure whether there is an oversupply in the market. Nationally, that could be true. Yet we can only talk about a property bubble in isolation. At this present time, the fundamentals supporting housing demand remain robust.
According to our property expert Phillip J. Anderson, investor confidence isn’t likely to slump anytime soon. He thinks Aussie real estate, on the whole, still has a long way to go before it hits its peak.
In fact, he believes the current boom we’re in will last for another decade.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is — and where it’s going. He predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade. He was right on both accounts.
In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.
Contributor, The Daily Reckoning