Green shoots or false hopes?

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The numbers surely have it: housing values across all capital cities surged during the first five months of the year, defying doomsayers who were predicting catastrophic falls.
According to the RP Data-Rismark Hedonic Australian Home Value Index, Australian dwelling prices climbed by 3.9% - translating to a 9.4% annual growth rate. Melbourne led the charge, racking up an impressive 6.1% in capital growth, bringing the median value to $443,811 since the beginning of the year. Darwin continued to outperform the rest of Australian cities with a remarkable 14.3% growth over the past 12 months."The property market's performance has been pretty outstanding, particularly in Melbourne, which is the best performing capital city this year," said Tim Lawless, national research director, RP Data. "The 6.1% growth figure for Melbourne was really strong."

But it was Sydney that stole the show with its record-shattering performance. Since the start of the year, house values jumped by 5.1% while median unit values rose by 5.4%.
"Growth in Sydney home values has been a long time coming, after recording virtually no growth in value between 2004 and 2009," said Lawless. "It's been languishing for quite some time due to poor affordability, but now affordability is back to levels not seen since 2001 based on income-to-property prices ratio. So it's been a real reversal of that housing affordability problem. It's become a more affordable market overall."

It is not just the property values that are gaining strength. The latest home lending data from the Australian Bureau of Statistics also showed loans for new constructions surged by 8% in May to its highest level in seven years.

"The latest round of housing finance data has reinforced the strength of the housing sector," noted Savanth Sebastian, economist with CommSec. "A sustained improvement in overall housing activity and, more importantly, the substantial jump in construction of new dwellings will have a multiplier effect throughout the economy. The sharp lift in home construction should ensure economic growth remains well-supported."

But can this be sustained?

In Lawless' view, the latest data is compelling evidence that a national residential market revival is already underway in Australia. However, other experts continued to remain wary about the strength of the recovery.

"I think it's too early to call it a turnaround," said Jonathan Rivera, research manager at Colliers International. "I have a feeling that not everything is on the table just yet, that's why I'm still looking at unemployment and business confidence. Once I see a pick up on business confidence, then I'd be more comfortable. I think this year is about getting back to equilibrium. Once it settles and buyers find their feet, we will see a recovery. At this stage I think this will occur in 2010."

Angie Zigomanis pointed out that growth remains patchy at the moment, and as such it is too soon to call a sustained upturn. "At the moment, the market is being supported by a small niche - the first homebuyers. At the end of the year, when the first homebuyer effect expires, the baton will be passed over to upgraders and investors. This will ultimately offset the fall in demand from first homebuyers. But there is still a risk of a setback in the economy and this could have a negative effect on sentiment. If the baton is not picked up by upgraders and investors when the First Home Owner Grant ends, then you might see some prices fall off again."

Despite this, Zigomanis noted that there are a few signs that suggest that Australia's economy will fare better than overseas, and he expects investors to start creeping back into the market this year.

"We expect rising confidence in the prospects for an economic recovery in 2010, so investors are likely to return in greater numbers, attracted by increased rental returns and low interest rates. Once unemployment peaks at the start of 2010, price growth is forecast to strengthen from that point on. A return to double digit growth in the market-wide price measures is projected for 2011-12."

Making money in this market

The stronger-than-expected price gains have been mostly fuelled by strong demand for affordable properties by first homebuyers, according to Lawless. In Sydney for example, the revival of the market is boosted by the cheaper western suburbs, which has seen the largest decline during the last five years. In Melbourne, it was the mortgage belt areas that pushed prices up to new record levels.

However, while growth has been impressive in this segment of the
market, Lawless cautioned investors against buying into these currently overheated areas.

"It's probably best to avoid the absolute affordable areas at the moment because they are totally dominated by first homebuyers now. The competition there is currently quite stiff." Investors should instead focus in the middle ring suburbs or properties between $550,000 and $750,000 where strong growth is expected, according to Lawless.
"I think the best opportunities are the middle-ring suburbs as they have largely been neglected up until now because they are not very appealing to first homebuyers. The prices in this segment of the market are a little bit more expensive and generally out of price range of first homebuyers", says Lawless.

"You'd also find that the middle-ring suburbs are generally well serviced by transport and ticks all the boxes in terms of amenities, etc. These markets haven't really moved that much, but they're probably the first one to take over that affordable segment of the market," he added.

With capital appreciation coming back into the market now in some areas and rental rates starting to slow, Lawless urged investors to position themselves strategically for medium to long-term growth.

"We don't expect yield to go down dramatically, but we don't expect the same rental growth that we've seen over the past two years to continue simply because rental affordability is becoming a real issue. But even with a lower yield, there are still a lot of growth properties that are approaching positive cash flow. Even if you're not a yield-driven investor, you're still getting good income coming through your rental rates. Positioning yourself in the market now, when you still get good income coming through, and buying strategically to achieve that growth when it comes along in five years time or so, is a sound move at this point in time." 

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