Investors are always looking for that magical moment when a market turns from a downturn into an upswing. Typically it's difficult to pinpoint exactly what stage of the property cycle we're in. Many people rely on the general media for this information - and therein lies the problem.

 

"What (the media) don't necessarily do, a lot of the time, is understand that statistics are bound by a particular timeframe and they are also historical," says Monique Wakelin, co-founder of Wakelin Property Advisory.

 

"There's often at least a three-month time lag - if not more - between what statistics say and what people are observing anecdotally."

 

So what, if anything, can we glean from the most recent statistics available?

 

How do the stats compare to anecdotal evidence about what's happening in the market right now? Based on both statistical and anecdotal evidence, is now a good time to buy property?

 

And, finally, do investors need to be worried about superannuation, interest rates or affordability having a negative impact on the next upswing in the property market?

 

What do the stats say?

Statistics are historical but it's still very important to examine the trends that have been taking shape. This provides an informed context for considering any anecdotal evidence.

 

First and foremost, let's consider median prices. According to PRD Nationwide research, the most obvious growth curve had been experienced in Perth and Darwin, which both had a surge in median prices from around 2003 right up until 2006.

 

During the same period, Adelaide and Hobart experienced moderate growth. Meanwhile, the market was flat in Sydney, Melbourne and Brisbane. In Canberra, the Australian Bureau of Statistics (ABS) established house price index shows that price movement also slowed right down in our capital city in 2004 and 2005.

 

So what's really interesting about all this data? Well, the statistics tell us there is evidence of prices picking up in the eastern capitals. (This was also true of Canberra, again according to ABS data).

 

In Sydney, statistics indicate improved conditions in the property market in mid-2006. However, it's worth noting that ABS data for the December quarter 2006 indicated a one per cent fall in Sydney house prices. So what can we make of the status of house prices in the east?

 

Residex chief executive John Edwards recently commented, "For approximately two years most of our housing markets have been adjusting. Even Brisbane should be slotted into this space, notwithstanding the fact that its market has, like Perth and Darwin, been driven by the resources boom.

 

"The statistical data suggests that the adjustment phase is drawing to a close and most markets are going through the very early stages of a new growth cycle."

 

Tim Lawless, research director with PRDnationwide, agrees that Melbourne and Brisbane "have really come out of the bottom of the market. They're really starting to show quite normal growth now."

 

Other analysts are being slightly more conservative with their language. Both Rod Cornish, the head of property research at Macquarie Bank, and Michael McNamara of Australian Property Monitors, are saying that most capital cities are still in the stabilisation phase. That's when prices are level and predictable for a period of time before beginning to grow again.

 

Of course, what's taking place in Perth and Darwin is a different story from most other parts of the country. The strong growth experienced in these cities has started to peter off in recent times. So any talk of new growth phases is confined to the other capital cities.

 

Auction clearance rates

Recent auction clearance rates reflect a similar trend to the median price data. All of the capital cities, except Perth, had a quiet couple of years in terms of properties being sold under the hammer in 2004 and 2005. But there was a slight pick-up almost across the board in 2006. (NB. Data for Darwin wasn't available).

 

Rents

Rents for houses rose by 14.89 per cent in Hobart in the 12 months to October 2006, according to Residex. There were also strong rises in Brisbane (11.32 per cent), Perth and the ACT (both 11.11 per cent), Melbourne (7.84 per cent) and Sydney (5.63 per cent).

 

Adelaide's house rents dropped by 6.12 per cent and in Darwin there was a fall of 2.94 per cent. However the rent returns (i.e. annual rental income expressed as a percentage of the total value of the property) in both Adelaide and Darwin were strong when compared to most other cities.

 

"It is clear that investors are at last starting to see their returns return to more realistic levels," Edwards comments.

 

Housing finance

There hasn't been a noticeable increase in the total value of investment housing finance in recent times, apart from a small increase of four per cent in the seasonally adjusted figures for December 2006.

 

Yet the number of owner-occupiers seeking finance has been on the increase over the past couple of years. The total value of those loans has also been increasing. It seems the recent growth in median values is therefore being led by demand from owner-occupiers.

