A global credit crunch; US sub-prime crisis; US economy heading for recession; stock markets down; interest rate hikes; housing affordability plummets to an all time low; unprecedented rental supply shortage; lenders tightening their belts.

The incessant media hype surrounding our property markets on a daily basis has been overwhelming to say the least. I know from conducting my recent round of public seminars, that many investors and would-be investors are feeling very uncertain as to what it all means and where our property markets are heading.

There is little doubt that scare tactics are being used by the media to sell stories.

The question is – how do you sift through all of the information to work out what's really going on?

Will our property markets provide us with a feast of excellent opportunities in 2008 or are we heading into a sustained period of low growth and investment famine?

To answer this question, let's consider the current underlying market fundamentals in more detail;

Supply and demand
Figures from Residex show that all capital cities enjoyed an increase in median values for the year to March 2008. The top performers were Melbourne, Brisbane and Adelaide, with median values rising by 20.03%, 21.15% and 19.38% respectively during this period.

So what has kept our housing market travelling well despite the various goings on overseas and here at home?

Quite simply…supply and demand.

Whilst new dwelling commencements have decreased substantially and remained stagnant for a prolonged period due to escalating construction costs and a lack of skilled labour, our population continues to grow exponentially.

This is particularly true for Melbourne, where the population is expected to boom by as much as 25% in the next 12 years to reach over 4 million by 2020. Melbourne will experience a significant housing shortage in the coming years.

Data suggests that Australia's building industry can only support the development of around 140,000 new dwellings per annum, whilst demand is in the region of 170,000 accommodation units per annum.

The simple fact of the matter is we do not have enough accommodation for our expanding population.

Because of this chronic housing shortage, I can't see how property values can decrease substantially or even remain flat for a prolonged period.

Whilst some forecasters are warning of significant drops in housing prices to come, others are more optimistically suggesting that things will continue to escalate over the next 2 to 3 years before slowing down to a moderate and sustainable rate of growth.

The bottom line is, as many potential owner occupiers and investors run for cover in the wake of all the negative press property has been receiving, for those of us who know better, there will be some excellent opportunities.

Buying in a slower market is all about buying right. In areas where there is restricted supply and continuing strong demand….in other words where there is no more available land to develop such as along select parts of the coast and throughout inner city markets, where the majority of people want to live…property will always perform strongly over the long term.

In fact the latest ANZ Australian Property Outlook says that house prices and rents will continue to skyrocket on the back of a record shortage of dwellings.

"By 2010 we project a record housing shortage of nearly 200,000 homes, which risks becoming an intractable imbalance as renters and first home buyers become collateral damage in the reserve Bank's ongoing war on inflation."

Rental market
The flow on effect from the housing shortage that looks set to continue well into the next decade is that the rental market is experiencing the lowest vacancy rates ever recorded.

The national vacancy rate has dropped to below 1.5% according to data from the Real Estate Institute of Australia and this is evident at every rental open house you go to on weekends. Prospective tenants queue for blocks and battle fiercely to literally "get their foot in the door" of anything that hits the market in some areas.

This overwhelming demand coupled with a severe shortage of stock has inevitably caused rental prices to soar.

"Double digit rental growth has occurred over the last year in many of our capital cities," according to Pamela Yardney, director of property management at Metropole Property Investment Strategists.

"With a shortage of rental properties and no relief in sight, investors can expect an extended period of strong rental growth. At least another 3 years" she said.

Recently released figures from Australian Property Monitors indicated that the largest increase in median asking rent for houses occurred in Melbourne, rising by 17% in the last 12 months. In other states they reported the following: Sydney 11%, Brisbane 10%, Adelaide 4%, Canberra 8%, Perth 14% and Darwin 11%.

"I must caution investors that not all rentals have risen to the same extent and while their is an abundance of tenants, they are still very price sensitive. Therefore when putting up their asking rents, landlords should remember that if they ask too much they can still experience extended vacancy periods" explained Pamela.

Economics
Although there has been much conjecture over the uncertainty surrounding the US economy and how it will impact on us, many economists believe we can weather the storm.

The ANZ Property Outlook says, "Australia's prospects are much more closely linked with Asia where the growth outlook remains positive. Over the year to September, the Australian economy grew by a robust 4.3% buoyed by strong growth in household spending and solid gains in business investment."

With unemployment at an all time low and further income tax cuts promised by our new government, consumer confidence remains high despite rising interest rates and cost of living.

It seems Australians are embracing a glass half full mentality despite the bad press the US economy has received here at home. This is perhaps due to the fact that we feel more independent than we have ever done as a nation…we are able to stand on our own two feet and sustain our own economy without relying on our "big brother".

There is no doubt that those in "mortgage belt" areas are having a tough time of it at present, with the proverbial belt tightening as households already mortgaged to the hilt struggle to make up extra on their monthly repayments. But overall, as the ANZ Outlook states, "in aggregate, rising debt servicing costs have been more than offset by solid income gains."

