The upcoming changes in real estate - and how investors can benefit.

The upcoming changes in real estate - and how investors can benefit

By Terry Ryder,

Investors haven't had to think too hard to make money until recently. For much of this decade, simply owning real estate somewhere was a formula for a capital growth. Not any more.

Investors now have to work smarter. They cannot rely on a rising market to make money for them. They have to buy the right product in the right places.

To achieve success in today's climate, investors need to understand the changes taking place in the Australian market. Buying patterns are changing and it's all about housing affordability, the cost of living and changes in lifestyles.

These are some of the trends real estate buyers need to know about ….

Change #1: A shift towards apartments

What it means: Capital growth on units, relative to houses, will improve

The buying habits of first-home buyers have changed. Increasingly, they're buying units.

Houses still dominate. But not as much as before. In 1997, 85% of first-time buyers opted for a standalone dwelling and only 15% bought a unit or townhouse. Last year 72% bought a house and 28% bought an attached dwelling, according to the latest ABS Australian Social Trends report.

The market share of units has almost doubled. This most significant of real estate trends is happening for two reasons: affordability and lifestyle.

Apartments are cheaper than houses. Buyers, particularly young ones seeking to be near work, cafés and nightlife, can live closer to the action more affordability by opting for a unit.

Today's busy lifestyles are another factor. Young professionals with frantic careers don't want to waste time on lawns and house maintenance. Apartments are a practical alternative.

This trend is likely to gather pace, with affordability such a big issue. Another influence may be the growing number of retirees, who often choose to downsize from a house to an apartment as they get older.

A consequence is likely to be an adjustment in one of real estate's dominant paradigms - that houses show better capital growth than apartments.

Scott McGeever, Brisbane buyers agent and president of REBAA, says many first-home buyers can't afford houses but don't want to move 20km from the CBD. "So they have to re-align their needs and buy a unit instead," he says. "Sometimes they can pick up good apartments under $300,000 within 5-10km of the City."

People adopting this approach take the view they can buy their dream house later. "It's an adjustment of expectations," McGeever says. "You can't have it all in the first purchase. There's a new wave of these buyers - mostly people in their late twenties or early thirties."

Melbourne buyers agent Michael Ramsay says he has been advising clients to buy apartments for the past three years. "Apartments are becoming popular with people who can't afford houses," he says. "I would always buy a quality apartment in a good suburb, rather than a house in a poor street. I have bought 20 apartments for clients in the last 18 months and they have gone up 10%-plus in value."

Ramsay says it's been unusual for young people to buy an apartment as a first home. "But the trend is moving back to the city, partly because of petrol prices, so an apartment closer to the action makes sense," he says.

Research analyst Michael Matusik says the level of proposed apartments for Inner Brisbane is inadequate because the population is growing faster than expected, with around 7,000 new residents each year.

"New apartment prices are rising and re-sales show average gains around 10% last year," Matusik says. "The vacancy rate is under 2% and rents have been rising for several years. We expect residential sales across inner Brisbane to increase 30% over the next five years."

Matusik says 11,800 dwellings sold across inner Brisbane in 2007-08 and 8,000 of them were apartments, a rise of 15% over 2006-07. "Long-term rents have shown strong growth," he says. "On average, rents for permanent tenanted units have risen 9% a year over the last five years."

New one-bedroom units fetch $350-400 per week, while three-bedroom product commands $700-800 per week for non-riverfront and around $1,200 for riverfront. Furnished apartments attract a premium of $100 per week for one-bedroom product, up to $200-250 extra for three bedrooms.

Perth analyst Gavin Hegney of Hegney Property Group says the growing preference for units over houses will be an ongoing trend and the best way to profit from it is to buy land suitable for unit development.

Change #2: More people are using public transport

What it means: Suburbs with rail will rise in popularity and price

The high cost of fuel, road tolls and city parking is giving impetus to an investment trend of rising importance: buying homes near public transport nodes, particularly railway stations.

Median prices in suburbs close to rail are already out-performing. State Governments have been actively promoting the development of mixed-use railway "nodes", but the high cost of driving to work is the real catalyst.

A July Newspoll found 20% of Melburnians were using public transport more often because of high petrol prices. According to Melbourne's Metlink, travel by public transport is two-thirds cheaper than car travel, with a medium-sized car costing 75 cents a kilometre in petrol and maintenance, compared with 28 cents for the average train trip.

