During the past 5 years, several Australian cities have seen extraordinary growth in their house prices.
But over the past 12 months, Australian interest rates have gone up, but the Aussie dollar has remained steady against the US dollar, and occupancy rates for rental properties have started rising,whilst prices have stabilized in several cities. Australia's unemployment rate is at a historical low.
Migration is at an all time high. The economy is healthy. Taxes have been lowered.
These facts must have an effect on the Australian real estate market in 2007.
The question is what?
The interest rates in Australia have moved up slightly to around 7%, still relatively low historically, and the rental yields around 4-5% have only just started to go up, meaning real estate investment demand has remained slower during 2006.
Although, as any specialist knows, it is foolhardy talk about Australia's real estate market as if it is one homogeneous whole. Each city, and even sectors within each city, move on different cycles.
For example, the Sydney and Melbourne real estate markets peaked in mid 2003, Brisbane houses continued to grow until until late 2004, and Perth property is currently Australia's strongest real estate market, booming right through 2005 to 2006.
Astute investors who sold in Sydney in 2003 and moved into Perth houses have since doubled their money.
So, where to from here?
Evidence is that the rate of house price growth has started to slow now in Perth, and prices may be overheating. Perth is now ranked as the most expensive city in Australia for it's real estate (based on comparison with median incomes).
There are strong indications that parts of the Sydney market have already started to recover. Sydney has always been the most expensive city in Australia in terms of absolute house prices, but interestingly, current affordability levels in this city are at their best level since the early 1990's.
There is very strong pent up demand, and this market is set to fire again starting in 2007.
Rentals will start to rise towards the end of 2007 too. However, certain areas will outperform others.
The traditionally safe areas around the harbour are predicted to greatly outperform the outer area - although in saying that one should remember the Sydney market as a whole has always proven to be one of steady growth, over the long term.
The stand out performer for the next 6 months though appears to be houses in Melbourne.
A study of house prices over the past 10 years shows that Sydney increased by 160% and Melbourne 148%.
However, over the past 5 years, Sydney has gone up by 81%, pretty much as expected.
But Melbourne has greatly underperformed at just 35%. This is around half of what we'd expect at this stage of the cycle. The past 20 years for Melbourne houses has shown growth of 348%, so all evidence seems to show that the past 5 years there has definitely been underperformance.
Yet the fundamentals in Melbourne are strong.
The population is growing. The economy is sound, migration is increasing. The rental occupancy rates for houses are running at over 98%, and reports from Melbourne show many tenants are having to enter a bidding war to secure a home. Rents have risen 5% in the past few months.
We expect a catch-up in Melbourne house prices that may surprise many.
It is the best time for some 6 years to enter this market for houses, although apartments in Melbourne may not recover for until later.
Rents around Australia have generally not increased significantly since 2001, although rental increases have now started, especially as mentioned in Melbourne. We expect them to gain momentum through 2007 in the other cities.
Most analysts are advising their clients to immediately buy Melbourne houses while bargains can still be found, and to look for "off-plan" Sydney apartments early next year, especially in prime areas around the harbour. Off-plan apartments with a 2 year completion, will be very well positioned to enjoy the next Sydney upturn.
Today, the key to success in the Australian property market can best be defined by sustaining your ownership.
The key is to buy a trouble-free property that has good rental and growth prospects over a long period of time.
By taking the long-term position, it can mean almost guaranteed wealth......security goes hand in hard with the patient and long-sighted pursuit of accumulating wealth.
It is an endeavor that can not be hurried without risk.
For more information on this topic, visit www.Australianpropertycentre.com
Written by
Michael Bentley
Michael Bentley is one of the leading advisors to overseas investors looking towards buying real estate in Australia. With a career in this field spanning 25 years, he has been featured in many leading publications, TV and Radio shows, and is a regular speaker in Asia on Australian Real Estate Investing.