PUTTING AN END TO THE ‘BIG SPEND’!

PUTTING AN END TO THE ‘BIG SPEND’!

While it may sound easy to accomplish, this task is of gargantuan proportions that will cause havoc with many families who will have no alternative but to sell-up. The dilemma is, that property prices in heavily mortgaged markets are in rapid decline. On the other side of the property spectrum, those residing in the wealthy socio – economic markets are still bathing in ongoing capital growth markets where interest rates have little to no effect. These markets remain robust as a direct result of strong business performances which resonate in our property market.

The Reserve Bank (RBA) is endeavouring to cut spending from the current figure of 5 to 6 per cent back to 2 to 3 per cent. The 2008 war on inflation will result in high casualties given the general rule of thumb in Australian real estate: a third of households are in rental markets, the next third own their homes mortgage free with the final third sharing ownership with a bank. With rents on the rise and 11 interest rate increases in just the last six years – two-thirds of our property markets are now under increasing pressure.

Last week, the RBA said in its quarterly statement on monetary policy that core underlying inflation would reach 3.5 per cent by June 2008. It is now well documented that our “Head Teller”, wants inflation to be contained within the RBA’s – 2 to 3 per cent target. Interest rate increases will be the property market sledgehammer. We have seen this before and it is not pretty, considering that household debt currently sits around $1 trillion. Even more concerning – the RBA yesterday released figures which identified that the total outstanding balance on credit and cards rose to $42.698 billion in December.

Macquarie Research Economics said in their report on Tuesday 19 February 2008.

Impact

“The RBA has made it abundantly clear that it thinks that GDP growth needs to fall below 3 % in order to alleviate inflationary pressures. But with mining investment, exports and infrastructure spending likely to remain healthy, this implies that consumer spending must bear the brunt of the slowdown. This note asks the question: how much do interest rates need to rise to produce the necessary slowing in consumer spending. Several approaches suggest that this could require a cash rate of 8 %, which would take the standard variable mortgage rate up to double digit levels.”

The final point

“This said, there is a distinct chance that interest rates will hit 8 % before the end of 2008 and markets appear to be underestimating this risk. In our view, investors and households should explicitly consider what impact such an outcome would have on their financial positions.”

Much debate this week on the figures we published in last week’s edition for Mosman houses compared to the figure that appeared in The Sun Herald 2008 Domain Property Guide. We published the 2007 Median House Price in Mosman at $2,212,500 and the Domain Property Guide had the Median House Price as $1,900,000. I challenged Australian Property Monitors on this and I am happy to print its response.

Dear Robert,
This is to confirm that the APM data that Richardson & Wrench – Mosman & Neutral Bay (“R&W”), published in its newsletter last week is correct. On the face of it, it may look like the published data conflicts with that printed in the Domain Sun Herald Property Guide (“Property Guide”) last weekend. Not true.

The two sets of figures, each no less valid than the other, are snap shots of data taken at very different dates and as well use a different definition for the property type “houses”. To be more specific the figures reproduced in the “Property Guide” included houses, semi’s, duplexes, terraces, villas and townhouses whilst the “R&W” newsletter use houses and semis only. I must stress that both approaches are widely adopted and equally as valid amongst real estate circles.

From APM’s perspective as long as the same methodology is used consistently between reports and and from one year to the next the growth figures are reliable. This is why APM chose to take the same approach for the “Property Guide” this years as per past years and why the results were different to those featured in the “R&W” report.

It is also important to note that APM is subject to editorial deadlines weeks in advance of the “Property Guide” being published. This is another reason for the differences between the “R&W” data and the “Property Gide” data and why the APM’s reported number in the “Property Guide” was the lower of the two numbers..

Between January and April each year the APM data – including the data for Mosman – will continue to be revised, almost daily and certainly weekly, as new and additional data comes in. In other words, the same calculation this week may well have a different number than the same calculation applied the next week whilst the sales are so fresh and still being recorded.

In closing I must stress that the integrity and accuracy of our data is of upmost importance to APM and I hope you and your readers can now appreciate our explanation.

Kind regards

Michael McNamara
General Manager,
Australian Property Monitors

So there you have it. Now I will argue that duplexes, terraces, villas and townhouses should actually come under the banner of “units” (agent perspective) as they are strata title. Also, I debate that there is an enormous discrepancy from the $1,900,000 median price that APM published to the $2,212,500 that we published. For those who can’t get enough facts and figures, I did the figures the RWM way and the APM way for 2007.

With “fire in belly” the correct median house price for Mosman in 2007 is $2,225,000 not $1,900,000 as suggested in the 2008 Domain Property Guide, by Australian Property Monitors.

Mosman Houses
RWM – House and Semi sales 2007
Total Sales 462,
Total Value $1,108,848,920
Median Price $2,225,000
Average Price $2,724,444

APM – House, semi,duplex, terraces,villas and townhouses 2007
Total Sales 505
Total Value $1,159,154,920
Median Price $2,075,000
Average Price $2,610,709

I will let our learned readers draw their own conclusions on what they consider to be the correct application. It was unanimous in our office that our way is the correct way to determine the exact value for house price performance in a calendar year.

We are recording excellent results so far this year in both apartment and housing markets (evidenced by sales results indicated on our property menus). This continued strong growth from the 2007 market clearly identifies the popularity in the 2088 postcode. What many forget is that 90 percent of Mosman is surrounded by water and our property markets are swimming not sinking. We will do a five year comparative analysis on apartments next week. Cheers ^__^

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