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A volatile share market should be an added spur as investors look for an alternative. But so far the residential market has fragmented into the areas that are actually booming and those that appear to have missed out completely. The big price rises have so far been contained to the more wealthy suburbs of the major cities. In many other areas house prices are subdued and in some cases still falling.
So what is happening and what are the implications for real estate investors? Should we be buying into the markets that are already booming or act counter-cyclically and buy into the depressed areas and wait for the boom to spread?
The extent of the problem is best seen in Sydney. In the five most expensive suburbs (Hunters Hill, Mosman, Woollahra, Waverley and North Sydney) over the past four years prices have soared by more than 70 per cent. In the five least expensive suburbs prices have failed to even keep pace with inflation. A similar pattern emerges in the other capital cities although the prices rises have been more subdued.
The wealthy suburbs are booming while the less expensive suburbs are going backwards. For example in Melbourne over the past ten years prices in the five least expensive suburbs, after adjusting for inflation, have dropped by one third - an absolute disaster if you had been a negatively geared investor.
In many rural areas too, with just a few exceptions, the anecdotal evidence suggests that the boom so far at least has passed it by. This fragmentation of the housing industry compares starkly to the housing boom of the late 1980s when just about all house prices rose in every=0Dsuburb and rural area.
The fragmentation is a warning to would-be residential real estate investors to take care.=0DAccess Economics, an independent Canberra-based consulting firm has been looking at this phenomena and has suggested a few explanations. The different experience of different areas can be explained by the differing economic fortunes of the people who live or want to live there.
In the current economic conditions some people are doing exceedingly well economically while others are actually going backwards. The poor performance of the cheaper areas reflects in part an excess supply of housing, greater job insecurity and falling real wages.
A separate study by Access shows that people on award wages are seeing their wage fall after adjusting for inflation. This has been occurring for the last two years. Single people who rent, the very people who should be the next generation of home buyers, are in an even worse position with real wages falling for five of the last seven years. These people are also taking the brunt of the retrenchments that are still occurring and the ones for whom many job opportunities are confined to part time and casual work.
By contrast the wages and salaries of executives have been rising strongly over the past few years. This is particularly so in Sydney and Melbourne, which have the bulk of the corporate headquarters and the most highly paid executives. These people also tend to live in the more expensive suburbs where the supply of housing is short and prices rise sharply when there is a surge in demand. The more wealthy people also tend to have more of their wealth in the share market and have been the main beneficiaries of the recent rises in the share prices.
Given all this, what are the strategies open to investors? Access believes that the boom in the upper end of the market could continue because so far none of the factors that are causing the current boom have gone away. Other analysts are more cautious and suggest that these prices could fall sharply in any downturn. In the other areas prices may start to rise if the supply of available housing dries up, but given that wage increases in the current environment are likely to be low, house prices are likely to be subdued.
In other words the boom may not spread elsewhere and it may not last.
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