How long can the real estate boom last?

15 September 2001
By Robert Harley

The 500-strong Ray White Real Estate chain has just had its best winter ever and the chairman, Brian White, expects a "big bouncy spring". But he's seen these cycles before. Surging house prices don't last more than a year.

Sometime in the next nine months the house-price frenzy will falter. Not plunge or collapse, but cool. Then the fundamentals will return. The dangers of building too many apartments, the varying cycles between cities and the generational shift to the inner city and the coasts will re-emerge as the key drivers in house price growth.

But the coming months will bring big price jumps. Buyers' advocate David Morrell says that even the pessimists see "10 per cent more in Melbourne". In Sydney, John McGrath can see 15 per cent in his upmarket inner-city stronghold, and Gold Coast property analyst Alan Midwood, who has seen second hand Gold Coast units rise 25 per cent in the past year, expects similar rises this year.

Those rises rarely show up in the big-picture statistics. They are the final wave up the beach that goes beyond the high-water mark. When the market cools they'll be gone - a windfall for any seller able to pick the top and an added burden on any purchaser who pays too much of a boom-time premium.

There's no question this market is hot. On the Australian Bureau of Statistics index, Melbourne prices jumped 7.1 per cent in the June quarter, Canberra followed with 3.7 per cent and Sydney was up 2.7 per cent. Even Adelaide prices rose 2.6 per cent and Hobart, the tardiest performer of all, had a 1 per cent rise.

The figures are probably conservative. What about the warehouse conversion in the Melbourne suburb of Richmond that was bought two months ago for $505,000 and has just been resold for $620,000? Or the $1 million-plus Vaucluse home in Sydney, resold untouched after a year for a 30 per cent gain? Or the $1 million Holdfast Shores block of land in Adelaide that on agent Anthony Toop's reckoning is priced 30 per cent above what could have been obtained last year?

On Australian Property Monitors' auction numbers, the heat is increasing. In August, $787 million worth of Sydney property changed hands at or before auction - at a clearance rate of 77 per cent and with a total value 33 per cent more than the July figure. For Melbourne, the figure was $670 million, a 23 per cent increase from July, at a clearance rate of 83 per cent.

After four years of strong growth in Melbourne and Sydney, those numbers lose impact. What is different this spring is the breadth of the price surge. On the back of the First Home Owners Grant even regional centres like Bendigo and Wagga Wagga are experiencing their first price rises since the 1980s.

Of course, it is still not universal. Noosa, the stellar market for most of the 1990s, has been subdued. Perth, despite a stronger winter, is still carrying the hangover of the overbuilding of the early 1990s and the weak local economy. And many of those who bought inner-city apartments in Melbourne and Sydney in the late 1990s have missed the price growth seen on houses.

As the Noosa example shows, nothing lasts forever and at some point the frenzy peaks. But as always, the top is hard to pick.

After the Reserve Bank move last week, interest rates - the key driver of house prices - are back to an all-time low. A rise would trigger a slowdown but the economists are split. Those, such as Macquarie, who believe the Australian economy is strong enough to withstand the global downturn, predict rates will rise next year; others, such as Westpac, don't see a rise till 2003.

It's the relative, some would say lulling, strength in the economy that is the next factor driving the housing market, and BIS Shrapnel director Robert Mellor believes the economic slowdown will cool the heat:"We don't think prices will do much. We think the overriding factor is the economy."

But the US economy is unquestionably heading south, and the country is experiencing a housing boom. Perhaps not in Silicon Valley or The Hamptons, but this year 5.19 million homes will change hands across the US - the second-highest figure on record - and the National Association of Realtors expects the record to be broken in 2002.

The third driver of this market is investment buying. Spooked by the stockmarket and encouraged by the promise of future capital gain, investors have turned to property. In May, the finance commitments for residential properties "for rent or resale" leapt 40 per cent to break the $3 billion mark.

Ironically, investors are buying just as the returns, particularly in Sydney and Melbourne, are declining because of the number of vacant properties, falling rentals and rising prices. At some point the investment ardour will cool but the alternatives - the stockmarket or cash - are not looking too flash at the moment.

The vacancy rate has been a leading indicator of price movement. It foreshadowed the downturn when Sydney vacancies blew out in 1988-89 and predicted the upturn when they tightened again in 1997.

Ominously, while vacancy rates in Hobart, Brisbane and Adelaide are tightening, the Sydney figure has blown out to a level not seen since 1989, although BIS Shrapnel's Mellor believes the blowout will be short-lived because "fundamentally, Sydney is not oversupplied".

The fourth driver is shortage of stock. In the June quarter, 8,900 Sydney houses changed hands, a drop of 17 per cent from the same three months of 1999. The statistic has parallels around the country. Ominously, again, apartment sales were up, by 31 per cent.

More stock will flow with the spring but unless asking prices rise so far that clearance rates falter, the spring sellers are unlikely to dent demand. Sure, it's a good time to sell, but what then? Who wants to buy another property in this heated market?

Every great boom has been fed by government stimulus, and this time it's the First Home Owners Grant. In 2000-01, 147,000 grants were handed out, injecting $1 billion into the housing market, largely for existing property and largely in outer metropolitan or regional centres.

The proportion of first-home buyers is now near record highs and already questions are being asked about the continued strength of demand. Ray White's Brian White believes many first-home buyers are cynical about how long the scheme will last and are bringing forward their purchases, effectively stripping next year's buying to fuel today's fires.

One final political factor will play a role this spring. Before Christmas, the Prime Minister, John Howard, has to call an election - a psychological break point that could be enough to stem the surge.

With so many factors influencing housing, what do the experts think?

As the accompanying graphs show, BIS Shrapnel is no longer expecting any real downturn in house prices. "I don't think there will be any fall," says Mellor. "Only if people have paid ridiculous prices compared with the fundamentals."

In fact, once the economy picks up, Mellor believes Sydney will see strong growth - between 8 and 10 per cent a year - during 2003-2005. Melbourne, where median prices are now less than 10 per shy of the harbour city, is unlikely to see such growth but Brisbane, if it can regain the population growth of the late 1980s, could shine.

Macquarie Bank's head of property research, Rod Cornish, believes the price growth at the top end of each market will slow because of the global slowdown, an increase in supply and the savaging of executive bonuses.

"But it is not going to crunch," he says. This market is completely different to the 1980s. Back then the payments on an average Sydney mortgage equated to 81 per cent of average male earnings. Today the figure is half that and the AMP REIA Affordability Index released this week is still on the rise.

"I think we have a little bit further to go [in Sydney] and good property could rise 10 per cent," says Cornish. "Certainly not more, and perhaps less."

He is also expecting more rises in Melbourne, certainly through to the first quarter of next year.and Brisbane, which is in a different cycle, is "only beginning to pick up with a strong rise to come from 2003".