Not as rosy as it sounds

MARIKA DOBBIN, property market editor
October 26, 2009

SOME in the real-estate game may have experienced deja vu in the lead-up to this weekend. Not the pleasurable kind, but an eerie feeling that inspires the biting of fingernails and twirling of hair.

The market hit peak supply on Saturday, only the 10th time in the past five years that auction listings have approached 1000 or more.

It was bigger than even the 820 that went under the hammer on the weekend before this year's AFL grand final, in a rush to sell before the Federal Government's first home buyers grant was cut in half.

The last time Melbourne had such a blockbuster auction event was on the same weekend last year, when the property market was in the depths of the slump. Back then, the glut of stock was not met by a surge in demand, and the clearance rate fell to 53 per cent, the worst result for vendors in many years.

This weekend's clearance rate of 82 per cent is evidence of how much the market has recovered, largely due to low interest rates and grants for first home buyers. Given the result, it seems safe to say the sustainability of the recovery towards Christmas is solid, with demand seemingly unabated despite interest rates now on the rise and the grants being wound up.

It has been a remarkable purple patch for vendors and agents, who have been so spoiled by clearance rates of 80 per cent or more for five months that some have come to think of it as normal. Far from it. Instead, the phenomenon is an indication of a market way out of balance, with supply nowhere near enough to satisfy demand.

Beyond that, there are some other key differences in the current market compared to the meltdown this time last year. Firstly, there is much less uncertainty about the economic outlook. Back then, it was the global picture that rattled Australian property market nerves, evidenced by the fact property was the first sector to bounce back.

Secondly, unlike 2007 and the first half of 2008, the market has been starved of stock for the year, with enough pent-up demand to carry into next year.

Another difference now is that investors, who retreated last year and have been wary of overpaying due to first home buyer enthusiasm, are on the charge. Data for August showed while the value of lending to owner-occupiers fell by a seasonally adjusted 1.7 per cent, lending to investors rose by 7.6 per cent (it's been rising for months).

Investors own 30 per cent of Australian real estate and that stake is getting bigger, according to Property Planning Australia. Their number and comparative wealth make them a much more powerful market force than first home buyers, who have driven competition for a year but traditionally make up less than 10 per cent of the market.

''First home buyers are very small in number, so they can enter the market with momentum but then die out very quickly,'' PPA director Mark Armstrong says. ''When investors compete with first home buyers, that is the start of a moving market. When investors compete with other investors, that is when a market really moves.''

Cumulative interest rate rises of 1 per cent are likely to knock many first home buyers out of the market. But investors are better protected and history shows that rates could increase by as much as 2.5 per cent before it cools investor demand.

The grants for first-timers have had no discernible effect on the rental squeeze. While rental growth slowed to a crawl in the first half of the year, rents are still at record highs and could start to move up again, as those prospective first home buyers who were priced out now look to sign new leases.

Yet for investors, the big problem will be a lack of investment-grade stock. The market has been skewed this year by a shortage of stock across all sectors, one reason that prices have climbed to new highs, with $30,000 growth to the median price in just three months.

Current listings show a scattering of affordable apartments and houses within 12 kilometres of the CBD. Property adviser Monique Wakelin says investors with more than $600,000 to spend will be at an advantage: ''The six weeks from now until the end of November is going to be the best buying time in that mid-priced bracket we are likely to see for quite some while.''

But investors playing in the $300,000-600,000 range may have to sit on their hands until next year - not good news for those wanting to grow their fingernails.