Colliers International researched Sydney, Melbourne and Brisbane suburbs within 2km of train stations and found prices often rose faster than city averages.

There was an average 22% increase in railway living house prices in Brisbane in 2007, with near-city Highgate Hill rising 64%. The most affordable rail suburbs were Wacol (median price $292,000) and Darra ($310,000, up 38%) in the Ipswich corridor in Brisbane's south-west.

Unit prices in key rail suburbs rose as much as 95%. The average growth over the past five years in the top 10 suburbs ranged from 15% to 32% a year. The best performer was Milton where the median unit price increased from $177,000 in 2002 to $710,000 in 2007, an average annual growth rate of 32%.

Generally, the median house price for Brisbane rail suburbs was $65,000 higher than suburbs which fell outside the 2km-to-rail zone. Unit prices were $16,000 higher. Colliers says the project growth in Brisbane's population will put more pressure on road networks and make homes close to rail attractive.

The trend is expected to draw the most support from Sydney residents, who already use public transport more than other capital cities. Colliers says falling housing affordability in Sydney is driving demand for dwellings close to transport nodes.

In Sydney, the median house price for suburbs close to rail networks was $540,000, $67,000 more than the median for houses outside the 2km zone. Sydney price growth was modest (6.6%) last year, but some suburbs performed much better. Sydney's top 10 rail suburbs were headed by Cheltenham, Beaconsfield, Kogarah Bay, Homebush, Haberfield, Pyrmont and Artarmon, all of which achieved growth above 30%.

Units near rail were more affordable, with median prices ranging from $172,000 (Ambarvale) to $420,000 (Waverley). And units in rail suburbs can provide property investors with good yields - annual rental returns range from 4.8% to 10.7% in the top 10 rail suburbs for units, with nine of the 10 yielding better than 5%.

House price growth across the top10 Melbourne rail suburbs was consistently high in 2007 (44% to 57%), while average annual growth over the last five years ranged from 10% to 23%. Units in rail suburbs also achieved good growth - between 37% and 57%, although average annual growth over five years was lower than houses - between 7% and 11%. Pascoe Vale South achieved the highest 2007 growth - up 52% to $410,500.

"The increase in fuel costs will see even greater demand for the region's public transport, in particular outlying suburbs," Colliers says.

Colliers also published a report on city parking which found the Sydney and Brisbane CBDs were among the most expensive places to park in the world. City workers who don't have a job-allocated parking space pay between $760 and $800 a month. Add fuel prices and road tolls and it's easy to see advantages in living close to suburban rail.

Colliers' Global CBD Parking Rates Survey found the Sydney CBD is the most expensive city in the Asia Pacific and third priciest in the world, with Brisbane ranked fifth in the world and Melbourne No.11.

Louis Christopher of Adviser Edge says there's evidence railway suburbs are more in demand but buyers need to be selective. "There's a point where you can be too close to a railway line," he says. "Buyers also need to be aware of crime rates - there's evidence that people living too close to railway stations may experience a higher level of crime.

"But generally the evidence suggests suburbs close to rail will out-perform. I can see it in my own area of Sydney. Pymble has similar standards of housing to St Ives, but Pymble is out-growing St Ives. Pymble has its own rail station." (Pymble has a median house price of $1.2 million after big growth last year; St Ives has seen little price growth since 2004 and has a median house price of $975,000.)

The gap between the have and have-not suburbs, in terms of public transport, may grow. A report by Dr Jago Dodson and Dr Neil Sipe of Griffith University says 34% of new residential growth to 2013 is vulnerable to petrol price increases because of poor public transport.

"A public conversation must now be held about the sustainability of the contemporary Australia suburban model and its multiple vulnerabilities," says Dodson.

Griffith University publishes a VAMPIRE (Vulnerability Assessment for Mortgage Petrol and Inflation Risks and Expenses) index which identifies the relative degree of socio-economic stress in suburbs in Brisbane, Sydney, Melbourne, Adelaide and Perth.

"In our earlier study (2006), areas of stress were largely in the outer suburban mortgage belts where car dependency is high," Dodson says. "In this study we have seen the number and geographical range of vulnerable households creep inwards as fuel costs and interest rates rise."

He says those able to shift to public transport appear to have done so in increasing numbers. "Public transport use in Sydney steadily declined between 2000 and 2005, but the sharp rise in fuel costs forced commuters on to trains. Between 2005 and 2007 the number of train journeys jumped by 11 million," he says. "Across our cities public transport is bursting at the seams during peak hour, which gives clear evidence people will use public transport when it becomes just too costly not to."

