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Why residential property will pick up in six months

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There’s a lot of doom and gloom about property at the moment – but there is a glimmer of good news on the horizon. SCOTT KECK

Scott Keck

By Scott Keck

There is a lot of doom and gloom around property selling at present and I would have to say that the media has not got things too wrong. However let me run through some of the good news on the property front.

First here is what I am witnessing. The market is completely broken up and odd things are happening so it is hard to talk about trends. But what we do know is the market is not being driven by a shift of values or oversupply or anything significant.

And the reported negative news is missing some facts.

There is more movement than people think. There is a shredding of property going on but there is a high degree of confidentiality surrounding the transactions. There are discounts of about 10% to 15% on some commercial properties, but people are keeping the sales private as they don’t want discounts disclosed.

Primary property, which has a secure and long term cashflow, is only falling by 10%. But secondary property in retail, office and industrial, is being discounted by maybe up to double that.

Retail is being hit harder because of the dark clouds gathering around that sector, which is affecting retail lessors.

On the retail side, in the outer suburbs where values are lower and there are different socio economic conditions, the market is floundering.

However the inner urban market is being strongly supported. Auctions indicate that it is soft but there is a lot of offmarket activity that people don’t know about. People rely on the results being printed in the paper but there are a lot of properties selling before and after auction and a lot of private sales. So the residential market in the inner suburbs is in better shape than people would have you believe.

And you can expect that with the continuing reduction in interest rates and the stimulus to the economy, that it will be the first part of the economy to recover. It is traditionally also the first part of real estate to improve as it is more resilient and a cheaper price point of entry than commercial.

Now everyone is talking about the economy recovering in one or two years. But historically after a dramatic fall in interest rates in three months and given the lag time between interest rate falls and impact on sentiment is two months, I predict that within six months we will start to see significant change in sentiment for the better on the inner urban market.

The interest rate reductions have always stimulated the market more quickly in this segment. It will bring developers back into play as the lower rates bring costs of borrowing down and the risk is less because there are more purchasers in the market.

Also this market is undersupplied and demand is growing so for the next couple of years we will see people more focused on the residential property than non residential.

Property always gets a strong upturn when the sharemarket performs badly.

But there is one other factor that has a huge influence on the property market. Our research shows it is the 45-60 year olds.

About 70% of real estate markets across the board are influenced by 45 to 60 year olds. They have got the money, equity in their properties, shares and the capacity to borrow.

At present they are worried about shares, and their super and there is not much activity. But when that negative semtiment turns around it will directly affect residential property.

As interest rates fall, it will help their borrowings so they will feel better. As they see an improvement in the sahremarket, they will feel better. When they see the government spending on infrastructure they feel better.

Once they feel better, property starts to move again and you start to see some activity in the sector and then the developers return. I predict that will be six months away.

 

For more Property Investor blogs, click here.

 

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