Market Comment – Monday 4th October 2010

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Spring is in the Air!

Spring has sprung!

Any more clichés we can think of?

With a 74% clearance rate on nearly 500 auctions, another 450 private sales and with some agents deferring auctions because of the greatest day in September, well October, since 1990, the market is well and truly alight. Agents all over Melbourne are talking about buyers flooding into the market. Stock will not be enough unless a lot more vendors decide to sell.

Tomorrow the Reserve Bank is most likely going to raise interest rates by 25 basis points. Even if they don’t the banks probably will raise our rates anyway. If the RBA does raise interest rates by 25 basis points, there is a better than even money chance banks will raise rates more. It is so difficult for banks like the Commonwealth to make ends meet, that they are bitterly complaining that the cost of funding loans is going up so they can’t make enough profit. $6.1 Billion isn’t enough for the bank. This is an increase of 42% on last year’s results.

Now that I have had my whinge about banks gouging $3.1 Billion in fees, we need to discuss what will happen in the market. Firstly, interest rate rises do not have the same effect on the higher, over $1M, range as they do to the below $1M range. Most people who are purchasing over $1M will actually have smaller mortgages, as a percentage of value than those in the $500k range. This is usually because they have made money on previous properties.

The market below $400k made up of first home buyers may slow down a little. Certainly new estate suburbs will find buyers have lower limits to spend on their homes. We should see another fall in the median prices in new estates as builders sharpen their margins to continue to attract business. This always has a fundamental effect of lowering the established market in places like Melton, Tarneit, Werribee, Pakenham, etc. The average loan size for first home buyers is $284,500 according to ABS June 2010.

The market between $400k – $600k which is full of private investors will actually begin to heat up. With the advent of owner occupiers having to save more money before purchasing, the pressure will be increased on rental returns. Investors will want a little more to offset the increase in interest and there will be more people having to rent. The Melbourne rental market is already very tight. Well, it is about to get a lot tighter!!

Price! Inner city suburbs, the most popular place for investors will continue to steadily rise. Rental returns will strengthen, property trusts are slowly gathering momentum again and may put pressure on stock levels and we are still well short of a balance in supply and demand. Whilst currently a good, well positioned, two bedroom apartment in a suburb within 10km of CBD is currently worth between $500k & $600k; it will only take about 6 years to reach $1M. This will occur faster if the interest rates continue to rise due to the fantastic economic growth of our country.

The over $1M market is steadily gathering momentum and tomorrows potential interest rate will do nothing to dampen this. If we assume the board of the RBA are doing their job, then interest rates usually only rise when the economy of the country is on the rise. The upper end of the market is tied far closer to the performance of the economy than the lower end.

If you are interested in purchasing property in the near future, why not drop in for a chat. There is no obligation nor cost for the first meeting.

Ian James

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About the author

Ian has been operating his own businesses for more than 25 years. During this time the self taught lessons of building the business, dealing with staff, suppliers, clients and economic woes have been invaluable. Ian is a fully licensed Real estate Agent, a member of the REIV and registered with the Business Licensing Authority.

Buying property is not just sticking up your hand and outbidding your rival. It is an emotional, fiscal and psychological decision that needs to be planned and well executed. Ian is usually involved in over three hundred property negotiations per year; ranging from the $250,000 first unit purchase for a young couple to multiple million dollar residential developments. Ian's business background and endless numbers of negotiations make him one of the industry's leading negotiators.

Ian is married with two adult children, living in Patterson Lakes. He is a keen fisherman when weather and business allows the time.

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