ABS data shows major increases in public transport usage in our cities. The greatest increases in patronage have occurred in the bigger cities where many have greater distances to travel - while patronage has declined in smaller cities where traffic congestion is less of an issue.

Between 1996 and 2006, adults using public transport to get to work or study rose from 23% to 26% in Sydney, from 13% to 18% in Melbourne and from 14% to 17.5% in Brisbane. But there was little change in Perth while patronage declined in Canberra and Hobart.

More recent figures indicate patronage has continued to rise in the three biggest cities, particularly in Melbourne which offers the choice of train, tram and bus transport. According to Metlink, an extra 100,000 Melbourne residents are using public transport each day, compared with a year ago. The O-Bahn system, Adelaide's main bus service, has seen passenger numbers rise from 7.4 million in 2004-05 to 8.2 million in 2007-08.

In New South Wales, some commuters will get free buses in a strategy aimed at cutting the numbers of cars on the road. A free shuttle bus around the Parramatta CBD, running at 10-minute intervals, was launched by Parramatta Mayor Paul Barber in August. The service, costing $550,000 a year and supported by corporate sponsorship, is expected to be the prototype for services in other congested areas of Sydney.

Hegney says Transit Oriented Developments will become more prevalent as State Governments seek to a greater return from their infrastructure. This may lead to "up-zoning" of residential property close to transport nodes - which means houses 500-800 metres from train stations may be re-zoned to allow higher-density residential.

Change #3: Gen Y will become more dominant

What it means: Greater demand for modern inner-city units

When Generation Y people (born between 1976 and 1991) accumulate some serious inherited cash, real estate trends will change. There are lots of them (at the 2006 Census there were 5.15 million) and they're fussy about how they live. Most are not buyers currently but that will change as they age.

The Housing Industry Association says just over 50% of Gen Y people are living at home, included 52% in New South Wales and 54% in Victoria. "If you're in your twenties, on a low-to-middle income, and looking to buy a home, it's becoming virtually impossible," says HIA chief economist Harley Dale.

Gen Y often start adult life shackled by debt (HECs debts, credit cards and mobile phones) compared with the boomer generation. "73% of Ys are in substantial debt," says Dr Sally Breen, associate editor of Griffith University's Review magazine. "They have new car loans, designer furniture on 36 months' credit, $10,000 boob jobs on credit, red-line property portfolios, not to mention all the Bettina Liano jeans and gourmet beers burning a very large hole in the plastic."

Gen Y people are not scared of debt and some have already bought property. Matusik says ABS data shows the average Gen Y in 2006 had $5,500 in the bank, $2,100 invested in shares and $10,000 in superannuation.

Queensland is attracting Gen Y across the border, with the ABS reporting that since 2001 there has been a 4% increase in the numbers of people aged 26 and younger moving to the state; 33,400 more young people moved to Queensland in 2006. In Brisbane's rapidly-expanding inner-city apartment precincts, 30% of occupants are in the 20-26 age group.

The housing needs of Gen Y will change as they get older but, today, 19% of young people in this group have a mortgage and only 3% own their homes outright. Two-thirds are renting, according to Matusik Property Insights.

Matusik says that when Gen Ys leave home, they have specific needs. They live in a connected but wireless world - occupants are comfortable communicating via email and mobile phone and many homes occupied by Gen Ys don't have a "fixed" telephone line. Gen Y buyers and renters don't want huge homes - they want to live in a well-utilised space with dual-use options (e.g. a kitchen bench that doubles as a breakfast bar or somewhere to put the laptop when browsing the early morning news). And they want more flexible space where they can "hang" with their friends.

Matusik says this translates to more flexible floor plans, including integrated outside living areas. Gen Y people are attracted to the external lifestyle of inner-city living with access to gymnasiums, restaurants and parks. This demographic group is likely to be attracted to the infill and transit-oriented housing being developed close to amenities like cafes, shops, parks and nightlife.

So inevitably Gen Y will be attracted to attached housing - not just for affordability but to make better use of their time. Matusik suggests property marketers need to work on the interactive side of their websites because Gen Y buyers are familiar with virtual tours and will spend time experimenting with re-arranging furniture or looking at floor plans in different configurations (if you give them the option).

