At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.

Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace. Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia’s terms of trade similarly peaked about six months ago, though they too remain high.

Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid 2011. Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.

In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.

Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent range.

As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.

Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.

In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.

Between January and March prices rose 0.9 per cent, the second consecutive quarter of growth, figures from property data provider Australian Property Monitors show.

The rise in prices over the last two quarters follows 15 straight months of falls, APM said. It also comes after a recent slump in building approvals, new home sales and lending.

Sydney’s housing shortage continued to bolster prices, which rose 1.4 per cent. Prices rose in all capital cities apart from Brisbane and Adelaide.

”Sydney was the standout performer in the unit market over the quarter with median unit prices rising by 2.5 per cent,” the APM economist Andrew Wilson said.

”Although the Melbourne market has been encouraging so far this year, this may prove to be short-lived if the Victorian economic performance continues to deteriorate.”

Other data continues to reveal mixed signals about the state of the property market.

This month another property analyst, RP Data, said the nation’s house prices had stayed flat over the same period. Melbourne’s fell 0.8 per cent but Sydney’s rose 1.1 per cent, RP Data said.

Auction clearance rates – another indicator of market health – have edged up this year, to around 59 per cent in both Sydney and Melbourne.

The more upbeat APM figures may not shift would-be home owners cautious about deciding when is a good time to buy.

”It is slow to steady. There’s no boom happening out there at the moment,” said Peter Thomas, the chief executive of the real estate agency Stockdale & Leggo.

”It certainly is a great time for buyers looking to purchase because they’re not under the pressure they were before and prices are stable,” Mr Thomas said.

The interest of buyers may be piqued on Tuesday, as many analysts expect the Reserve Bank will reduce interest rates.

Source : Simon Johanson, Sydney Morning Herald, 27 April 2012.

The behavioural tendency to extrapolate out from our immediate environs to the 8.5 million homes not located in our street leads to what psychologists might call an “anchoring bias”. It is no different to taking a micro-cap listed on the ASX and assuming that its returns are a good guide for the ASX All Ordinaries Index. If anything, individual homes, and specific suburbs, are even more heterogeneous.

This anchoring bias is arguably exacerbated by the fact that media organisations tend to focus the bulk of their efforts on covering $1 million-plus properties. But as my first chart below shows, these homes are irrelevant to 95% of all Australian property buyers. In particular, this diagram depicts the distribution of all sales over the last 12 months sorted by price. You can see that homes worth more than $1 million accounted for just 5.7% of total sales. For what it is worth, 90% of all Australian homes sales were for dwellings worth less than $800,000.

Click to enlarge

Anyone familiar with Australia’s housing market will intuit that this makes sense. The median dwelling price across all regions and property types was only $400,000 in December 2011. As I reported earlier in the week, Australia’s dwelling price-to-disposable household income ratio has now fallen 12% from a peak of 5.2 times to its current level of around 4.5 times.

Notwithstanding these facts, the property lift-outs in most newspapers and magazines dedicate an inordinate amount of space to the tiny minority of homes that trade for more than magical million-dollar mark.

We also know that by dint of their incomes, many of the analysts, economists, retail bankers, fund managers, investment bankers, accountants and financial planners who are called on to proffer comment on Australian house prices live in its more salubrious suburbs. In this respect, they are especially ill-placed to make inferences about the broader market.

This is likely why during downturns, such as in 2008 or 2011, one frequently finds investment bankers amongst the most “bearish” on conditions, with shrill claims they are down 10% to 30%. Ironically, the bankers are probably right if they are talking about Bellevue Hill, Bondi or Point Piper. But these statements are meaningless when it comes to the 450,000 homes that sell each year that are not located in these areas.

Of course, if the bankers’ communities were representative of the national market there would be no bias. But they are not. In fact, they have systematically underperformed during these corrections. My next chart shows the change in the value of homes situated in Australia’s “cheap”, “expensive”, and “mid-priced” suburbs since the housing market started flat-lining in April 2010. The chart beneath it presents the same data in a slightly different way by comparing Australia’s most expensive suburbs with all others.

