Is the Australian residential property market set to recover?

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The Australian residential property market got off relatively lightly during the financial crisis of 2008/9 and surprised many people with its resilience. A recovery in 2010 raised hopes that the market would power on but 2011 saw price reductions and a lack of interest from overseas buyers as the strong Australian dollar deterred investment. As we head through 2013 there are signs that the market is recovering with The Real Estate of Australia advising that prices have risen by up to 4% over the year. The Australian Bureau of Statistics supports this view and advises that for the year ending Q1 2103 the house price index for the country’s major cities rose by 2.6%. So should investors jump into the Australian market now?

As with any market, it is almost impossible to accurately forecast what will happen with prices. However, the basics for a rising market appear to be in place with lower interest rates and improved affordability in most states. The economy is still moving along nicely, growing by 2.5% over the past year and inflation is expected to remain in 2% to 3% p.a. so there should be no need to increase interest rates in the short term. Rental yields are at around 4.5% to 5.5% and are in line with most developed countries. Rents are rising particularly in growing cities such as Perth and Sydney.

Whilst all this sounds good from an investors point of view, residents of Australia may have a different view. The country ranks as one the top five most unaffordable countries in the world. For individual cities, Sydney ranks alongside Hong Kong and Vancouver in terms of un-affordability. This has driven many people, particularly those at the bottom of the property ladder, to become long-term renters. Like many countries, Australia is simply not producing enough homes to meet a growing demand. With restrictive planning policies, onerous tax burdens on developers and a lack of development finance this situation is unlikely to change in the foreseeable future.

One issue concerning some overseas investors is the possible effect on the Australian economy from falling demand from China for its natural resources. However, according to the Australian Bureau of Statistics the economy grew by 2.5% for the year ending Q1 2013 and similarly acceptable growth is expected over the medium term.

As advised above, another issue putting off some overseas investors is the strong currency. However, the Reserve Bank of Australia Governor Glenn Stevens recently said “The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.” Nevertheless, the days of an under valued Australian dollar seem to have gone for the foreseeable future and parity with the US dollar is likely to become the norm.

We have been involved in the market there for many years but have stayed out of it since 2008. The signs are that now may be the time to jump back in. As with all investments, there is always a risk that it will not perform as expected. Having said that, if the aim is to own a safe and profitable property investment then the Australian market is certainly worth considering as we head towards the end of 2013.

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