"For this generation, 30 minutes to do anything is akin to 'forever'," Matusik says. "If they send an email asking for information, they expect a response the same day and preferably within the hour."

They're also highly mobile. According to Matusik, renters are three times more likely than owner-occupiers to relocate. Over the past year, 35% of renters moved house but only 10% of owner-occupiers. And young renters move more often than their older counterparts, as do people living alone.

"Three out of five of our young singles under 35 rent, while half of our young childless couples rent too," says Matusik. "Long-person households aged 35 to 44 are more likely to rent, too (56%), with the rental rate for this demographic changing the most in recent years (up 9%) and this is particularly the case for middle-aged males living alone (59% rent)."

Change #4: More are buying established rather than new houses

What it means: New homes will become smaller to become cheaper

Matusik says investment in new housing for owner-occupation is at an all-time low. Over the past 12 months, there were about 90,000 loans for construction or purchase of a new dwelling, compared with 683,000 loans for established (second-hand) homes for owner-occupiers.

Ten years ago 20% of housing loans were for a new home; today it's closer to 10%. If you include investment properties, the market share of new dwellings has dropped from 30% to 10% over the last decade or so. The key factor is that a new home is now so expensive. Matusik says the price differential between a new house and an established one of equal quality is now close to 40%.

"This has driven new residential sales down and we believe the housing affordability discussion needs more focus," Matusik says. "Existing stock is not that expensive but new property is. It's now extremely difficult to bring new homes on to the market at a price which provides a developer an economic rate of sale. The new market is currently under-supplied by 30% and is likely to get worse rather than better. Some are forecasting that this under-supply of new stock will last well into the next decade."

Matusik claims new homes are expensive because land supply is "artificially restricted by current town planning rhetoric". New property is over-taxed, he says, with taxes and charges making up 40% of the end price. And "it takes way too long to get a development approved".

Whatever the reasons, it makes sense for investors to buy existing homes. Because of the huge price differential, buying a new home these days is like buying a new car - it devalues as soon as you take it out of the showroom. Another reason buyers steer clear of new homes may be disappointment with the product.

Archicentre, the national advisory service of the Australian Institute of Architects, says a quarter of new homes around Australia are "cracking up". Following a national survey of more than 100,000 homes inspected before purchase, Archicentre found a "surprising" rate of problems in homes less than 10 years old. In new Victorian homes, 30% of roofs were starting to deteriorate, 25% of new homes had cracking, 18% contained some form of illegal building, 17% had timber rot and 16% had problems with damp.

"Just because you're buying a home less than 10 years old, don't assume it will have no faults," says Archicentre general manager David Hallett. "The percentage of faults in a home rise considerably when a property is 25 years or older. We more or less expected this. But what really surprised us was the number of faults in newer homes."

Another issue relates to the typical McMansion product pumped out by building industry. Australians are no longer asking to supersize their homes as the affordability crisis brings the dominance of the four-bedroom two-bathroom house to a halt.

An ING Direct survey finds almost 10% of Australian families are considering selling their home to trade down to a smaller place. ING says half of households plan to change to their living situation in the next 12 months to cope with increased mortgage and rental pressures - including paying off the mortgage quicker, drawing down more money on the mortgage to keep afloat or selling their home to trade down.

"Consumers are changing their spending habits to adapt to life under increased petrol, grocery, rental and mortgage costs," says ING Direct executive director Brett Morgan. "But this is the first evidence to suggest families are seriously reviewing their living situation. With almost one in 10 families planning to sell their house to make ends meet in the next 12 months, Australians are clearly feeling the pinch of current economic conditions."

A project at Griffin on Brisbane's northern fringe is typical of a new type of subdivision where smaller houses are pared back to essentials on blocks little more than 300m2. A spokesperson for developer Stockland says the smaller homes offer first-home buyers a start and challenge the market's expectation that bigger is better. The REIQ has applauded efforts to provide entry-level opportunities for first home-buyers.

As Census data indicates more single-person households than ever before and young families continue to shrink, developers have identified the need for smaller, more energy-efficient, affordable homes.

Cedar Woods and Hermitage have developed "building block" homes that can be added to as required to address affordable housing in Victoria. The new approach to building offers a 16-square house for $119,500 and includes plans to extend to 24 squares when required.

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This article was written by Terry Ryder & is taken from the Feature Articles page of the Hotspotting website http://www.hotspotting.com.au. We highly recommend this website for people interested in real estate.



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