Quarterly Property Briefing Q1 2008

Residential market snapshot

As world markets continue to experience volatility as a result of the US sub prime crisis, the Australian residential property market continues to deliver strong and reliable returns for investors.

The January 2008 ANZ Economic Report states “In raw terms since 1984 residential property has enjoyed an extraordinary growth of 13.4% (slightly lower than 13.8% for equities). But in risk adjusted terms, residential property has delivered vastly superior returns to all other broad asset classes”. See graph 1.

Much less volatile than other asset classes, house prices have virtually never fallen over the past 23 years (the greatest annual falls recorded were -0.3% in the 1990 recession and -0.9% in 1996 - compared to falls of 15%, 17% and 18% in equities throughout 1987, 1995 and 2003 respectively).

Resulting from a tightening in the housing demand and supply balance, residential prices and rents continue to rise, providing greater total returns on residential property.

In the last quarter 2007, the Australian average median house price was 2.7% higher compared with the June quarter and 7.5% higher than the September quarter 2006 (refer graph 2).

With underlying demand for new housing across the country just under 170,000 (starts each year), “we need to build about 450 new homes across Australia every single day” (Matusik, October 2007).

As household sizes (number of people living in each home) continue to decrease and net international migration grows, the underlying demand for housing is boosted.

However with current issues such as rising interest rates, construction cost increases and limited land availability, the recovery in building starts has been delayed, creating upward pressure on housing markets. Assuming the current housing crisis continues across Australia, a shortage of near 200,000 homes is predicted by 2009-10.

Melbourne

Melbourne’s population growth, driven largely by immigration, is placing direct pressure on underlying demand for housing; and residential property prices are experiencing greater growth than they have in years. Median house prices in Melbourne increased by 24.7% in the year to December 2007, with the greatest increases seen in inner and middle ring suburbs.

Falling to a 25-year low in September 2007, Melbourne’s vacancy rate currently sits at 1.2% (down from 1.6% in July 2007).

Brisbane

According to the latest census, Brisbane’s population increased by 11%, or 177,323 people from 2001-2006, making it the fastest growing capital city in Australia.

Strong population growth in the south-east region of QLD coupled with the limited supply of land and strong state economy, Brisbane is expected to continue to perform well over the next few years.

The Brisbane rental market has continued to tighten with an increase in advertised rents of 18% over the past 12 months and a current vacancy rate of 1.6%.

Adelaide

With the resources boom, Defence Contracts and population growth fuelling the property market, Adelaide is likely to continue to perform well over 2008.

The above average increase in dwelling values during 2007 is unlikely to be sustained, however Adelaide is predicted to maintain a growth rate higher than other capital citiies due to its high level of affordability and the increasing resource-related activity taking place in the state.

Adelaide is currently enjoying the lowest rental vacancy rate (1.1%) of all state capitals. The virtually non-existent vacancy has led to a 22% increase in advertised rents to the September quarter 2007.

Pacific Eastcoast History File: Rental performance

“SXY” - Yarra Street, South Yarra:Apartment 705 - one bedroom purchased on 6th March 2006, and settled on 21 December 2007. At time of purchase the weekly rent was estimated to be $325 per week.

Following settlement a 12 month tenancy has been signed at a rent of $360 per week (5% gross return) Apartment 603 - two bedroom apartment purchased on 7 March 2006, and settled on 19 December 2007. At time of purchase the weekly rent was estimated to be $480 per week. Following settlement as 12 month tenancy has been signed at a rent of $550 per week (5.2% gross return)

Sales performance

“Saville Pandanas” Apartment 903 - one bedroom apartment purchased on 3rd November 2005 for $305,950. Due to settle in February 2008, Heran Todd White valued this apartment in January 2008 at $350,000 (14.3% capital growth).

“Morphis Coogee”, Apartment 4 - two bedroom apartment purchased unrenovated under the “Morphis scheme” in May 2006 for $552,000 (unrenovated price of $460,000 and renovation costs of $92,000). After a full internal and external renovation, this apartment was valued at $640,000 (16% capital gain over the 16 week renovation period) and is currently rented at 5.4% gross.

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