Consumer sentiment up and home prices rising

Lower interest rates and lower prices have improved housing affordability.  CommSec reports that rate cuts have helped to lift consumer sentiment about buying a dwelling, according to the Westpac Melbourne Institute Index of Consumer Sentiment, with improvement last month in the “time to buy a dwelling” index as well as the “time to buy a car” index.

However, concerns about the economic outlook and job security remain at the forefront; and overall sentiment sits at 1.7% below the level recorded in October last year, despite a 125-basis-point reduction in the cash rate that has brought the average standard variable mortgage rates down by nearly one percentage point.

But an interesting perspective comes this week from Crikey –  while we appear to be plagued by low levels of confidence (and could well do without the incessant negativity of federal politics), Aussies are buying new cars in near record numbers, travelling overseas – also in near-record numbers – and buying over the internet, both at home and abroad, in growing quantities.

And somehow, while managing to consume at fairly high levels, we are saving at rates of 9-10% a year.

There are many factors at play here, and clearly we need more solid ground to stand on; but could it be that we just don’t know how well off we are?

There is also good news on the housing front, with rising home prices and a pick-up in new home sales.

The back-to-back lift in house prices is encouraging.  Across Australia house prices have risen by 1.6% over the past two months, according to RP Data, and while that may not sound all that exciting, it is the biggest two-monthly increase in property prices in over two years and a welcome turn from a period of sustained weakness.

The ABS house price data, out this week too, finds a similar trend, with established house prices up 0.5% over the last three months, against an annual decline of 2.1% nationally.

These results highlight the underlying strength in residential property and that the market appears to have bottomed out.

In addition, housing activity has shown signs of improving, with new home sales rising for the third consecutive month.  It must be stressed that these gains come after new home sales reached a decade low earlier this year.  So they are off a low base.

It is clear that the sector is crawling off of the floor (basement, really), however the fundamentals for housing remain solid and while the sector is likely to remain in a period of consolidation in the near term, there may be light at the end of the tunnel.

Importantly, not only has there been a modest pick-up in sales/price activity across the sector, but rental vacancy rates remain strong, rents continue to rise and many investment properties are starting to show gross rental yields well into the 5% range. 

While builders are likely to continue to compete hard for available work, home owners are likely to see the value of their homes rise over the year.

Many forecasters are now tipping prices to rise over the remainder of calendar 2012.  We think – assuming one last drop of 0.25 percentage points in the cash rate later this year – that a rise of 2% or 3% in the price of generic housing across Australia over the next five months isn’t out of the question.

What to buy when buying property

Rules – I’ve got 10 of them when it comes to successful investment buying.  Here’s just a sample:

Rule 1: Select new or at least recently renovated property to maximise depreciation/tax return and gross rental returns.

Rule 2: Choose a small or multi-staged development – preferably under 50 dwellings; large properties should not be ruled out, but should have substantial points of difference.

Rule 3: Buy in a strong location – “infill” highly favoured, with high existing amenity; a great “walk-score” and more importantly, potential for above average mid-to-long term capital growth.

Next Wednesday’s Missive will elaborate – so pencil in the read.

But if you can’t wait and you’d like to register for a free copy of my presentation, What to buy – 10 rules for better investment buying, just click here.

Michael Matusik is the founder of Matusik Property Insights, which has helped over 550 new residential projects come to fruition.  Read Michael's blog or follow him on Twitter or connect via LinkedIn.