The above is in line with recent reports from other commentators throughout Australia:

As reported in Property Review Dec 2005:

• HIA’s chief economist Simon Tennent said the improvement in first home buyer numbers appears to show the worst is over for this cycle, particularly given the stable outlook for interest rates, unemployment, and house prices.
• Further evidence is that rents have continued their upward trend and vacancy rates are near all time lows
• J.P. Morgan’s chief economist Stephen Walters said like the September (05) rise in home loan approvals, the rise in October (05) was driven by higher borrowing by both owner-occupiers and investors.

The Australian Financial Review (one of Australia’s most respected financial publications), 11th January 2006 reports:

• “Residential rental property yields in 2006 will improve markedly as contracts are renegotiated to reflect tightening vacancies, property analysts have predicted.  Vacancy rates are at the lowest for several years in most capital cities due to pent-up demand and reduced house and apartment completions.”
• “In Sydney, vacancies have fallen from 4 per cent in December 2003 to 2.8 per cent in September 2005; in Melbourne over the same period from 3.8 per cent to 2.2 per cent; and in Brisbane from 2.5 per cent to 2 per cent.”
• “ANZ Bank economist Paul Bradick said the gap between underlying demand and supply of residential property in most capital cities was widening, causing rental vacancies to fall.  He said fewer completions had dampened supply…”

“My best guess is that by about June (06), supply issues (shortages of rental properties) will start to generate significant numbers of stories about increasing rentals and investors will start to return to the market.  Until then housing prices are likely to show a little further correction but no significant gains.  It is a market for those of us who are well informed and are buyers positioning ourselves for the upswing that will come.” 

So, let’s have a look at some of the specific locations that are at the bottom of the current property cycle.

Melbourne - Like Sydney the Melbourne market has been very flat, however, long term it is a very solid market with strong underlying demand and a lack of supply.

Following the last four low points in Melbourne’s residential price growth (early 70’s, early 80’s, early 90’s and 1995) the growth in the ensuing 6 years has averaged 12%pa.

According to the Residex September 2005 report:

• Last quarter provided a more normal growth rate of 2.19%
• Sales activity remains relatively strong and has only come off 34% since its peak (which is less than in many other markets)
• Unit market corrections appear to have passed the worst which was 6% for the quarter ending January 2004
• The over supply conditions are abating

Melbourne Long Term Statistics – Last 10 year average
 

Residex Region	Capital Growth %pa	Net Rental Yield	Total Return
Inner/North West Units	8.91%	6.42%	15.93%
North East Units	9.41%	6.19%	16.24%
South East Units	9.66%	6.42%	16.78%

Source: The Residex Report, September 2005

The signs are evident that Melbourne will soon begin its next upward cycle.  The perfect time to invest in this market, especially with “off plan” projects that have long completion times and initial rental guarantees.

Sydney - The Sydney market has been very tough for the last few years. As many of our investors are aware, we have, for the last few years, chosen not to list Sydney residential stock. The price points were, we believed, too high and the returns too low.  As it turns out we were correct.  But, the market is now turning and developers have adjusted their pricing to meet the market.  We now believe that it is time to return to this market, which like Melbourne, as a longer term prospect will always be extremely solid.  As developers have adjusted their prices and as the market begins to turn, we believe these prices will soon be adjusted upwards once again.  This plus the increasing rental yields suggest that the time to re-look at Sydney is here.

“The numbers are pointing to a situation where the bottom of the market has been passed and, from here, one can reasonably expect that the typical Sydney property will only increase in value.  If you haven’t already got yourself set in anticipation of the next growth cycle, then it’s time to do it or miss out.”

Source: Residex Newsletter, January 2006

Sydney at a Glance - Where we’ve come from…

• We are currently witnessing the longest period of sustained correction recorded (other than in periods of serious economic distress)
• The correction in the market commenced in December 2003
• The total correction in values since December 2003 to date has been a modest 5.6%

In a market that has just undergone one of the longest “sustained correction periods” a drop in values over this period of just 5.6% is not bad and is an indication of the strength of the Sydney market.

Future Capital Growth Predictions for  Sydney Units

• 7% + p.a. next 5 years 
• 7% + p.a. next 8 years

This growth plus increasing rental yields will ensure Sydney is a very solid medium to long term investment.

Sydney Market summary

• The Real Estate Institute reports that vacancy rates have reduced in the last two years and are currently about 2.5%
• Our best guess is that by this time next year is will be closer to 1% than 2%

Like Melbourne, we believe that now is the time to be entering the Sydney market.  But with projects that are well located and have a long completion period.
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