 

Michael Matusik, director of Matusik Property Insights, points out that since October 2002, owner-occupier housing demand has grown to record levels despite interest rates having risen eight times. The strongest owner-occupier demand has been at the top end of the market, where interest rates have less of an impact.

 

Matusik says there's a correlation between the performance of the share market and the increase in demand from owner-occupiers. He also suggests that many Baby Boomers have been using the equity in their homes to upgrade into bigger and better properties, which has also been driving demand.

 

Overall trends

What we're seeing is that demand in Perth and Darwin has started to wane. Meanwhile, demand for properties in the eastern capital cities seems to be picking up - especially from owner-occupiers.

 

We're also seeing an increase in rental returns, which suggests property investments are becoming easier to finance. Normally an improvement in rental returns (or rental yields) is like a green light to investors who are waiting to return to the property market. The statistics aren't yet telling us that investors are back in any significant way. But if we have a look at the anecdotal evidence, it's a slightly different story.

 

What's the word on the street?

At the moment, the tabloid media loves running sensational stories about queues of people going to desperate measures to secure a lease on a property. The story they're yet to tell is the fact there are buyers scrambling over one another in certain suburbs. This is particularly the case in Melbourne, Brisbane and Sydney.

 

In Australia's three biggest cities, there are certain inner suburbs, as well as blue-chip areas, that are red hot. This is mainly due to demand from owner-occupiers. However, at the end of 2006, there was a surge in demand from investors as well, according to those 'on the ground'.

 

Melbourne

Wakelin says demand in Melbourne is primarily being driven by owner-occupiers. "It's areas like Boroondara and Stonnington that are the key focus for the owner-occupier driven demand," she says.

 

Wakelin is referring to the two municipalities which are home to most of Melbourne's blue-chip suburbs such as Hawthorn, Camberwell, Toorak and Armadale.

 

"We've also got some very specific undervalued areas ... areas like Brunswick, Northcote, North Melbourne, Thornbury, Kensington, Flemington and Ascot Vale ... Those areas have a considerable amount of upside because of their proximity to the CBD. They're certainly firing (already) but they're not firing at the same sort of level that the Stonnington and Boroondara markets might be."

 

Wakelin points out that rental vacancy levels in suburbs within four to 10 km of the Melbourne CBD halved in the last three months of 2006. She says this is a symptom of the strong demand from buyers in these areas.

 

In other words, there are many people who might be interested in buying in these inner suburbs, but because of the strong demand which is pushing prices up, they feel they're not able to. However, they're not willing to sacrifice their lifestyle by moving further afield. Therefore there has been an increase in rental demand and an increase in the number of people signing up for longer-term tenancies in these suburbs.

 

Wakelin says it's not just owner-occupiers who are behind the huge levels of demand in Melbourne. Investors are starting to come back, she says. In the closing stages of 2006 her business - in its capacity as a buyers agency - noticed an "enormous surge" of enquiry and demand from clients who were investors.

 

"When investors perceive that a market has levelled out ... and the market becomes much more predictable ... typically, investors re-enter the market quite quickly," she says.

 

Brisbane

Brisbane buyers agent Meighan Hetherington confirms that certain Brisbane suburbs have been red hot since November last year. "The inner-city market is one of the hottest, probably within a five-kilometre radius of the CBD," she says.

 

"Paddington is one of the top performers. We've seen prices for entry-level homes go from high $400,000s to mid-$500,000s very quickly."

 

Properties in Ashgrove have received multiple offers at the first open house and gone on to sell for well above the asking price. It's a similar story in Bardon. According to Hetherington, the strongest demand is coming from cashed-up first homebuyers in their 30s.

 

"They're prepared to pay better than entry-level prices to get into (an entry-level home in) a trendy suburb that has a good name." There has also been a resurgence in investor demand.

 

"Investors have come back really strongly this year. I think that's pushed on by the low vacancy rates with strong rental returns - pushing up in some areas up to 5 (per cent) and 5.5 per cent gross."

 

Sydney

Sydney's blue-chip suburbs have also been moving along in leaps and bounds. "You look at Sydney as a whole and our top-line figures say that Sydney hasn't moved at all over the last 12 months," says APM's McNamara.

