Good news for property investors - property values in Australia’s east coast capital cities will rise strongly over the next couple of years.

Despite the best intentions of Kevin Rudd, and probably the most conservative Labor government Australia has experienced, the twin forces of supply and demand plus the strong momentum of our property markets will ensure that rents and property values will keep increasing.

Property values will rise significantly particularly in Melbourne Brisbane, and to a lesser extent in Canberra and Adelaide. The more affluent suburbs of Sydney, where prices have already started to move, will continue to perform well, but other parts of Sydney may take a little longer.

It is likely that our property markets may falter a little as the uncertainty of change will cause some buyers to procrastinate and delay their purchasing decision.  And the inevitable interest rates rises next year will slow things down a bit (that’s what they are meant to do.) 

However the value of well located properties in our capital cities will continue to go up, as will rents so home buyers and long term investors should take advantage of the opportunities the Christmas lull will offer, as the property markets will take off again next year.

Of course the reaction to the new Rudd Labor government has been mixed and many home owners and most property investors are wondering what the change in government is going to do for house prices and for the future of the Australian property markets.

I have heard some older property investors worrying about soaring interest rates, remembering that last time the Labor Party was in government rates rose to over 18%, slaughtering the property markets for around 3 years.

On the other hand a generation of voters who don’t remember how our property markets faired under the last Labor government are excited by the change.

While many young families and some home owners who are struggling to pay their mortgages want to see housing affordability increase, property investors and many of the 70% of Australians who currently own their own homes are happy with the way most of our property markets are booming. They are waking up richer than they went to bed the night before as the value of their homes and investment properties rise.

The latest figures from Residex show that home prices around our capital cities have grown strongly in the last year. These figures show Brisbane led the way with a median house price growth of 18.46 per cent in the year to October. Even Perth, which in a property slump, showed some price growth in the last quarter.

It seems the common feeling is that under a Labor government wages rise, as do interest rates, and that property markets fair well. In contrast it is often said that the stock market performs better when the Liberal party is in power.

So will interest rates rise under the new Rudd Labor government and what will this do to inflation and the property markets?

Will the Labor government be able to make housing more affordable?

Well…interest rates will rise and so will inflation! But this would have also occurred under a Liberal government.

Our record low unemployment will ensure that some of the Labor party promises will cost more than they anticipated. And the Government will have to keep importing skilled migrants who have to live somewhere which will push up rents and property values, particularly in the capital cities of Melbourne (which gets a disproportionate share of immigrants), Brisbane and Sydney.

This will obviously do nothing to help housing affordability, but fixing this problem would always have been difficult.

Low affordability is due in part to:
1. Rising interest rates
2. Demand for housing far outstripping the supply of new properties.
3. The high cost of new development including limited supply of new land, high infrastructure costs, expensive planning costs and high construction costs.

Of course only some segments of Australia are experiencing housing affordability issues. These are mainly first home buyers and low income home owners who are struggling with their mortgages.

For many Australians who own their home outright, or bought it a number of years ago, affordability is not really an issue. The value of their homes has gone up with many doubling in the past 7 years or so, giving their owners a hefty amount of equity in their properties.

If you think about it house prices wouldn’t be rising by ten, fifteen or twenty percent each year in Melbourne, Brisbane, Adelaide, Canberra or some of the affluent suburbs of Sydney if properties  were unaffordable.  The more affluent Australians are not really concerned about affordability and even many so called “middle-class” Australians have so much equity in their homes that they can afford to borrow to upgrade their homes or to purchase an investment property.

The problem for Kevin Rudd is that there is no simple way to make housing affordable for first home buyers and at the same not disenfranchise the 70 per cent or so of Australians who already own their homes and don’t want to see the value of their houses go down.

The Labor party has suggested that it will leave negative gearing intact and may offer tax incentives to property investors to encourage them to buy investment rental properties that cater for the low to moderate end of the rental market.

With our low vacancy rates, and lack of new construction to cope with current demand, together with our changing demographics and large number of new immigrants requiring housing, there is only one way for property prices and rents to go – and that is UP!

The property markets may falter a little as the uncertainty of change will cause some buyers to procrastinate and delay their purchasing decision.  And the inevitable interest rates rises will slow things down a bit (that’s what they are meant to do.)  But the value of well located properties in our capital cities will continue to go up, as will rents.

One factor that investors should consider is what is going on in the world economy right now.

The Australian economy has had a dream run on the back of a strong world economy and the boom in China and India. Like all booms this must eventually. Also it is likely that there will be more fall out as the US Credit crunch progressively unwinds and further losses are revealed and the likelihood of a US recession increases.

There will be interesting times ahead, but Australian property owners can take comfort from a recent study by the Department of Finance, Banking & Property, College of Business, Massey University in New Zealand, which looked at “Investment Returns under Right and Left Wing Governments in Australasia.”

They looked back at Australia’s economy since the early part of the 20th century and concluded that left of centre governments are more concerned with controlling unemployment than right of centre governments and that this can lead to increased inflation.

While they found the stock market outperformed during periods when the country is controlled by Liberal governments, however they were surprised in the results they found for property.

Given that inflation tends to be higher under a Labor government and property values tend to rise with inflation, the researchers expected to find property would outperform during the term of office of Labor governments.

Yet they found that property was a more stable investment and the difference in returns was insignificant. Property returns were 15.53% during Liberal and 14.87% during Labor governments.

What this means is that if you are a “long term” player in our property markets, as either a home owner or property investor, then take a long term view and take advantage of any weakness in our property markets during the upcoming time of adjustment to judiciously buy the best properties you can afford.

Interestingly the election result and rife speculation about rising interest rates hasn't phased the property market. Home owners and investors on the east coast of Australia, and in particlular in Melbourne and Brisbane are still out buying strongly. This is in stark contrast to many previous Federal elections, where many property investors placed their activity on hold waiting for the outcome the election.

As for rising interst rates, while first home buyers are concerned, investors seem to have factored them in to the equation and they are looking forward to rising property prices and considering the record low vacancy rates, they are anicipating large rental increases.

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