Look Through The Right Window

DECLINING building approvals and first-home-buyer affordability paint a sorry picture for property as an investment. But these figures represent only a fraction of the market.

At face value, the numbers do not look good. The Bureau of Statistics reports that building approvals for private-sector housing dropped 3.4 per cent from March 2006 to March 2007. Approvals for apartments fell 2.7 per cent.

Housing affordability shows a similar trend, with the HIA/Commonwealth Bank Housing Affordability Index falling

10.5 per cent in the year to March 2007.

These indicators are widely reported as being a sign of doom and gloom for the property market. From a broad economic standpoint, this is absolutely right. Housing development creates substantial employment in the manufacturing, wholesale, retail and labour sectors. It also bolsters the banking sector and gives lenders a major revenue base to pursue other interests. Lending finance for owner occupation was $14.4 billion in March this year alone.

However, in reality, new housing is concentrated in the central business district and urban fringes. New apartments have burgeoned in the CBD over the past decade, but they still account for a small proportion of Melbournes properties because the numbers started from a very low base. New houses are spread over a diverse area, but their primary appeal is to first-home buyers, not investors or people upgrading.

As a result, building approval and first-home-buyer affordability figures apply only to a small proportion of the market. They do not apply to the inner and middle suburbs, where most housing is bought and sold second-hand. These suburbs are sought out mainly by people who are upgrading or downsizing their family homes, or who are buying purely as an investment.

Common sense tells us that, because the inner and middle suburbs have only a limited amount of land for development, second-hand property makes up the vast majority of the overall market.

For this sector of the market, we need to look at different economic indicators. The first is supply, illustrated by land values. Because there is little land left for development in the inner and middle suburbs where second-hand property dominates, demand generally outstrips supply.

That is why land values in areas such as Carlton North and South Yarra are about $3000 a square metre, compared with just $100 to $300 in outlying areas such as Werribee and Roxburgh Park.

In areas of high land value, the growth rate for property values tends to be significantly higher than in areas of lower land value. According to the Real Estate Institute of Victoria, median values in inner Melbourne grew by 15.3 per cent in the year to March 2007, compared with just 5.3 per cent in newer suburbs.

The second indicator is demand, illustrated by the proportions of owner occupation and investor ownership. In suburbs such as Carlton North and South Yarra, the proportion of owner-occupiers and investors is a relatively even split, indicating a constantly strong level of demand. By contrast, new housing areas such as Caroline Springs and Roxburgh Park are 90 per cent owner-occupied. Demand in these areas fluctuates along with movements in interest rates and building costs.

In addition, of those who own property in Carlton North and South Yarra, 60 to 70 per cent own their properties outright. In comparison, the figure is only 25 per cent in Caroline Springs and Roxburgh Park.

This means many owners in the second-hand market have significant equity, which increases their purchasing power. The more purchasing power they have, the greater the competition and the higher the rate of capital appreciation.

In reality, it is the second-hand property market that is showing the higher and more consistent rate of capital growth. If this is the case, why dont the headlines pay attention to this sector of the market? It is simple — second-hand property is a result, not a cause, of the nations economic performance.

The key measure of success in a capitalist society is the rate of growth in gross domestic product. The new-property sector is a major contributor to GDP by way of building materials and trade services. The second-hand property sector, by contrast, contributes almost nothing.

It is clear that, when assessing the performance of the property market as a whole, using one set of figures in isolation will not provide an accurate view of what is really going on.

The economic indicators that reflect the new housing sector are different from the indicators that reflect the second-hand sector.

Next time youre looking at the latest economic indicators, make sure you apply them to the relevant market sector.

You may find it has no impact on your decision making.

Mark Armstrong and David Johnston are directors of Property Planning Australia.

www.propertyplanning.com.au

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