Lessons learnt from property slowdowns

During the 10 years to November 2010, home values nationally have increased at an average annual rate of 9.3%. Despite the strong growth it has been far from uniform across the decade and throughout different regions.

During the first five years of the last decade, property values increased at an average annual rate of 11.9% compared with average annual growth of 6.8% during the second five years, almost half that of the first five years.

What is probably most interesting is the performance of the market following strong value growth phases. The market across the combined capital cities recorded a strong period of between 2001 and 2003 however, following this boom period property values increased by just 2.9% over the 21 months to August 2005.

Following the onset of the Global Financial Crisis (GFC), the capital city markets recorded falling values for 10 months between February 2008 and December 2008. The strong recovery thereafter was hastened by the boost to the First Home Owners Grant but probably even more so by the lowest mortgage rates in almost 50 years which encouraged re-investment in the housing market and the greatest number of first home buyers in history.

The market has been recording a slowdown in value growth since May of last year. With the latest data to November 2010, if the same scenario was to play out as occurred after the 2001-03 property boom the residential market would show no real signs of recovery until March of 2012. If the market followed experienced the same recovery as it did following the GFC, the recovery would start to occur at around March of 2011.

Of course the market is not uniform and within different capital city markets recoveries and booms have occurred over various time frames due to different stages in the growth cycle, differences in the economic base of each market, supply/demand differences and range of other factors.

A good example of this is the Sydney property market. Property values peaked in Sydney in February of 2004, the market then well and truly underperformed for some time. It wasn’t until April 2009, more than five years later, that values in the city eclipsed their previous 2004 peak.

During the last decade, Melbourne has recorded three strong surges in property values, 2001-04, 2007 and 2009-10. Coming out of the 2001-03 property boom the market recorded a marked slowdown and between August 2003 and December 2006 property values in Melbourne recorded total value growth of just 6.7% in over three years.

Brisbane recorded value growth well in excess of the national average during the 2001-04 property boom and did so again during 2007. Since that time Brisbane property value growth has significantly lagged that of the rest of the nation. During the 2001-04 property boom, Brisbane home values peaked during March 2004 and from that time until December 2006 Brisbane property values increased by a total of just 8.8%. Since the onset of the GFC, growth in Brisbane home values has significantly lagged that of the national market.

The Perth property market has had a much different performance to that of all other capital cities over the past 10 years, largely due to the influence of the mining and resources sector and its impact on home values. Over the first five years of the past decade, Perth recorded average annual value growth of 16.6% compared to growth of 7.4%pa over the second half of the decade. Since values peaked in October 2007, Perth property values have fallen by a total of -0.8% to November 2010.

With the market slowdown now in full swing, RP Data expects that property value growth nationally will be more in line with the period post 2001-03 property boom than the recovery following the GFC. Given this, we aren’t expecting reasonable value gains to return to the market until at least 2012.

Like always, the recovery will be far from uniform and some markets will perform better than others. The key drivers of an eventual recovery are likely to be: interest rates, home loan affordability and rental growth given the expectation of strong rental growth through 2011. Consumer confidence and economic conditions both domestically and internationally will also have an effect.