Click to enlarge

Click to enlarge

If you happen to live in the most affordable 20% of suburbs, the value of your dwelling drifted by only a trivial 1.5% over the last 1.5 years. If you inhabited the price cohort above, which we classify as the “middle 60%” of suburbs ranked by price, your home’s value declined, on average, by a still fairly modest 3.7%.

It is, by way of contrast, the affluent who have suffered the worst. The most expensive 20% of suburbs across Australia have registered much more substantial price falls of about 6.5% over this period. And you can bet that if you broke this group down further, into, say, the dearest 10% of suburbs, you would find steeper losses again.

So what explains the inferior performance of Australia’s most expensive localities over the last year or two? I would argue one candidate is post-GFC structural adjustment.

The financial services industry, which was one of the principal drivers of demand in the dearest suburbs in Australia’s non-resources states, has now quite radically altered its future growth expectations.

The retail banks, investment banks, and stock broking firms are not shelling out anything like the pay packets that were prevalent in the period preceding 2007. The abysmal performance of the share market more generally has weighed heavily on the portfolios of wealthier individuals, who were often loaded up with equities by their advisors. If only they had more cash and fixed-income!

I would venture that this new “air pocket” in housing demand is most relevant to non-resources states, and to homes valued at between, say, $3 million and $10 million. Australia is still creating extraordinary wealth, with the list of billionaires now numbering in excess of 20. And private sector wages growth –  and total disposable household income growth – have been expanding at normal rates.

In the last one to two years, home buyers have received a tremendous affordability dividend, with the circa 4% decline in house prices accompanied by healthy disposable income growth of around 5% per annum. And now due to the RBA’s benevolence, mortgage rates are 0.4 percentage points lower than they were in October 2011.

So I suspect the housing market will remain healthy for most Australians. RP Data-Rismark’s new daily house price index, which is quoted by the ASX, has reported small capital gains over February and March. There is nevertheless likely to be a fundamental downward adjustment in that specialised $3 million to $10 million segment that was once dominated by financial services professionals.

On the other hand, it is questionable whether demand at the extreme heights of the market, where estates trade for more than $20 million, and buyers typically have little debt, will be much affected.

Australia will keep on producing individuals worth hundreds of millions, if not billions, of dollars. For the time being, however, fewer will do so in financial services.

Since the beginning of 2006, rental growth across the combined capital cities has outpaced the growth in home values. Over the period December 2005 to December 2011, capital city home values have increased by a total of 34.5% compared to rental rates having increased by a total of 46.8%. On an inflation adjusted basis, capital city home values have increased by 15.4% over the period and rental rates have increased by 27.7%.

Looking at the performance across individual years highlights the fact that you typically see either rents or values growing or in some instances both. Across each year highlighted, one of either values or rents has grown by more than 5%. The results also highlight that if value or rental growth slows, typically the other will increase; the markets tend to be counter-cyclical.

The results are also indicative of a disconnect between housing demand and housing supply given that in any given year values or rents are growing at a rate that is in excess of the growth in inflation.

Across individual capital cities over the five years to December 2011, house values have grown by as little as an average annual rate of 0.1% in Perth and by as much as 7.9% per year in Darwin. Across the combined capital cities, house values have increased at an average annual rate of 4.4% over the last five years.

In comparison, house rents have recorded average annual growth of as little as 2.8% per year in Adelaide and as much as 9.9% annually in Darwin. Across the combined capital cities, rental rates for houses have increased at an average annual rate of 5.8% pear year over the last five years, a full 1.4 percentage points higher than average annual value growth.

Focusing on units, they have enjoyed stronger value growth over the past five years than houses. Across the combined capital cities unit values have increased at an average annual rate of 5.5% per year over the period and have increased by as much as 12.5% per year in Darwin and by as little as 0.9% per year in Perth.

