Is property hitting the brakes?

Despite all the jawboning from the Reserve Bank of Australia warning property investors that prices don’t always go up, they keep going up.

Well they do in Sydney and Melbourne and to a lesser extent Brisbane.

Property monitors RP Data have recorded a solid 1 per cent lift in October prices. However, without the big rises in eastern seaboard cities they actually would have fallen nationally. So what’s happening?

The ongoing strength in home prices, particularly in Sydney, poses a problem for the RBA because it is counting on the strength in the home construction sector to counter-balance to declining investment in resources, as the mining boom comes off the boil.

What it doesn’t want is too many tax-driven investors coming up empty on their property investments and retreating from the sector en-mass thus triggering a collapse of confidence and prices . . . and indirectly handing the banking system a kick in the bad debt department.

This week saw the chief executive of ANZ Bank’s Australian arm, Phil Chronican, stating he could understand why the RBA was looking at imposing some type of curb on property investment, but said he thought it was time for a larger debate around the effectiveness of tax concessions as they affected property in competition with other investments.

There is no doubt that pent-up demand for housing, low vacancy rates and strong rental yields have increased the attractiveness of property as an investment class. In addition substantial cuts to interest rates continue to drive activity. In Sydney.

According to CommSec total returns (capital appreciation plus rental yields) on homes have lifted by almost 18 per cent over the past year, with nearly 13 per cent gains in Melbourne. Of course if the capital gains disappear those returns would look comparatively skinny especially at current price levels.

So can property keep going up? CommSec believes that supply will catch up with demand in 2015 and price gains will become more subdued, but no bust.

That scenario may be happening faster than it thinks. Despite a good start to the Spring selling season observers are noting some vendor pricing is appears to be too optimistic. This weekend auctions in Sydney will be a good test of that theory with a massive 900 homes offered for sale.

Surprisingly September’s building approval numbers saw a sharp fall-off with total dwelling approvals falling 11 per cent – more than the expected 1 per cent decline.

One month’s figures are not a trendline in this particular market volatile – where big projects can distort the numbers – but the raw data saw apartment and townhouse approvals fall 21.5 per cent, compared with an 8.2 per cent rise in August. In Victoria, where apartment ­construction has led the country, apartment approvals fell a seasonally adjusted 26.2 per cent in the month.

CommSec quoted the well-respected Saul Estake form Bank America Merrill Lynch Australia and he seemed to be of the opinion that the trend to building apartments in preference to standalone homes was creating a distortion in the numbers. He regarded the national fall in multi-residential dwellings of 34.2 per cent compared with a year ago was “a big surprise.”

What this means is the longer-term trend figures become more important and these may be leveling off as the housing industry “reaches its current capacity constraints.”

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