2009: Property Market “wrap up”..

by Alana Elderfield, on 8th December, 2009 •

Hi all..

Wanted to share with you my summary of 2009: the year that was, which I wrote and shared with my clients locally for early December. I’ve been writing monthly market updates, but never sharing them.. and thought this might be the ideal platform to do so.. and hopefully receive in return some feedback on whether you agree with my summary, what you are noticing in your own local market and how you communicate that to your market place.. and basically any general thoughts you’d like to share with the Gen-Y community.

I always enjoy hearing the Gen-Y market reflections.. given that we always seem to be so upbeat, positive and perhaps not as tainted by past experiences as our older generations.

2009:  The year that was..

THE FACTS:

• The Reserve Bank has lifted rates for the second straight month – the first back-to-back rate hike since March 2008. The cash rate was lifted by 25 basis points to 3.50 per cent. Rates had stood at a 49-year low of 3.00 per cent before the decision in October to lift the cash rate.

• Even with the latest rate rise, monthly mortgage payments are still, on average, about 25 to 30 percent lower than what they were in August last year when variable mortgage rates were averaging 9.6 percent.

• Residential property prices in Australia increased 3.7 per cent in September to a six year high, heightening the likelihood of a third consecutive rate hike this month (December).

The two interest rate rises seen over the last quarter in consecutive months, is consistent with the view that, while the economic recovery is still patchy, it is now solidly underway.

After a very bumpy start to the year in the wake of the global financial crisis, with a substantial reduction in property values greater than we’d seen before on the northern beaches, our market has continued to gain momentum on a steady basis until the last quarter of 2009, when conditions suddenly improved beyond any of our expectations, even beyond government budget forecasts.

Early November, the Federal Government upgraded growth expectations for the Australian economy, forecasting growth of 1.5 per cent in the 2009-10 year, up from a forecast of a 0.5 per cent contraction made in the May budget. The Government also slashed its projections for the unemployment rate, which is now expected to be 6.75 per cent by next June, down from the 8.25 per cent forecast in the budget. The jobless rate is currently at 5.7 per cent.

The economy’s unexpectedly strong performance during and following the global financial crisis appears to have been fuelled in part by record-low interest rates that the RBA is now nudging higher to prevent inflation picking up.

Even after the two recent RBA rises, our market continues to prosper, and we are currently positioned with pressure on the market to begin to increase in value due to the current lack of stock on the market, and increasing number of buyers entering the market. The only factor appearing to hold the market back from increasing at present is the potential and reality that interest rates may again increase throughout 2010.

If the RBA were to continue to ‘normalise’ rate settings over 2010, there is a good chance that our market will absorb the impact and be able to sustain our recovery and potential growth, so long as they continue to move in 25 basis point increments. At this point in the cycle, a move of 25 basis points strikes a nice balance – it edges the cash rate back to more normal levels without threatening the economic recovery. The RBA arguably went too far with rate hikes in 2007 and early 2008, and a repeat could have a seriously detrimental impact on our market.

Without a crystal ball, it is near impossible to predict precisely how the market will change over the first two quarters of 2010. It has been widely suggested that the cash rate will be at 4.0 percent by February of next year and by June the yield curve suggests a cash rate of about 4.50 to 4.75 percent. The Reserve Bank has previously indicated that the “normal” or neutral cash rate is around 5.00 per cent. A neutral cash rate means that monetary policy is neither expansionary nor contractionary, so even at a cash rate of 4.75 percent, we are outside of, and below what is to be considered as a neutral stance from the RBA.