Affordability improves nationwide

Housing in Australia is at its most affordable level in seven years, according to the Housing Industry Association (HIA).
The HIA-CBA First Home Buyer Affordability Index showed there was a 14.6 per cent improvement in affordability for the March 2009 quarter, which followed a 40 per cent surge at the end of 2008.
Over the same period the average home loan repayment fell by 11 per cent to $1831 per month, compared to the previous amount of $2056.
The HIA attributes the current affordability of housing to the boost to the First Home Owners Grant, record low interest rates and relatively stable house prices.
Affordability improved in all capital cities and regional areas in the March 2009 quarter, with the largest improvement found in Hobart, Adelaide and Sydney.
Aside from the current economic climate, the HIA's chief executive Chris Lamont says for many homebuyers there has never been a better time to buy.
"The boosted grant, which now provides a minimum of $21,000 for new homes across Australia along with the significant builder discounts on house-and-land packages, is increasing the number of first homebuyers entering the new home market."
Lamont notes that the grant has created and secured jobs in the residential construction sector.
"It is also assisting in boosting the supply of housing which we know to be grossly short of the nation's requirements."
Housing affordability is expected to improve even further for the June quarter.
Editor of Australian Property Investor magazine Eynas Brodie says it's pleasing to see the door opening wider for people who want to enter the housing market but haven't been able to in recent times.

How to profit from the next property boom

Property investors need to plan ahead in order to take advantage of the next upturn in the property cycle, according to quantity surveying firm Asset Economics.
"Property booms never last (and) neither do property busts," the firm says in its latest newsletter.
To take advantage of the next boom, investors need to buy for long-term capital growth and anticipate the ripple effect.
"As our next property cycle comes around, it will be the most desirable, the most sought-after areas that start growing first," Asset Economics says. "These are usually the most affluent areas."
From there, capital growth starts to "ripple outwards" through adjoining suburbs, it adds.
Asset Economics has identified a number of suburbs around southeast Queensland that it says will be among the first to move in a positive direction. These are:
- Bayside areas east of Oxley Avenue in Redcliffe, Woody Point and Scarborough;
- Stafford (must have city views), Kelvin Grove and The Grange in northern Brisbane;
- Murarrie, Carina and Mount Gravatt in Brisbane's east;
- Fairfield and Greenslopes on Brisbane's southside;
- Indooroopilly and Chelmer in the city's west;
- All areas east of the Nicklin Way and the Sunshine Motorway on the Sunshine Coast, including Mooloolaba, Buddina and Currimundi;
- Southport and Hope Island on the Gold Coast.

Changes to First Homers Grant to Affect Prices

If the First Home Owners Boost ends after the June 30 deadline it's likely property prices will be pushed up in the short term, according to new research.
The boost has been responsible for increased activity in the residential property market since it was introduced in October last year.
Research conducted by BIS Shrapnel for QBE LMI shows that if it's extended beyond June 30, first homebuyer demand could peak at 180,000 loans next year.
But if it isn't continued demand for new and established housing will be pulled forward, resulting in short term rises in property prices of five per cent.
The amount of loans taken out by first homebuyers has been on the rise as current conditions provide incentive, including the boost to the grant, rising rents and lower interest rates.
First homebuyers have also typically been borrowing more money, with research showing their average loan size has increased from $264,500 in October last year to $280,600 in February this year.
CEO of QBE LMI Ian Graham warns government incentives alone shouldn't be the main motivation for buying.
"First homebuyers, irrespective of whether the first homeowners grant boost scheme is extended or not, need to ask whether they are buying for the right reasons as a home purchase or mortgage is a long term commitment and they need to be able to service interest rate increases in the future," he says.
"This is particularly important if the boost scheme is not extended beyond June 30, 2009, as this may result in a hasty decision by first homebuyers on their choice and the price they are prepared to pay for their home."

Short term relief for mortgage stress

Lower interest rates and government payments have relieved mortgage stress in Australia but it’s predicted to rise again later in the year.
The number of households experiencing mortgage stress fell 5.5 per cent from February to March 2009 to reach 587,000, according to the Fujitsu Mortgage Stress-O-Meter monthly update.
The number of severe stressed households fell 36 per cent, with 96,500 households still at risk or having to sell up or lose their homes.
Mild stress increased 6.2 per cent, explained by the fall in severe stress, as well as lower incomes due to the reduction of overtime hours and falling investment incomes.
Martin North of Fujitsu Consulting says falling interest rates and government intervention have significantly improved mortgage stress levels.
"This is good news in the short term and the additional government payments will reinforce this trend over the next couple of months," he says.
"We still expect to see a significant rise in mortgage stress later in the year, as unemployment continues to bite."
"Recent interventions have definitely postponed the inevitable but for example, if unemployment reached 7.5 per cent by December 2009 this would translate into over 1.2 million households experiencing some degree of stress, of which over 460,000 would be close to the edge."
The report drew attention to first homebuyers, pointing out they're still entering the market with small deposits. North says this is a concern because they're left with very little protection against falling house prices and potential unemployment.
"If unemployment were to rise by 7.5 per cent by December, up to one-third of the 125,000 first-time buyers who entered the market in the last 12 months could find themselves in mortgage stress," he says.
"It would be wise to ensure prospective purchasers had a

