The hottest topics in real estate
It is a dynamic time in Australian real estate at the moment. Various commentators have expressed a diverse range of views and opinions regarding the market. Below are some of my thoughts on the hot topics surrounding Australian real estate.
1. Foreign investment
The impact of foreign investment on the price of Australian real estate continues to be the subject of debate. Some argue that Chinese investment, in particular, is responsible for affordability issues in certain markets, while others argue that the impact is insignificant.
Statistics from the Foreign Investment Review Board (FIRB) indicate that investors from China received the highest number of approvals for Australian real estate purchases in the 2013/14 financial year. However, this is not an accurate representation of the real amount of investment from China. There is an important distinction between approvals and purchases. Many foreign investors receive approval, but decide not to proceed with the purchase. It is difficult to determine exactly how many foreign investment approvals turn into actual purchases. The RBA has estimated that the number of purchases is as few as half that of approvals.
People from many countries are interested in Australian property. The Century 21 Australian website sees large amounts of interest from all over the world, including developing nations. Countries that are historically associated with foreign investment in Australian real estate (such as the US, UK and New Zealand) still rank higher than China as a source of overseas visitors to Century 21’s website.
I believe that on the whole, foreign investment is beneficial to the Australian property market. The current regulations encourage foreign buyers to purchase new homes rather than existing ones. This means that foreign investment helps to expand the supply of housing in Australia; something that I consider of vital importance to the continued strength and success of the property market.
2. Picking the market
The notion of ‘’waiting to buy’’ until prices drop and then riding the next cycle to its peak might bring dollar signs to many investors’ eyes. However, in my opinion, this strategy is fraught with difficulty. When an investor tries to make a profit in a short amount of time from the real estate market, they may be adding extra risk to their plan. Not only do they have to pick the ideal time to buy a property, they also have to pick the right time to sell. In addition, transaction costs such as stamp duty can reduce profits substantially.
Another issue is that there are many property markets in Australia and they are not all moving at the same pace. Sydney and Melbourne have had a strong run over the last three years, but the other capital cities have not had the same experience. According to CoreLogic RP Data’s June Hedonic Home Value Index Results, price growth in all capital cities other than Sydney and Melbourne has been less than 13% in total since May 2012.
To try and pick which property market will perform best over the short term is complicated. Not only do different areas grow at different rates, but growth will also be dependent on other factors such as local economic activity, infrastructure, access to employment, and housing supply.
I believe that if buyers try and time their purchase to coincide with the bottom of the next downturn in the housing market, they could end up missing out altogether. In my opinion, investing in real estate over a longer period – rather than one or two years – makes more sense. This may help investors minimise their exposure to short term volatility and the associated risks.
In recent months, there have been a number of media reports surrounding underquoting. Understandably, any case of underquoting is a serious issue, particularly where it affects buyers struggling to enter the market. Underquoting occurs when an agent advertises a property price which is less than the agent’s estimated sale price as per the agency agreement. This is done in an attempt to stir up interest for a property by luring potential buyers on the false hopes of getting a bargain.
With demand running so high in many areas, it seems that this practice would add little benefit for the agent. The false hope of purchasing a property at a low price holds little sway in a market with such high demand.
It is important to remember that just because a property sells for more than the advertised price, a case of underquoting has not necessarily occurred. With the market running hot in many locations, it is increasingly difficult for agents to accurately predict what price a property will sell for. Agents do not set prices – the price is the point where a buyer and a seller agree to meet.