What you need to know about the property markets in 2011

In one of my recent market commentaries I made some predictions for Australia’s property markets over 2011 and beyond.

My first prediction was that most predictions would be wrong ¬– because they always are. I also warned that there are always unforseen X-factors that take us by surprise, and since then we’ve had floods, earthquakes and a nuclear accident. And if history repeats itself there will be others this year.

I also predicted that most investors would get it wrong this year, but those who got it right would do very well and set themselves up for success in the years to come.

Sure, the property markets have slowed down and the next couple of months might be choppy as buyers and sellers work out what’s ahead. However, although the doomsday speculators would like us to believe this is the end of the world as we know it, the truth is that we are not in for a property crash. There are always peaks and troughs in the property game – it’s just the way the market works.

During times of change it’s always good to go back to basics, so let’s look at the fundamentals that affect our property markets and how they will play out over the next few years.

The key drivers of the property markets:

A strong economy: Australia’s economy continues to grow strongly when many of the world’s major economies have struggled to record any growth. Our economy is booming in a large due to huge offshore (mainly Chinese) demand for our commodities and currently we are among the world’s strongest economies. The RBA predicts this will continue with forecasts of GDP growth in excess of 3% for the next few years.

We’re experiencing a resources boom: The huge capital expenditure by the mining companies will boost our economy and create jobs. At the same time commodity prices are booming, helping boost our export sales and bringing overseas money into the country.

Employment growth: Around 230,000 full-time jobs were created last year. Unemployment is low and job participation is at record highs, which means wages, especially for certain jobs, are likely to keep rising.

Inflation is under control: Our CPI is now back within the RBA’s target range, which means that the Reserve Bank will not need to be as aggressive with further interest rate rises. However many economists are suggesting rates could rise a further 0.5% later in the year.

Population growth is among the highest in the developed world: Even though our population is not growing at the record rates it was a few years ago, our high population growth (around 1.8% per annum) coupled with undersupply of dwellings in some regions and low building approvals will continue to put pressure on housing.

Ongoing property shortage: Despite our increasing population new housing construction is at 30-year lows and the National Housing Supply Council estimates Australia is undersupplied by around 200,000 dwellings. With development approvals hard to come by and funding for new developments tight, it is unlikely this undersupply will change any time soon.

Increasing rents: With vacancy rates at low levels and a surge in rental demand, 2011 is likely to be a year of strong rental growth.

Increasing market confidence: The perception of wealth is an intriguing factor when it comes to the performance of our property markets. Basically, when we all feel wealthy, when we see our economy is doing well and we are confident about our jobs, we are more inclined to spend money.

Most experts predict that employment levels will remain strong, particularly as more skilled trades are required to get Queensland back on track and rebuild homes and infrastructure. Our economy is expected to remain robust, largely due to the Chinese driven resources boom that the RBA says will continue for at up to 25 years.

While there are many mixed messages in the media, more Australians are feeling a sense of financial wellbeing and this looks set to continue into 2012 and beyond. This type of ongoing prosperity will continue to boost market sentiment and encourage people to keep buying houses to live in and for investment.

Buyers will return to the property market: As the year moves on, we are likely to see four types of buyers return to our property markets:

1. First home buyers have been sitting on the sidelines, but as rents increase many will take the plunge into the property market.
2. Investors will return to the property markets buoyed by general market confidence and increasing yields.
3. More properties will be bought by Self Managed Super Funds as investors take advantage of the modified legislation to allow super funds to borrow to purchase properties.
4. Overseas buyers will keep buying property because of the security and stability of our economy and political environment.
Interestingly, all the above groups are likely to purchase properties in much the same price range – $400,000 to $700,000.

As 2011 pans out our key residential property fundamentals, all of which are positive, will start to come to the fore. However one fundamental that could negatively impact our property markets would be rising interest rates as currently many recent first home owners are already feeling financial stress.

The bottom line is that 2011 will not be year of booming property prices. But there’s no property crash on the horizon either.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.