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Money Magazine

June Issue 2009 - Time to buy

As interest rates hit the lowest point in almost 50 years and share markets remain volatile, 2009 will be remembered as the year of opportunity for first home buyers and investors to re enter the property market.

History shows us that when the share market loses value it is the property market that benefits. Over the last 30 years the Australian share market has experienced three major down turns.

The first adjustment was in 1987 when the share market lost around 50% of its value. In the two years that followed the property market experienced a significant boom as values increased by almost twenty percent each year in some states.

A similar trend emerged after the 'Tech Wreck' and September 11 savaged the share market in 2000 and 2001. The property market once again went through a growth spurt as first home buyers and investors drove the market.
The reason for this trend is because property markets and share markets work counter cyclically. That is when one is booming the other is struggling.

Why? Because the share market is a leading indicator of where an economy is heading. When it crashes it means the wider economy is beginning to slow down and in some cases heading towards recession. As a consequence businesses are forced to lay off workers that were employed to keep up with demand when the economy was booming and unemployment begins to grow.
To combat rising unemployment the Reserve Bank of Australia only has one tool, they lower interest rates.

In the last interest rate cycle, as the share market was booming, it took six years for interest rates to rise 3 per cent yet only six months to fall by four percent.
This means when the broader economy cools, interest rates fall and property becomes affordable again for both first home-buyers and investors.
For example a tenant who lives in a property valued at around $420,000 is currently paying approximately $19,000 a year in rent while still having to put money aside to save for a deposit.To buy that property last year would have cost the tenant almost $38,000 pa at an interest rate of 9%. However that same property can be purchased today at a cost of only $21,000 per annum.

At the same time investors are coming to the realization that interest rates and rental returns are almost at parity, meaning they can buy a blue chip investment property that is almost neutrally geared from the day they buy it. For example an investor can buy a $420,000 property today that will cost around $2,000 - $4,000 per annum in holding costs. Twelve months ago with interest rates at nine percent and rental yields closer to four per cent an investor was paying over $20,000 to hold onto the same property.
The upshot is now is the perfect time for both first home-buyers and investors to re enter the property market. However it is important to note not all property will benefit from the return of these buyers.

The property market is complex and is made up of numerous sub markets that will be pulled in different directions throughout 2009. The multi-million dollar sector of the market for example will fall due to lack of business confidence. Further, rising unemployment will have a negative impact on areas where the workforce is dominated by manufacturing and mining industries. Areas that are the traditional domains of investors and first home buyers on the other will begin to grow.

Investors focus on property in lower price ranges where rental demand and yields are strong. These properties tend to be smaller in well established areas close to public transport, shops and amenities.

At the same time more first home buyers are beginning to think like investors and are viewing their first home as a stepping stone rather than their dream home. They are electing not to buy brand new properties in the outer suburbs but instead are focusing on homes in established areas that will provide access to life style amenities such as cafes, restaurants and parks.

In short first home buyers and investors compete for the same type of property and are on a collision course.
The property market will not boom in 2009 however it will mark the start of the next growth cycle.

The key to making money from property is to first understand the underlying economic factors that drive the market. Then to use this knowledge to make educated decisions about where and what to buy to achieve your long term investment objectives.

Mark Armstrong is a director of Property Planning Australia, propertyplanning.com.au, and The Property School, propertyschool.com.au