 

However, he points out that in 2006, premium suburbs including Palm Beach, Waverton, Bellevue Hill and Darling Point achieved double-digit growth. According to Sydney buyers agent Patrick Bright, it's not just blue-chip suburbs that are in demand. The more affordable inner suburbs are also starting to see a lot of interest from buyers.

 

Bright says demand has been strong for quality real estate within three to 10 km of the CBD, as well as in the northern beach suburbs from Manly to Dee Why. He says this demand really started to heat up in mid-2006.

 

Just like in Melbourne and Brisbane, Bright says a lot of this demand is being driven by owner-occupiers. But he also says investors have seen the tide turning and have started to return to the market.

 

"They don't have a lot of confidence in the stock market - that's part of it. They're feeling that it's probably due for a correction ... That's not my opinion. That's the feel I'm getting from buyers," Bright says. "The other thing is, they just feel (Sydney property) represents excellent value in this market. They see yields are coming back. Rental vacancy is well below two per cent. That is certainly pushing up rents."

 

Although Bright witnessed a surge in demand from mid-2006, he says some investors were trickling back into the Sydney market even before that. Of those investors who were early to return to the market, there was a significant number of ex-pats living in countries such as Singapore, Hong Kong and Japan. They felt that Sydney represented very affordable buying compared to the countries in which they were residing.

 

Overall trends

Many blue-chip and inner areas - suburbs with a good degree of 'scarcity' factor (i.e. limited supply) - are already growing strongly in our major capital cities.

Cornish comments, "Always in a cycle, the areas closer to the city (CBD) tend to stabilise and start to moderately recover first, before the outer suburbs. The outer suburbs tend to grow strongly later in the cycle."

 

Is now the time to buy?

McNamara believes that all capital cities apart from Perth and Darwin are pretty much at the "bottom" of the cycle. So he believes it's a good time to buy. "If you get in at the bottom of the market as rental yields are moving upwards, then as the property market starts to pick itself up out of this stabilisation phase, then you'll be in the box seat," McNamara says.

 

You might be wondering where the "bottom" of the market is. Melbourne-based Wakelin explains, "You're not buying in a classic downturn. You're buying in a market that's quieter and somewhat more level than it was in 2001 and 2002."

 

In the past it was easier to recognise the peaks and troughs of a cycle but they're less marked in the current economic climate.

 

Price growth

So when will we see some serious price growth? "I personally don't think that it will happen this year," McNamara predicts.

 

"We may start to see positive signs come back into the market at the end of the year and possibly into 2008. However, just the fact that in many places we're at the bottom of the market, it is a good time to buy and there are a lot of bargains out there."

 

KPMG demographer Bernard Salt doesn't expect to see a boom in 2007. "What I'm saying is that 2007 could well be the thin end of the wedge, that the market stops flat-lining," he suggests. "And that there's a clear and concerted rise - modest at first but which could be expected to gather momentum in 2008-09, leading to boom conditions at the end of the decade."

 

Melbourne-based Wakelin says, "It is likely that prices will rise this year - very likely. But it's already happening - anecdotally - within some of the areas (in Melbourne) that we've been talking about. But we haven't seen it in the stats yet."

 

Wakelin predicts growth will be between five and eight per cent, conservatively speaking, in the inner urban areas of Melbourne this year. Matusik is also predicting moderate growth for 2007.

 

However, he predicts that in 2008 Sydney will lead the charge with 10 per cent growth, while Melbourne and Hobart both see eight per cent growth, and Brisbane and Canberra see five per cent. There seems to be a general consensus that things are about to take off in most capital cities - albeit slowly at first. It's as important as ever to research the area you buy into, to make sure you actually see some of this anticipated growth.

 

Rental returns

It's important to keep an eye on rent levels because improved rental returns might be one of the main drivers of the next upswing in the market. Matusik says, "Most housing recoveries in the last 50 years in Australia have been driven by declining interest rates, with the exception of the 1960s where an undersupply of existing stock coupled with rising demand from overseas migration saw new housing starts rise.

 

"We envisage a 1960s-styled housing recovery this time around, as interest rates are likely to remain steady over the next decade or so. We are certainly more likely to see a rental-led recovery that an interest rate one."

 

Click here to keep reading on Page 2 for the final analysis ...

 

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