Rental growth for units has outpaced the growth in the value of units over the last five years. Unit rents have increased at an average annual rate of 6.2% annually over the past five years and have increased by as much as 11.9% per year in Darwin and by as little 3.1% per year in Canberra.

The average annual rate of rental growth for houses has outpaced that of units over the past five years in each city except Melbourne, Adelaide and Canberra. Duringthe same timeframe, rental growth for units has outpaced value growth in Sydney, Brisbane and Perth.

Over 2012, RP Data expects that growth in rental rates will continue to outpace the growth in home values. The reason being that we are not anticipating any ‘real’ growth in home values. Additionally, tight rental market conditions accompanied by an insufficient supply of new housing is likely to result in superior levels of rental growth to that of home values.

As always, there is likely to be some disparity between rental growth across individual capital cities. Markets such as Sydney, Brisbane and Perth are anticipated to be the strongest performers for rental growth due to the large discrepancy between housing supply and demand and low rental vacancy rates. On the other hand, rental pressures are not expected to be anywhere near as strong in Melbourne and Adelaide due to higher rental vacancy rates and less of a disparity between housing demand and housing supply.

Bidders were in attendance in both major capital cities, and auction results gave further signs of entering something of a holding pattern.

The Real Estate Institute of Victoria put Melbourne’s clearance rate at 62% over the weekend from its 797 auctions.

The last week of February showed Melbourne’s clearance rate at 61%, among the most successful auction weekends since October 2010 and the first weekend with a clearance rate higher than 60% since March last year.

Sydney recorded a 55% clearance rate from its initial 311 results, according to Australian Property Monitors. It was 55% in the weekend prior.

Australian Property Monitors data shows 19.7% of Sydney vendors chose auctions over private treaty last year, compared with 21.7% in 2010.The percentage of homes actually sold by auction fell to 13.9% of total sales from a peak of 15.8% in the same period in 2010.

Senior economist at APM Dr Andrew Wilson says after a flat few years, there was strong auction activity in the second half of 2010.

The inner west and east are Sydney’s traditional auction hot spots, with 26% of vendors selling this way last year.

The inner west had peaked a year earlier at 28%, with east on 27%.

Tim Lawless, research director at RP Data, noted recently that auction clearance rates were one of the timeliest indicators of housing market sentiment, particularly in the major auction markets of Melbourne and Sydney.

About 30% of all Melbourne houses and units are taken to auction (as opposed to private treaty sales) – the highest proportion of any capital city.

Source : Jonathan Chancellor. Property Observer. 5 March 2012

CBRE is marketing the Cross Street property following recent development approval for a complex with 78 apartments along with a 600-seat cinema complex with five screens.

Architects PTW designed the eight-storey U-shaped building, which will feature views over Sydney Harbour. The hotel closed in 2009.

Scarborough took over control of the project from the beleaguered Ashington group, which failed to get either Woollahra Council or state government approvals given heights concerns. The original proposal from Ashington was 14 storeys.

The last sale of the six-storey complex is unknown, but it has been reported the 2008 purchase by Ashington was $81.5 million.

It’s been reported that since its December 2011 development approval, Scarborough has been approached by a number of parties looking to acquire a stake, despite the number of floors being trimmed back, along with the profit margins, from nine floors to eight to secure approval.

The expressions-of-interest campaign could result in McCabe either selling the development or striking a partnership deal.

The development will reportedly have an end value of about $230 million.

McCabe has told Fairfax Media that demand for such a prized location, with full planning permission, was hardly surprising.

“Double Bay … is one of the jewels of Sydney’s exclusive eastern suburbs” and ranks as one of “Australia’s most densely populated areas”, he said.

Source : Jonathan Chancellor. Property Observer. 29 February 2012.

Interest rates are steady after dropping over the past few months, rental returns are climbing and it’s a great buyers market.  But wait, there’s more… there is a way you can increase your return dramatically.

With the Affordable Rental Housing – State Environmental Planning Policy (SEPP) or granny flat initiative introduced by the NSW government in 2009, you can add a granny flat to your investment property and rent it separately, resulting in an increased yield and good depreciation benefits. You can also add a granny flat to your own home if you have a large enough block size.

