Great Ocean Report September 2015

It is always interesting to watch the psychology of property market participants when there is a high level of volatility in the share market. In our modern media age, we are constantly barraged with headlines and those who are active in any investment market often find it difficult to find the right way forward, given the volume of incoming information. This large amount of information can be quite paralysing and in times of share volatility, like we have recently seen, many will take a wait and see attitude. So let’s try and demystify what is going on so you don’t get caught in this unnecessary trap.

In layman’s terms, the recent share market correction was due to occur. Since 1982 there have been 8 corrections between 10 and 30%, so on average, approximately one every four years. The last one occurred in 2011 as Greece starting mentioning to the European Union that they may have a bit of trouble paying their debts. This time around the trigger is China and their ridiculously overpriced share market. Unlike many of the western stock markets, where large well informed institutional investors are present in the markets, the most prolific investor profile in China is one of unsophisticated individual retail investors who buy as much on emotion than the underlying fundamentals of the stock they are buying. To the outside observer it is almost as though many are treating it as a form of gambling.

With the interconnectedness of the global markets, every market gets affected when there is a large rise or fall (particularly fall) in another market. Fundamentals get ignored as emotion takes over. The fear of an active share market is always whether a correction is the start of a bear (long term falling) market. Since 1982 there have only been 2 bear markets, despite the 8 corrections, and there were dramatic background events occurring at these times which caused those bear markets to occur.

The average length of the correction period is between 3 to 3.5 months, where you will see significant volatility in the share market. This volatity (rise and fall of the index) is not only because of the emotion (confidence) of the market. It is also because of the increased presence of short sellers (Google to understand as it is too hard to explain easily) in the market that are making money on the fall of the market, while the bargain hunters are buying shares when they do fall and pushing the prices up again. There are many media channels and commentators that will offer a million variant views, but that is basically what is happening.

The good news for those either buying or selling real estate is that interest rates will stay low for an extended period, with a strong chance of another reduction in November. At writing, interest rate markets were factoring in a 76% chance of this occurring. As we have mentioned in previous Great Ocean Reports, a low interest rate environment will always provide a strong platform for property transactions to occur.

For those intending to buy a property, the recent volatility may cause some potential buyers (who don’t read this riveting article) to put their hands in their pockets as this correction affects their sentiment in the short term, but it will not last long. For metropolitan buyers who are competing with international buyers or at least buyers sourcing their money from offshore, particularly China, this dramatic fall in the share market may actually see increased amounts of money being deployed into safe havens like Australian real estate by them. In 2011-12 when the European debt crisis was making headlines, it was this offshore money that provided strong support to the Melbourne and Sydney markets, while many local buyers had their hands in their pockets watching the news. Once they realised that properties were still being bought and sold their FOMO (Fear of missing out) kicked in and re-engaged.

For the coastal markets, we are expecting a strong spring and summer for several reasons. Stock levels are extremely low after a very active winter and therefore, competition for properties through lack of choice will be common. Low interest rates, as we mentioned, but also because of a new factor – price differentiation. With over 59 suburbs in Melbourne now showing a median house price of over $1m, the coast looks cheap.

This has a flow on affect in at least three ways. Firstly, the increased equity in their Melbourne home will help a lifestyle buyer to fund a property on the coast. Secondly, the young couple or family who cannot afford to buy in Melbourne will look to Geelong and the Surfcoast for affordability reasons. Lastly, the downsizing, soon to be retiring Baby Boomers will continue their coastal love affair by taking advantage of the buoyant Melbourne market, selling the family home and buying the apartment in town and a coastal base.

With these factors in mind, if you were planning to sell on the coast and are looking to time the market, then the upcoming October to Easter period is looking like a positive time frame to aim for. Your method of sale will be crucial to maximising your returns in this period and we are happy to talk you through this if required.

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