What Investors Should Watch For?

By John Lindeman

The housing market is likely to slow down as the Reserve Bank is forced to put the brakes on a rapidly overheating borrower market. Once borrowers have got their confidence back, it takes a number of rate hikes to knock it out of them again and the RBA usually sends the cash rate too high or too low in the process, overshooting the mark. The current rate, as the RBA has recently acknowledged, is simply too low to be sustainable.

When will rates rise, and by how much?  Watch for the June Quarter Gross domestic Product figures to be released early September. If these show that the economy is not contracting, a rise in the Cash Rate is inevitable later this year.

As the graph shows, the RBA never raises the rate just once, so if the rate is going to go up, investors should be prepared for a series of rises over the end of this year and into the next, looking for a pause in the Cash Rate next year when it reaches 4% to 5%.

Apart from the risk to any budding economic growth that such a rise might bring with it, what should investors watch for in the housing market? The answer is brutally simple – avoid those areas which have seen heavy first home buyer activity, as these are the areas most at risk if rates rise. Even a small increase in foreclosures can signify a large increase in listings, as disillusioned first home buyers bail out of the housing market.

There is no way this will precipitate a crash in housing prices in the fashion of the USA housing market following the sub-prime lending crisis, as in Australia we have an overall shortage of housing. Any reduction in housing prices in some areas is likely to be short lived and will be compensated by increases in housing rentals elsewhere.

So where should investors look to find growth in market? One certain option is to look at the areas which will benefit from the billions to be spent in the various Building Australia infrastructure development schemes announced earlier this year. It has been a generation since we have had a government so committed to infrastructure development and investors stand to gain the benefits.
For example, the development of Newcastle port facilities and extension of the Hunter Valley line comes in sync with planned development of the coal fields in the Gunnedah Basin. This is already having an impact on the residential housing market in the local towns, especially Quirindi, Narrabri and Gunnedah with growth of over 5% already occurring in the areas around Singleton and Maitland.

In Victoria a highly significant project is the $4.3 billion Regional Rail Express network, which will build dedicated express train service lines over the next four years from Victoria’s three major regional centres Geelong, Ballarat and Bendigo, all the way into the CBD, putting them within easy commuter access with the city.

The impacts on household growth in these cities will be huge. The State Government expects their combined population of 350,000 to grow by 236,000 or around 67% by 2036.

The graph shows that the median value of a house in Geelong is only 66% that of a Melbourne house, while the median value in Ballarat or Bendigo is less than half that of Melbourne. The housing markets in these areas are already showing signs of responding to this opportunity.

Many of Geelong’s suburbs grew by over 12% in the last year, and in the last three months Bendigo house prices have jumped 4%. Astute investors are snapping up bargains near the current and proposed stations on the three new express lines and they will do extremely well.

These are just two examples of how investors can follow the infrastructure yellow brick road to find real future growth opportunities. Interest rates will always go up and down, but investment opportunities such as these come but once in a lifetime. 

This article was written by John Lindeman, Head of Research at Residex and authors the quarterly Residex Report and Best Rent Reports - two of Australia’s most highly regarded regular publications on the nature and trends of the residential housing market in Australia. He is a recognised authority on the housing market, its influences and likely movements, delivering keynote speeches and presentations at major industry events and initiatives.