Following on from part 1, the above graph has combined the two ‘primary sales indicators’ for Melbourne Metro residential property over the decade from the end of 2004 to 2014.
If we analyze the graph a little more closely, you might see the correlation between sales price and volume and therefore its potential impact on the supply / demand equation, especially since 2009.
The period from the end of 2004 to the end of 2009 saw a healthy rate of price growth (avg 6.3% p.a.) supported by relatively consistent volumes (apart from a couple of volume peaks in 2007 and 2009). This period suggests a relatively stable and balanced growing economy.
The rate of price growth then increased fairly significantly during 2010 (around 15%), but volumes started to decrease (reduced demand), and continued to do so until the end of 2012. It was during that period where we saw a reasonably significant price correction or ‘market adjustment’, followed by the known recovery in 2013 where volumes and price on established dwellings once again began to trend upwards.
So what happened during this period of ‘instability’?
This is when we can have a look at other market forces (or other indicators) to see what they can tell us. Factors such as supply shortage/surplus, sentiment, interest rates, population changes, jobless figures, or other local factors for example. Below are a few graphs we can have a look at.
Leading up to 2010, housing CPI and interest rates were relatively low, and so relative affordability was high. Confidence in the property market surged and clearance rates were very high. This can create a potential shortage of supply and therefore upward pressure on prices.
2010 – Unsustainable Growth
Despite interest rate increases, the trend during 2009 continued through the first part of 2010. This could be due to unemployment rate remaining relatively stable. Combined with the cumulative effect of supply shortage (which we believe was the major factor), prices continued to escalated well above the norm (around 15% after about 8% the year prior).
However, the steep price growth continued to put pressure on interest rates and inflation (housing CPI up 3% from 2009 to 2010), increasing the cost of living. Despite unemployment rates remaining fairly stable in the second half of 2010 (at just above 5%), public sector wage increases continued to taper off due to the flow on effect of other forces in the economy.
This reduced affordability as it put financial pressure on more and more households, ultimately tipping the scales and resulting in confidence and volumes heading steeply downwards. A drop in building approvals followed suit through 2011.
2011 & 2012 Adjustment & 2013 Recovery
It took a little while for things to turn around, but a combination of a drop in interest rates towards the end of 2011 and through 2012, coupled with price corrections of around 3-5%, appeared to re-balance the equation and improved relative affordability (housing CPI down to 3% from peak of 7%), resulting in more people buying and positive price growth once again.
The key message we can take from this is that property investment as a short term strategy can be risky, but a medium to long term view tells quite a different and more positive story. Despite the significant 2011-2012 adjustment, the lowest performing five year period (2010-2014) achieved no less than an average annual growth of 4.3% per year for units, and 6% per year for land and houses.
Not bad considering the circumstances don’t you think?