Reports from RP Data last week showed that a 5 month surge in Melbourne house prices has undone the damage to the property market wrought by the global financial crisis. In fact, median property values have increased in all capital cities other than Perth and there are increasing suggestions that our property markets are on the up and up.

So the question many are asking is; how did all those who predicted the collapse of property and those who last year recommended we sell up our properties get it so wrong?

I guess another question that could be asked is: why should we believe the current round of predictions that the property markets will remain buoyant?

Firstly lets look at the latest figures:

The median house price in Melbourne rose to $470,000 and the median unit price rose to $377,000. Both record highs.

RP Data reports the following median property prices changes for the first 5 months of 2009:  Melbourne prices increased by 6.1%; Darwin 5.5%’ Sydney 5.2%; Brisbane 2.6% Canberra 2.1%; Adelaide 0.5% and property values in Perth fell by 0.5%.

Yet I clearly remember a queue of investors coming into our offices late last year and early this year, convinced that they had to sell up their property portfolios, because the bottom was about to fall out of the property markets.

The problem was that they were listening to well meaning, but inexperienced, advisors.  And the same is starting to happen again.

There is are already a new group of property spruikers -  a new throng of so called gurus -who are advising to buy new, often overpriced properties off the plan or from developers. And there are others telling you how easy it is to become a property developer and make squillions.  I’ve seen these people come and go over the years and many investors suffer from taking poor advice.

It’s easy to sound smart in a property boom – you know what they say: “A rising tide lifts all ships.” You have to be very careful who you listen to at this stage of the property cycle. There are still challenges ahead.

While I have strong positive views on our medium and long term property market prospects, I am expecting a period of volatility in the short term. It will be a while before a general market pickup occurs.

Similarly while I am pleased by the news of the “green shoots” that are appearing in the economy, I recognize that we have more pain to come. In fact if our economy picks up too quickly and if our property markets start booming, we are just setting ourselves up for the next big bust.

So what happened?

A combination of historically low interest rates, tight rental markets and generous grants to first home buyers are working their magic to push home prices at the lower end of the market higher. In fact, in Sydney and Melbourne dwelling prices are back at record highs while other capital city home prices are not far off peak levels.

What the pundits who made their dire predictions last year got wrong was as simple as the law of supply and demand. Demand for homes is being spurred by improved affordability, the fastest population growth in 40 years and weak returns on other assets. At the same time, we are experiencing an under-supply of homes through lack of building over recent years.

Demand for homes exceeds supply and this has put a floor under property prices and in some areas has pushed prices higher.

Of course some segments of the market are experiencing problems, especially holiday locations, some regional areas and in particular the upper end of the market. 

And clearly the situation could have turned out much worse. 

Fortunately business and consumer confidence has increased due to lower interest rates and the stabilization of the stock market. And now with the news that, so far, Australia has avoided a recession, and the good news on property values, this will give existing owners the confidence that their largest investment has been a secure way of storing wealth while other asset classes have decreased in value considerably.

And it will give builders and developers the confidence to go out and start building the new dwellings we desperately need.

While initially the property recovery has been lead by first home buyers, we’re now seeing more established home owners and investors moving into the market. In fact first home owners make up less than 20% of current property purchasers

Just to make things clear…I’m not suggesting that house prices will continue rising dramatically. They may only show modest consolidation over the rest of the year, but we are not going to have the doomsday result that many other commentators predicted.

But it’s not all over yet!

It’s probably a little to early to say we’re clearly out of the woods; there are still mixed messages coming from economists and the market and there will still be increasing unemployment and it’s likely a couple more large companies are going to go broke, sending shivers through consumer confidence.

So, while it is likely that the worst is over, it’s not going to be all smooth sailing. Not all properties will increase in value.

One of the big lessons out of the last two years is that one has to stick to the fundamentals of property and one must understand finance and debt.

After a decade of cheap and freely available credit the banks changed some of the rules and credit became more difficult.  That’s why the team at Metropole have joined together with Rolf Schaeffer, an experienced finance strategist, to establish Metropole Finance.  If you would like to hear the replay of a recent WebCast I conducted with Rolf about the challenges of property finance in this new financial era please click here now!

Having invested for over 30 years, I know that the markets are continuously teaching us lessons. It’s remembering them that’s a bit hard.

My favorite is probably to stick to the fundamentals.

Most of the pitfalls I have seen in recent years have been from investors who have steered away from the fundamentals of buying well located real estate. Many were speculating rather than investing, others thought the most important part of property investment equation was tax or finance, when that’s clearly not the case.

One of the big risks facing investors currently is that they will get too excited about the pace of the recovery and go off and buy any property. In fact I’ve already seen that happening.

To help you through the next few challenging years you need to get advice from people who have been through this stage of the property cycle before. That’s why property tax specialist Ed Chan and I are studying past property cycles and preparing for our upcoming round of seminars in August and September which I’m going to call Road Map to Recovery.  I’ll send you details in the next few weeks.

One of the big mistakes investors can make at this challenging time in the property cycle is to become too pessimistic and not take advantage of the long term opportunities the market is offering.

But just as big a danger is to become overconfident and not worry enough. And I have already seen this happen with investors going out buying off the plan properties and properties in secondary locations based on what they think are cheap prices.

This will create opportunities for those who know what they are doing and traps for those who don’t.

By the way…

In changing times like we are experiencing, no one can help you through the property maze quite like the multi-award winning team of independent property strategists at Metropole. And remember, we help homeowners too, not just property investors.

We have no properties to sell, but access to every property on the market. If you want to find out a bit more about what is happening in your local market and what our research suggests is in store for us, join us at a free property briefing in Melbourne, Sydney or Brisbane. Just click on this link to find out more and reserve your place.

And if you haven’t purchased your own copy of my new book, Thriving not just Surviving in Changing times, please click this link to find out more about it.

Attention HOME BUYERS AND INVESTORS!

2009 will present some of the best buying opportunities we have seen for a long time…Are you ready for it?

ATTEND A FREE BOARDROOM PROPERTY BRIEFING

Click here to find out more about Metropole's free property briefings - held in Melbourne, Sydney, Brisbane and Perth.
Join us as our buyer's agents show you how they pick top performing investment properties and the perfect home for any buyer. Click here for details or to register your interest.

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