This strategy allows investors to dip their toe in property developing starting with a smaller project like the granny flat to build their property portfolio.

The Sydney market can be expensive, which is what sent one me further afield to find a more affordable investment area.

After purchasing a few investment properties in Sydney, I found that they were all negatively geared. I needed to find properties that would assist with cashflow not drain me.  My research took me to the Hunter region of NSW, and it’s there that I found the perfect fundamentals for an investment market. The local economies are booming thanks to the coal mining industries but also very diverse with wine growing, tourism, manufacturing, agriculture, horse breeding and retail all supporting strong employment.  Coupled with massive government spending on infrastructure projects and strong demand for rental properties, I thought I’d struck gold.

Property Bloom now offers a granny flat service along with our other development strategies. We find properties suitable for a granny flat development, usually three-bedroom houses on large blocks, but not just any houses. They need to meet a long list of our criteria.  We manage all the fine details, including renovating the house and building the flat, creating a positively geared investment.

Investors will benefit from casflow from the rent on two dwellings and also receive good depreciation benefits on the new flat.  This means people can keep moving forward with their investment strategy.  Unlike buying a single apartment in a capital city for instance, which is likely to be negatively geared, adding a granny flat to a property that already has an existing dwelling can result in a cash-flow positive situation.

In the past granny flats were only permitted in certain residential zones, but this SEPP has opened up a whole new real estate door. The aim of the granny flat is to boost the supply of affordable rentals by providing housing for the elderly so families can support each other, as well as the younger generation who are living at home and are not in a position to move out just yet.

Government projections show us that single-person households are likely to be the fastest-growing sector over the next 20 years, so demand is definitely there.

Small secondary dwellings are an attractive option for singles and couples who don’t need a lot of room and are the most likely people to be under rental stress. Young people are also staying at home longer, and granny flats can provide extra space for them and be a lifesaver for baby boomers who were hoping to empty their nests sometime soon.

In the Hunter, we are finding properties for around $240,000 and with the addition of a two-bedroom granny flat, which we can build for around $95,000; it’s a really affordable investment for a total cost of around $350,000. These projects are creating a 9% to 10% gross rental yield, and like the northern beaches, the rental markets are extremely tight in the Hunter. This type of development suits someone starting out in developing or an investor looking to create a positively geared investment.

To take advantage of the NSW government’s Affordable Rental Housing – State Environmental Planning Policy (SEPP) the regulations include:

• Granny flat must be no more than 60 square metres in size
• Land must be more than 450 square metres
• Can only be one house and one granny flat on the land
• The land cannot be subdivided
• You will need to comply with the LEP of your council (contact council re building
  requirements)
• It must meet the requirements of the Building Code of Australia

For more information on the Affordable Housing SEPP visit the government’s website.

Source : Jo Chivers, Property Observer. 16 February 2012

The poll, which was conducted by Turf Australia, garnered the views of 114 real estate agents nationally between November 2011 and January 2012.

Top of the list of ‘elements of a property most valuable to buyers’ was an extra bathroom, with 42% of agents saying that buyers were looking for a property with more than one bathroom.

Being on a quiet street came in a close second (41%), followed by a decent sized backyard (34%), being close to a bus route or shops (20%) and off-street parking (13%).

Interestingly for investors who own property with a patch of grass, Turf Australia claim that the survey results show that home buyers are prepared to pay up to $75,668 more for home with a lawn.

According to the survey’s results, lawns add the most value in Victoria (19%), followed by NSW (16%), Queensland and South Australia (12%), and WA (9%).

“Australians have changed their ideals for a backyard but a townhouse or larger suburban home with an area of grass is still important in 2012,” said LJ Hooker CEO Janusz Hooker.

“For sellers, the key is to put some time into making the lawn look well-cared for and perfect for the new owners – that’s how they’ll capitalise on the added value a lawn can offer.”

Source : Your Investment Property. 14 February 2012