Australian Outlook by Maquarie Economics

! With no data released in Australia this week, the Reserve Bank of Australia
(RBA) provided an update on how they feel about the current health of the
Australian economy and financial system. The Financial Stability Review was
released, while head of economic analysis, Anthony Richards, spoke on the
‘Conditions and prospects in the housing sector’.
Impact
! Richards provided an optimistic outlook on the Australian housing market over
the medium term. He argues that the massive degree of policy stimulus
provided in the past six months has contributed to far more accommodative
conditions in the housing market, resulting in a pick up in interest from
potential home-buyers, as well as easier conditions for existing home-owners.
! He also addressed some key features that distinguish the Australian housing
market from those of the US and UK. Meanwhile the Financial Stability
Review provided a relatively upbeat assessment of the Australian financial
system.
Analysis
! Housing finance commitments have increased markedly in the past few
months, driven by dramatic improvements in housing affordability. While this
improvement has mostly been focussed on approvals for existing homes, the
RBA liaison with homebuilders has shown some evidence of a pick-up in
construction activity as well. Furthermore, improvements in auction clearance
rates compared to this time last year are also showing a pick-up in demand
for housing.
! Indeed this week’s speech by the RBA’s head of economic analysis, Anthony
Richards, highlights these signs of life in the Australian housing market, which
is likely to be the key sector contributing to a turnaround in fortunes for the
domestic economy in the year ahead.
! Richards also notes some key factors that differentiate the Australian housing
market from those in the US and UK, which have experienced sharply falling
house prices over the past year.
! The first key point is that Australian monetary policy has been far more
effective in gaining traction on market rates compared to global peers. The
RBA has lowered the official cash rate by 400bp since September last year.
Since then, standard variable mortgage rates have come down by 375bp, and
the average interest rate paid on all outstanding loans (an average of fixed
and floating) has come down by 265bp.
! As a result, affordability has improved substantially in Australia, which is
contributing to stronger demand, particularly at the lower end of the housing
market. Indeed, as the second chart opposite shows, while house prices have
fallen sharply in the most expensive suburbs, prices in other suburbs (which
are a much larger proportion of total housing stock) have held up reasonably
well.
! In contrast, central banks in the UK and US have cut official rates by even
more than the RBA, but rates paid by mortgage holders have fallen by less
than 200bp in the UK and less than 50bp in th
! The final key factor addressed in the speech was a
comparison of lending standards between Australia and
the US.
! The comparison of non-performing loans in the US and
Australia is stark. Most importantly, is that even during
the boom years, Australian lending standards were
nowhere near as relaxed as in the US, with the ratio of
US non-performing loans much higher, even when both
economies were growing strongly.
! Subsequently, Richards explicitly stated that he does not
believe that the current easier conditions in Australia will
lead to an expansion of riskier lending practices. This is
due to a recent tightening of lending standards and a
reduction in maximum loan-to-value ratios.
! Furthermore, Richards highlights that ‘many of the
lenders that might have been most likely to write riskier
loans have scaled back their activity’.
! Indeed, this theme was also prevalent in the RBA’s semiannual
Financial Stability Review, which provided a
positive assessment of the Australian financial system,
despite global financial market instability.
Lending practices have been far more stringent in
AustraliaBanks' non-performing housing loans as % of on balance sheet
loans.

! While the banking system is no doubt facing some of the
most difficult conditions for some time, the RBA report
highlights that the Australian banks continue to find
themselves well placed to weather the global financial
storm, as they considerably outperform global peers.
! The RBA highlighted the key points of strength within the
Australian banking sector. These include strong
profitability, limited exposure to high risk securities,
strong capital positions and the maintenance of high
credit ratings by the major banks.
! Certainly, the key theme pushed by policymakers this
week is one of relative strength across both the housing
market and financial system in Australia.
! That said, we do not believe that too much can be read
into this positive rhetoric in regards to the outlook for
interest rates. While the housing market will be very
important in generating a turnaround in activity over the
medium term, the RBA will still be very concerned about
the worsening short-term outlook, as unemployment rises
and confidence levels remain fragilee US.