In short, people can still afford to spend, and that's always good news for our property markets.

Interest rates
Of course the double edged sword when it comes to a robust economy is the inevitable inflationary pressure that causes interest rates to climb. Some forecasters are predicting a continuing upward trend for our interest rates throughout 2008, just maybe not at the breakneck speeds we have recently experienced.

Many investors who are old enough to recall the 1980's property pinch of 18% plus interest rates are cringing at the thought of returning to these conditions. But this is not a likely scenario according to most finance experts.

In fact our interest rates are still relatively low and even if the RBA feels inclined to raise them by a further 0.25% to 0.50% over the coming months, they will remain within 2% of the lowest they have been for the past 40 years.

Investors who know how to manage their portfolio and the financial obligations that goes with it, should be able to ride out any further interest rate hikes. The key is to plan properly, treat your investment endeavours as a business and never over-extend yourself.

Borrowing to buy good properties is not a worry. Not being able to repay your loans is! So ensure you have factored in further potential interest rate rises and have a sufficient buffer to be able to handle them. Look forward to the best scenario, but be prepared for the worst. Then you can sleep comfortably at night.

Affordability
Of course rising interest rates will impact that sector of the market that is already bearing a financial burden.

Would-be first home buyers are being forced to remain in an ever tightening rental market. Caught between a rock and a hard place, they are unable to get into the property market as they cannot afford to meet escalating mortgage repayments. And saving for a deposit is virtually impossible as they pay climbing rents to keep a roof over their heads.

This is good news for investors of course, as it will mean the pressure on rental prices will continue to build to all time highs. And this means that yields which have been lagging behind rapidly moving property values for some time, will finally start to catch up and look better.

So what does it all mean for investors?
The good news for investors who are wondering if they should jump the property ship, is that housing continues to provide strong and stable returns. Data from the ANZ Property Outlook reveals it remains the safest asset class of choice.

In raw terms, since 1984 residential property has delivered a compound annual total return of 13.4%, slightly below that of equities at 13.8%, yet far beyond commercial property (10.4%) and bonds (9.4%).

The bonus is that along with such solid returns, there is a consistency to housing that can't be found in more volatile asset classes such as commercial property and equities. Quite simply there is really nothing else out there that is "as safe as houses"!

When we consider all of the above fundamentals and how they're currently combining to impact on property, we can see that now is actually a perfect time to consider starting an investment portfolio or building on an existing one.

In summary, the facts are as follows;

·We have a strong economy that's holding up well given the current climate of global uncertainty.

·Interest rates might be climbing, but they are still at some of the lowest levels we've seen for the past forty years. And quite frankly, they are yet to exceed the rate of capital growth delivered by the right property in the right location. Therefore, good capital gains can potentially offset current interest rates.

·The building industry cannot keep up with the high levels of housing demand we currently have and this is only going to become more apparent as our population continues to escalate – this means Opportunity with a capital "O" for investors as property that has some degree of scarcity (either due to location, architectural style or both), will continue to grow in value.

·Due to interest rate hikes, the supply/demand and affordability crises, rental prices will continue to escalate. With many locked out of the buyer's market and a shortage of available rental stock, rents are set to soar over the coming years. This means stronger yields for investors, which along with capital gains will present a further opportunity to offset any further interest rate rises.

·The sub-prime crisis, interest rate uncertainty and low affordability will likely impact on buyer sentiment. This means that it will be a "buyer's market", with more people forced to sell and less people willing and/or able to buy. Seasoned investors recognise that this combination equals great prospects for buying at or below market value.

Of course I'm not completely blinkered in my assessment of our current market. There is no doubt that residential property won't escape completely unscathed from the growing uncertainty that many are feeling.

Whilst I do not expect that we will see the large gains we experienced in many of our capital cities for the previous few years, the fact of the matter is that it is very rare for property markets to crash.

Any slow down should not be viewed as some type of doomsday omen.

Rather it is a natural phenomena within the recurring cycle that property markets move in. There are always ups and downs, peaks and troughs. And within Australian property markets, these cycles are continually at different points and moving at different speeds, depending largely on that supply and demand equation.

At the lower end of the market, where there is more supply than demand there is already anecdotal evidence of a slowdown.

That being said, I do not invest in these types of areas. My investment strategy is to always buy in high growth, high demand areas (inner city) that have historically provided excellent returns (of 10% plus), and endured the cyclical peaks and troughs.

Chief equities economist with CommSec, Craig James suggests that residential property prices will continue to grow by 10% to 15% in most capital cities this year. On the flipside, he predicts share prices will only move by 3%.

I always find that when others are too afraid to make a move, I gain the most benefit from doing the exact opposite and jumping in with courage and conviction...to the right property at the right price

To read page 2 and state by state updates, please click here....


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