The growth in value of investment property is the critical success factor. In five to ten year period if the growth is not more the negative cash flow at least than there is no point in investing. Growth is property can be inconsistent in short period but over period 10 years it can be safely said that it can estimated on the basis of historical figures. After the sharp jump in 1987-88 the property market slumped in following years before started recovering in 1993-94. One of the underlining factors (not the only one) in that period was very high interest rates.
Last four years growth in Sydney market is high but not as sharp as it was in 1987-88. According to Mr Fitzpatrick of Real Estate institute of NSW “Sydney is currently enjoying the strongest growth in the property market since the Second World War. Over the last 8 years, house prices in Sydney have grown on average by almost 10 percent per annum”. The average annual growth for units in the Sydney metropolitan area from December 97 to December 2001 was 10. 8%4. According to the PRD research the Burwood figures in the top 10 council areas for annual price growth for units (Appendix A).
The unit prices have increased by 13. 67 percent in 12 months to 30 Jun 2002 and median prices is 328,0005. Some other sources like Domain. com. au show higher median price of 348,000 as well. The following graph of price movement of Sydney houses for 70 years (1926-1996) shows consistent growth trends6. The growth in terms (by discounting the inflation) is negative especially after sharp rises. One feature is distinct that the recent growth is spread over several years not over 2 years. According to this source prices have gone up by 60% in last 5 year in Sydney market.
Looking at the growth statistics for Sydney and Burwood in particular it is expected that growth over 10 years period will be positive. But a negative or zero growth is expected in next 2 to 3 years time. Sydney House Prices – Annual % changeThe Australian economy has grown very strongly over the past year, underpinned by a strong housing construction sector and consumption. The economy expanded by around 4 per cent over the year to March, making Australia one of the fastest growing economies in the OECD countries.
Looking ahead, it is expected that growth will slow over the coming year, led by a weaker housing construction sector and slower consumption. Forecasts are for GDP growth to slow from around 4 per cent in 2002, to around 3. 2 per cent in 2003 – weaker than the consensus expectation of 3. 8 per cent. The interest rate is a critical factor in any investment property cash flows. Australia has enjoyed a very low interest rates for last five years in the rage of 5-7% range. Interest rate depends on various factors which include trade figures, dollar exchange rates and interest rates in US.
In June 2002 the RBA Governor Ian Mcfarlane increased the official interest rate by . 25% and indicated more increases in six months. He also warned strongly against the sharp growth in housing sector. But since then rates haven’t increased and growth hasn’t stopped yet. US interest rates have further decreased to give required push to the economy to recover after September 11. Australian business performance is encouraging but not even across the board. The interest rates are not expected to increase significantly in next one year.
Current five year fixed rate of interest is around 6. 9%. The negative returns from the share market in last twelve months are another factor in strong interest in property market. Share market returns are not expected to improve significantly in short term therefore we can expect at least slow growth in property housing sector for next six months. Inflation is also expected to be contained with in 3% limit for next 12 months. The tax law related to negative gearing is always under discussion.
There is always a likelihood of changes in these laws which can change the calculation and cash flows in an investment property calculation. NSW state government demanded tax concession and housing grants be capped to push property investment towards the cheaper end of the market to help manage the population growth7. The Deputy Premier Andrew Refshauge asked for taxation benefits of negative gearing capped at the city average property price of the city or region in which house or unit is brought.
It is not expected that negative gearing will be stooped totally but there may be minor adjustments and it should take car for in the investment calculations. The recent report “Managing Sydney’s Urban Growth 2002” has indicated that extra 1000 people per week are increasing in Sydney8. To accommodate these people Sydney needs 27000 new homes every years. Population of greater Sydney will reach 4. 5 million by 2010 much earlier than expected. The immigrants’ most favoured destination is Sydney in Australia and this trend hasn’t changed.