Great Ocean Report November 2015

Summer is almost upon us and it has been a busy spring for the coastal markets. Stock levels remain tight and we believe that this will be one of the drivers that should facilitate a buoyant summer market. However it will, in our opinion, be a less obvious driver that will have an impact in the lifestyle markets this summer.

Before we look at that, let’s have a look at what is happening generally in the Australian property markets and try and demystify it for you. We have mentioned many times in this report that Australia has many property markets and each have some common drivers and some individual drivers which dictate their performance. In a general sense, low interest rates continue to provide an accessible entry into the property market for those who have a willingness to do so. This allows market participants of all classes, owner occupiers, investors and lifestyle buyers to continue to transact in an affordable environment.

In a more specific sense though, after such a strong run, the Melbourne and Sydney metropolitan markets are starting to settle into a more sustainable pattern. This can be seen in the most advertised measure, the Melbourne auction clearance rates, which have fallen to around the 70% levels in recent weeks and Sydney to around 60%, after a long period in the high 70% – early 80% range. These higher levels are usually associated with a peaking market however it was the length of time that these higher levels were recorded for, that was surprising.  There are several reasons for this settling, some practical and some psychological. On the practical side, after such a strong period of capital gain many of the rental investment yields did not stack up. Over the past two years rental investors have made up a significant part of the buying market (30-40% of loan approvals were to investors). This has added significantly to the amount of stock available for rent, which then in turn puts pressure on rental returns. Added to this was the pressure APRA (Australian Prudential Regulation Authority) placed on lenders to maintain and improve where needed, their lending standards to property investors, which they saw as being overweight in their presence in the property market. This reduces the level of finance available to some would be investors.

Another reason for the softening in the auction clearance rates appears to be the recent restrictions on money flowing out of China by the Chinese government. Although a recent occurrence, anecdotal evidence is that it is having an effect on the number of Chinese bidders at auction. In some parts of Melbourne, particularly around preferred schools, Chinese buyers have been present and active in significantly driving capital gains in those areas. Given that they are high profile areas and receive significant publicity, this often has a flow on affect in market sentiment, in other words they can act as an engine room for the rest of the metropolitan property market. It will also be an interesting space to watch.

The auction clearance rates in other capital cities are a much lesser guide as the sample numbers are so much lower. Mostly they have been steady with the Perth market remaining under pressure as the mining boom continues to dissipate.

Despite auction clearance numbers reducing, the Melbourne property market remains very buoyant and this has a sentiment flow on affect to regional and coastal markets. The REIV have reported in their November bulletin that in the month of October there were 11,800 sales and a total of 104,280 sales in the 12 months to the end of October, which is the highest since 2009. The Melbourne median house price now sits at $729,500 which was a 4.5% increase from the September quarter.

It will be interesting to watch from this point because traditionally, from a psychological point of view, everyone does what everyone does when it comes to asset markets. Our reading is that although the metropolitan market has passed its peak for this cycle, the low interest rate environment will continue to provide a platform for high volumes of transactions. There have been many who have not been able to buy where they would have liked to over the past 18 months because they were just getting out bid by the high levels of competition, and this pent up demand will continue to provide sales turnover for the foreseeable period.

One of the key drivers for the coastal markets this year, we feel, will be the price differentiation that now exists between the metropolitan market and the coastal markets. Although the coastal markets have been very active, we have not seen the significant capital gains that Melbourne has seen. This has a very tangible, psychological impact on buyers as they get used to seeing what a certain dollar amount can buy in their suburb and then see what that same dollar amount can buy on the coast – and this summer we believe the coast will look cheap by comparison. But there are several layers to this. The lifestyle buyer can also use their new found equity in their metropolitan home to secure a family beach house. The Baby Boomers are setting up for retirement and are taking advantage of the buoyant market and cashing in the large family home and downsizing between the coast and often, an apartment in the city. The young families who cannot afford Melbourne are relocating to Geelong, the Bellarine and the Surfcoast to fulfil their great Australian dream of home ownership. As agents at the coal face we are witnessing all these categories first hand and while interest rates stay low, we expect it to continue.

Although we generally don’t comment on our company in these reports, we are going to make an exception in this case as we are very excited about the opening of our new premises at 32 Gilbert Street Torquay. This is a significant upgrade from our previous Walker Street address and represents our long term commitment to the Torquay and Jan Juc markets.



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