"As I see it, when we feel wealthy many of us like trading up and buying a bigger, more expensive home - even if we don’t really need more space."
What Australians' reluctance to move means for property investors: Michael Yardney
How do you like change? If you’re like most Australians, you probably prefer the certainty of the status quo, but there are some important changes taking place in our property markets that all investors must understand.
You see, there a number of interesting things going on in our property markets at present, and a lot has to do with our levels of confidence.
We’re not moving house as often.
The average Australian home owner now stay put for nine years, according to data to RP Data. That's up from an average of 7.6 years a few decades ago. And it’s much the same for apartments – the average hold period has risen to 7.7 years, from about six years in 2000.
RP Data research analyst Cameron Kusher suggests: "It appears that home owners are increasingly likely to keep their current properties rather than upgrade due to the significant cost."
He believes one reason for the drop in housing turnover is that affordability remains an obstacle for many would-be buyers, curbing potential demand. Kusher also blames high stamp duty for making home owners less keen to change their residences.
I think there’s more to it than that.
As I see it, when we feel wealthy many of us like trading up and buying a bigger, more expensive home - even if we don’t really need more space. It’s a great feeling during property booms thinking our home, our castle, is increasing in value.
On the other hand, in our current markets where the price of the average Australian home is in some cases falling and at best remaining flat, we tend to stay put. And if we need to upgrade we’re more likely to renovate our existing dwelling.
According to RPData Melbourne led the nation in the average time people remain in their houses before selling (10.4 years up from 9.9 years 12 months earlier.)
In Sydney, the average holding period was 9.8 years (up from 9.5 years 12 months ago) and over the same period. In Brisbane the average time increased to 9.1 years from 8.4 years. In Perth the hold time extended to an average of 7.9 years from 7.4 years, while in Canberra it extended to 8.7 years from 8.1 years.
We’re saving our pennies.
The other big change happening is that we’re saving, not spending. We’re paying down our credit card debts rather than using our homes like an ATM. And we’re renovating rather than moving house.
Property analyst Michael Matusik put it well when he said we are becoming more prudent.
But such a mindset comes at a cost. Property sales are down by a third against the past decade, and property values have fallen a bit.
Matusik explains that in addition to prudence, we are buying different things – services, not goods.
He suggests that maybe we already have many of the goods we really need, but when a society ages it uses more services. This is already happening and is best shown in the health sector, where new employment in this industry is up 260,000 since 2008. This is twice as many new jobs as in mining!
It’s affecting our construction industry
Despite Australia’s population growth picking up and increasing by 302,565 people last year (a growth rate of 1.4%, which is higher than most developed countries) our prudence and the fact that we are staying where we are has put our housing construction industry into a tailspin.
The HIA recently reported that housing starts – a forward-looking indicator of building – plunged 12.6% in the first quarter of 2012 to the lowest level in years. This makes housing construction the worst-performing sector of the economy, and this is unlikely to pick up this year despite recent falls in interest rates.
It’s also affecting property investment sentiment.
In a recent report entitled Households' Appetite for Financial Risk the Reserve Bank noted a change in household behaviour towards investments, including property.
It commented: "Surveys show a significant increase in the share of people nominating deposits and paying down debt as the 'wisest place' for saving and a decline in the share nominating equities and real estate."
So what should a property investor do?
Property cycles, in fact all economic cycles, are driven by fear and greed. While it’s important not to trivialise the extent of the changes that are occurring, it’s equally important to remember that every cycle brings downturns and times of opportunity.
In my experience, difficult economic times offer outstanding opportunities for those who are prepared.
If the “end of the world as we know it” merchants are wrong – and they always are – then your decision to take prudent action when all around you are fearful and to invest when everyone else thinks it's crazy will prove to be the kind of insight that truly great investors apply.I don’t see us having a property market crash in Australia because our economy is doing well, our interest rates are relatively low, our population is growing and unemployment is low, we have a sound banking system and we are at the beginning of a protracted prosperous period underpinned by our resources sector.
Unfortunately the current world economic problems won’t go away quickly, and we are entering a new era in the financial markets. But this is not a time to panic or make rash emotional decisions. It is a time to learn from history and control your financial future by investing wisely.
And guess what? While the optimists, pessimists and realists will argue whether the glass is half full or empty, the opportunist are going to drink it!
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.