Michael Bentley

WILL VALUES CONTINUE TO RISE?

After all the financial turmoil, will Australian property values continue to hold,
especially in light of other markets around the word falling?

Australian real estate, especially residential property, offers some unique
factors that have helped insulate it in the past from any major downturns.

At the time of printing (early 2009) one thing for sure the events of 2008 have
taught us is that no one knows the future, but there are certain indicators that
lead us to believe that Australian property could well be entering a new Golden
Age of property growth.

But this is our second bear market in stocks in less than 10 years. The 10-
year return on the S&P 500 is negative. Investors in the stock market over the
past decade have actually lost ground -- and that's before inflation, which has
run at an annual 2.7% in the USA from 1998 through 2007, and could easily
become much higher in the future.

So what does all this uncertainty mean for Australian property?

Following the World Stock market crash of October 1987, when the Dow Jones
fell some 23%, and the Australian all ordinaries fell some 42%, WHY did the
average Melbourne apartment rise by 37%, and the average Sydney apartment
by 54% in the 24 months immediately following the crash? (Source: Residex
October 1987-October 1989)

At that time people thought the financial world had ended.

However, what we found was that sales of Australian property over the next
24 months went through the roof, and prices of property in Australia rose
dramatically.

What happened then was that many who had been burnt or who had ridden the
roller coaster threw in the towel, and said they would never buy a stock again.
People moved back into the security of bricks and mortar.

There was a flight to safety, and billions moved into Australian real estate.
And that was at a time of 15% mortgage rates in Australia.

Certainly it is a great time to be a landlord if you already own property. Rents
are rising, and are likely to continue upwards for some time, there is no sign of
occupancy rates easing, and interest rates are falling. Migration in 2007-2008
was at an all time high, with around 400,000 new migrants arriving each year.
Population growth is a driver of property growth. Unlike the U.S.A Australia has
a large shortfall (rather than an oversupply) of property.

Australia has a population of just 20 million, in the same land area as the
U.S.A with over 300 million!

Australia's high divorce rate is also strangely a benefit to overseas investors, as
it creates demand for two houses instead of one.

Foreign investors are likely to see Australia as a “safe haven” and the lower
Aussie dollar will attract them into acquiring Australian assets. They have had a
huge “discount” on Australian property prices because of the lower dollar.
The cost of constructing new dwellings is only going to increase which will drag
up the value of established properties.

Shortage of supply

Whilst we mentioned above the huge land area of Australia and the low
population (creating virtually unlimited opportunities for future population
growth) Australia in fact faces a land shortage, in addition to the current
shortage of new construction.

Taking Sydney as an example, it is a coastal city, bordered on one side by the
ocean, on the other by mountains, so can only expand South or North, yet to
the South it is bordered by the Royal National Park.

To the North the Ku-ring-gai National park and extensive waterways prevent
further expansion, meaning Sydney ran out of new land to develop years
ago, yet strict high rise restrictions also prevent most suburban areas from
developing “upwards.”

Other factors that should give international investors confidence to invest
include:

Lower interest rates

Interest rates have fallen significantly from their 2008 levels.

High Employment

Employment remains relatively high.

Very strong overseas migration.

Between 2003 to 2006 migration into Australia was huge. By 2007 it had reached
410,000 people arriving, the highest in 18 years. High migration greatly helps
house price growth. In addition, natural population growth is also increasing.
In 2008 the figure was estimated at over 390,000.

No Mortgages

One third of all people have absolutely no mortgage at all. This greatly
underpins the strength of the housing markets.

Shortage of new supply

All cities are facing huge shortfalls in new house supply relative to demand:
A massive shortage of new construction around Australia, with increasing
demand and rising migration, has meant the imbalance in supply/demand has
become becoming huge, and will take years to rectify.

High equity

Most property owners in Australia, both investors and for own use, have been
required by the Banks to outlay at least 10%, and in most cases 20% to 30%
of their own money as a down payment, and have to face strict Mortgage
qualification.
This helps protect against any major default in loans.

Unlike the USA which offered 110% housing loans, even to those with no
income, no jobs and no assets. (NINJA loans)

This is a huge and fundamental difference in the Australian housing market
between both the USA and the UK, and is one of the most important reasons
for people to understand why Australia will not suffer housing downturns like
these countries.

Many potential investors (from the UK particularly) used to criticize Australia
for demanding they prove their income, and put up 20% as a deposit before
they could get a loan to buy investment property. Now these safeguards have
protected Australia, and are a very important reason why the markets will
remain strong into the future.

Little mortgage stress or mortgage delinquency

In spite of some sensationalist media reports, the truth is that missed home
loan repayments in Australia remain very low by international standards.
Australian Banks only have a tiny fraction of equivalent rates in the U.S.A.
Will values continue to rise?

Rental growth

Residential rents are continuing to grow throughout the country, as the
shortage of supply hits. As interest rates have also come down, investor's
returns are starting to look very attractive.

Cash is looking for a home

There is a huge amount of funds looking for a flight to safety after the recent
financial turmoil.

First home buyers grant

Australia has for a long time offered first time buyers a “First Home Buyers
Grant”, which helps young Australians get into the market.

This should not be confused with NINJA loans mentioned earlier, as this grant is a
Government Grant, and buyers still have to qualify for a Bank Loan as per usual.

Tax cuts

There were Tax Cuts introduced that will flow through in 2009-2010, with many
people now paying less tax, increasing their cash flow.

Low Cash deposit rates

As interest rates dropped, the interest rate paid on cash deposits also dropped
to very low levels, meaning many people will simply want a higher yielding
investment, which property offers.

Project cancellations

During 2008-2009, many developers found it harder to raise project finance,
and hundreds of townhouse and apartment projects were cancelled. This is
good news for investors, as it creates a scarcity.

Property booms after stock crashes

Historically, after every major stock crash in Australia's history, the property
markets have risen quite dramatically following a stock downturn.

Good banking /loan regulations
In the US, the house crisis was exacerbated by poor regulatory practices in
which lenders had no recourse to borrowers if they defaulted (which is not the
case in Australia) and the presence of two quasi-government agencies that
crowded the private sector out of the prime lending market.

Affordability reasonable

Debt-servicing ratios have remained unchanged thanks to vastly lower real
interest rates, the emergence of two-income households and higher real
incomes, as well as Tax cuts.

These improvements in affordability have been augmented by the
Government's $10.4 billion spending package, which has focused on supporting
incomes and boosting the first home owners grant.

Variable loans

In contrast to the US and Britain, where most loans are fixed for years, with
US loans in many cases being fixed for an incredible 30 years, about 85 % of
all Australian mortgages are variable so Reserve Bank rate cuts immediately
benefit borrowers.

Sub Prime market

Australia also benefits from the fact we don't really have a sub-prime market,
which accounts for 15 per cent of US loans.

Loans readily available

Unlike the US and Britain, which have suffered multiple bank failures, there
is no evidence of Australian banks systematically denying residential credit.
Since the crisis began the big banks have profited immensely from a decline
in competition and tremendous deposit inflows. Banks are happily investing in
the home loan market, which attracts a much lower risk-weighting from the
regulator. Today borrowers are still able to get loans.
All these and several other factors (many of which will be covered later) all
point towards long term rising values in Australia.

(From the E- Book, The Foreign Investors Complete Guide to Buying and Profiting from Australian Real Estate" published in 2009 Click here to read more)