Today’s Money Morning begins with three cheers for buyer’s advocate Catherine Cashmore.
In December 2014 Catherine warned our subscribers over at Cycles, Trends and Forecasts to steer completely clear of buying new apartments when it came to investing in Aussie property. This was especially true for inner Melbourne.
Events are beginning to vindicate what’s she’s been saying all along. Here’s just one example.
The Australian Financial Reviewthis morning that off-the-plan apartments in central Melbourne have lost about 11% in value.
That’s in the first year between their original purchase and pre-settlement valuations.
That could mean buyers needing to find additional equity as high as $68,000. That’s not true for all apartments, but the trend is big enough to give the banks a worry.
There are multiple problems with the apartment market. There’s already too many. Vacancies are high and rental growth poor. Prices have flatlined at best over the last few years.
But here’s the biggest problem of all: most people don’t want to live in one.
Here’s how she summed up her case at the time:
‘Investors purchase seven out of 10 apartments, so demand tends to wax and wane with sentiment.
‘For this reason, apartments have performed well over the short term, but over the longer term, family housing and land has seen the biggest gains. In my opinion, that will continue.’
You only have to look at Melbourne’s population growth to see where the people are actually going.
According to the Australian Bureau of Statistics, the four fastest growing areas nationally were in Melbourne. And they were all on the fringe of Greater Melbourne. They were Point Cook, Cranbourne East, Epping and South Morang.
Melbourne is seeing the biggest population growth in the country. This is happening as the end of the mining boom redistributes growth away from Western Australia. Perth’s growth is now the slowest it’s been in a decade.
The fact that these outer suburbs in Melbourne are attracting population increases is also consistent with Catherine’s further analysis.
These buyers are looking for land but are priced out of the established suburbs they most likely grew up in. So who is driving the booms in Sydney and Melbourne?
Also important to note here is this one way tying house prices to wages can break down. These migrants are often bidding as families.
But Bloomberg ran a story on this today. They profiled an accountant called Han who just bought a three bedroom house in Ringwood for over $900,000.
‘“It comes as a tradition in China to buy a home for a son to establish a family,” said Han who lives in the house with his 29-year-old wife Chen Junyang. “Without my parents, it would still be difficult for us to bear the large mortgage loans.”
‘Han is among scores of buyers who with the backing of relatives in China are underpinning a housing market in Australia that’s coming off the boil. More than half the buyers of Chinese origin are supported financially by relatives residing in the world’s second-largest economy, according to McGrath Ltd., Australia’s only listed real estate agency.’
What’s even more interesting is that Han mentions houses here in Australia a cheaper, bigger and better quality than whatever he could get back in Beijing. China expert Shaun Rein told me the same thing on my podcast last year.
It’s certainly true however that it’s getting harder and harder for average families to afford a detached house with a back garden close to the capital cities.
Whilst rental yields for units are stagnating at best, rents for the old suburban house on a quarter acre block are doing the opposite. For example, Warranwood has the fastest growing median house rent in Melbourne, now at $500 per week.
Warranwood is situated 27km north-east of Melbourne’s CBD, close to the suburbs of Warrandyte and Ringwood. The suburb features detached family homes, on large unbroken land blocks in quiet residential streets and close to good schools.
These type of properties are highly likely to outperform over the real estate cycle. For more on this, go here.