At last we can report that our housing markets have moved more solidly into positive territory.

Winter is usually one of the slower periods but improved affordability coupled with the First Home Owners Grant has seen auction clearance rates reach around the mid 60% across Australia and there is good asset growth in all but the top end of the market.

As shown in the following table it is likely now that for the year ended 30th June 2009 our markets will present positive growth with the only ones at risk of not achieving this outcome being probably Perth and some regional markets.

My picture shows a whale almost out of the water but we are left wondering if it will get its full body out of the water or simply drop back without reaching the full potential of the breach. The housing market presents in a similar manner. Will it continue on its current path of growth or will it simply fall back into the neutral growth pattern or worse? Will it fail to take advantage of the momentum it has built up as a result of the RBA's actions and the First Home Owners Grants or move forward from here?

I look at the numbers first and then discuss the likely future direction of our markets.

The growth trend is clearly positive with each capital city presenting as if the worst is over. The following graphic illustrates those cities that have been most affected by the downturn.

It is clear all markets are now normalising and revealing a uniform outcome. The graph also clearly shows the worst to be over for now.

The Table "Performance to 31st May 2009" presents the current position and our per annum average predicted growth rates over the next 5 years.

Periods covered:
Last Year - 1st June 2008 to 31st May 2009
Last Quarter - 1st March 2009 to 31st May 2009
Last Month - 1st May 2009 to 31st May 2009

The important points which are evident from the above table and prior monthly newsletters apart from the better growth rates are:

a) Rental increases are moderating - See the Rent Trends Graph. However, the rate of moderation has now slowed and the data presents as if we have passed the bottom of the adjustment phase. Overall, our view is that from this point rentals will increase again.

b) Our predicted rates of capital growth are moderate with Sydney offering the best outcome. From a unit investment point of view Melbourne looks best.

c) Darwin continues to be the standout performer with a higher rental return and better capital growth. The market is not exhibiting any real direction other than steady growth (See the growth Darwin Growth Index graph). We note that the rental yield is now only approximately 1% better than available in other areas and the median value is higher than Brisbane. We are concerned that the return characteristics are becoming such that its attractiveness as an investment area are diminishing and suggest caution when making investments in this area as it is very possible that we are very close to the top for this market.

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Now back to my "Whale of a Turnaround"; will the whale fall back on its tail or do as it should?

We should always remember that government action that stimulates a purchase is in fact, nothing more than a bringing forward of a purchase. Hence the First Home Owners Grant is in effect bringing forward home purchase activity. When the grant ceases there will, as a consequence be lower levels of activity. Further, lower levels of interest rates have stimulated purchase decisions, with a similar effect.

When I look at the recent growth rate in housing and in particular the growth over the last 3 months and the trend as consumer confidence has improved, I have a tendency to think that there will be no further interest rate cuts. In fact, I wonder if the RBA won't increase rates very marginally to create a view within the population that rates will rise in the future, as we recover from the recession. Housing even at the current low interest rate is basically unaffordable. This means that we will not need any significant rate increases to cause problems among those who have recently taken advantage of the grant. The following Table presents home affordability (based on gross pre tax incomes of the ordinary family) at current median values and at an interest rate of 7% pa which is something in the order of 1.5% higher than currently charged.

Affordability

Houses

Units

Without supply issues (shortages) which currently exist the above is a formula for a housing market slump next year. Nevertheless, immigration continues but is slowing, however the un-met demand due to failures to efficiently and quickly deliver land and supply generally will cause the market to hold its value. It is the supply issue that is currently driving price increases in a situation where buyers, in a way have been thrown an artificial affordability plank. It is clear from our customer enquiry level about where to invest and what price to pay that investors are returning to the market. Many of these people are close to retirement and looking for investment in low risk assets having lost a considerable amount of their wealth from a collapsing stock market. They will continue to exert increasing buying pressures on the market even as the First Home Buyer departs. They are astute and less likely to drive prices and will be looking for bargains and will in all probability support the unit investment market due to its simple management needs and more defined cost structure.

In essence it is our view that the old truism, affordable markets which are under supplied with the three P's (Position, Position, Position!!!) are the markets for investment.

The basic unaffordable nature of many markets will hold back growth in the next few years but during this time rentals are going to increase as the young move back to rental as the alternative to home ownership. How can they not simply recognise the benefit (lower living cost) from rental versus ownership when housing becomes as unaffordable as it is and the differential is so significant?

One other point is that the Australian population on average is not aging as much as other countries due to the high level of immigration. This means that there is not a decreasing demand for family homes but an increasing or stable need.

Overall, the position as shown in the May numbers is good news. It indicates stability and that the market has passed the worst with some help from Government. It also points to a market that is likely to present higher rental returns but lower growth rates on average then the long term historical trend. This is excellent news for the maturing investor as these investments will provide future attractive rental cash flow with low risk in a period when interest rates will be higher and there is a need for cash.

The risk areas in the market are those where you currently find the first home owner. These areas will offer good opportunity next year. In particular investors should watch affordable well-positioned units that are currently being sought by first home buyers.

So overall, in my view, the market will complete its turnaround like the whale.

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