Prospects looking good for housing market

Investors don’t need to be convinced that the current residential property market will reap rewards, according to BIS Shrapnel senior economist Jason Anderson.
With rents high and continuing to grow, he says they can already see the benefits.
Speaking at a BIS Shrapnel business forecasting conference in Brisbane last week, Anderson forecasted rental growth would remain strong due to the ongoing undersupply of housing in Australia.
Rental rates have increased by 18 per cent over the past three years and he estimates they’ll rise by another 25 per cent over the next three years.
"Housing deficiency is surging and in terms of supply, things are going to get worse over the next two years," he says. "Demand will skyrocket and as long as demand continues, rents have to keep going up."
In addition to further rent hikes, Anderson anticipates house prices will experience solid growth over the next three years, with an average yearly growth of around five to six per cent.
Interest rates are also expected to remain low, making property more affordable and creating favourable conditions for investors to buy.
While there has been a lot of speculation that rising unemployment will have a detrimental impact on the property market, Anderson firmly believes that won't be the case because interest rate cuts will outweigh any potential negative effects of unemployment. He notes that the vast majority of the community won't be impacted by unemployment, while significantly more will be influenced by a drop in mortgage rates.
"The rise in unemployment will fortunately be limited to perhaps three to five per cent of all households," he says. "That leaves the other 95 to 97 per cent still thinking about their housing needs without the constraint of unemployment. Even if half of those act in a way that's more cautious because they fear unemployment, it still leaves a vast majority that will respond to low interest rates and strong growth in rent. Both of those 'forces' are supportive towards increases in property prices."
Anderson points to history to provide evidence that unemployment won't cause property prices to plummet and says it's entirely possible for rents and unemployment to rise at the same time.
"It's false to say property prices will fall because unemployment is going up," he says. "The last peak in unemployment in 1992 didn't trigger a property market meltdown."
Unemployment rose by 360,000 people during 1990/91 and 1991/92, but dwelling approvals showed a rise of 20 per cent in 1991/92 and house prices grew by an average of five per cent per year during 1991/92 and 1992/93.
The experience of the early 1990s was that investors continued to buy property despite the absence of strong property price growth, showing that the attraction of declining interest rates offset the impact of unemployment. This time around Anderson says it should be even better because interest rates have been cut well ahead of evidence of rising unemployment.
According to anecdotal evidence, he says while first homebuyers are still more active, there's already a groundswell of investor demand.
"If that's the case and it continues to build over the next month, that's a pretty early recovery in investor demand," he says. In previous cycles, Anderson notes investors have come back into the market later rather than sooner.
Strong rental growth is one reason why investors are starting to buy again and the other is that interest rates have been cut earlier and more substantially that what has been seen in previous cycles.
BIS Shrapnel's managing director Robert Mellor, also speaking at the conference, said he expected the Reserve Bank of Australia (RBA) to continue to take a wait-and-see approach to interest rates. He believes it will leave interest rates as they are for the next two to three months and will likely lower it by half a per cent in the second half of this year.
Looking to the future, he says the RBA will slowly edge up rates.
"There will be a slight upward movement in rates in the latter half of 2010 and more in 2011 and 2012," he says.
Anderson forecasts rates will rise after unemployment peaks, which would probably happen by the middle of next year.
"It will be later rather than sooner and I think it will be the first half of 2010." Anderson says investing in the residential property market is still a good prospect for the medium term. With prices likely to increase by about five or six per cent per year, he says you'll be investing more for yields than capital gain.
"Yields are increasing at a significant rate and it's the cash flow benefit which should be the focus in a world where interest rates are low. In the medium term it (residential property) will be a good investment for those reasons."
Anderson believes the argument for buying property under these circumstances is compelling and as such, there's going to be a much more rapid response from investors.
"The economy needs the housing sector to perform well, to offset the decline in business investment," he says.
While investors don't need to be told that the current market provides opportunities for good investments, Anderson says upgraders do need convincing that the market is good so that the middle part can start to pick up.

Variable rates tipped between 4 & 5 per cent

Mortgage Choice managing director Paul Lahiff believes official interest rates will bottom out between two per cent and 2.5 per cent, putting variable rates into “the high fours, low fives”.
In an exclusive web video interview with API, Lahiff says that as a property investor himself, he won’t be thinking about fixing his interest rates until later this year.
“The last quarter of calendar (year) ’09, I’d be starting to think about it,” he says. “As I’m a property investor myself, I wouldn’t be doing anything much before September or October.”
Lahiff says he feels the Australian property market is in much better shape than some markets overseas.
“We don’t have enough houses being built, the rental vacancy rates are certainly a lot lower here than overseas and I think largely that Australian lenders didn’t really overcommit people, so in comparison to the US we had none of the damage that was created over there by lending to people who really couldn’t afford to repay the amount of mortgage (they took out),” he says