Hi [subscriber-firstname],
Is it just me or do real estate agents seem to always give over puffed, overly optimistic and simplified opinions of market conditions which are generally backed up with little to no evidence? Why do they to do this? Well most will pump up the market conditions to create an air of optimism in order to secure a listing or a contract. On one level or another, I think most of us understand this. I try to be a bit different by delivering the real information whether it be good, bad or indifferent. I do this in the hope that it will help my clients make the best decisions for them, not a real estate agent.
There is something that I have been keeping an eye on for a while now, something that has been steadily building for the past couple of years and I predict it will have an large effect on certain portions of the market in the future and in some respects it has already begun. As an example, I will describe what is happening in Bombery Street Cannon Hill right now.
Not too long ago, the Brisbane City Council re-zoned the land in this street from Residential A (low density residential) to MR (medium density residential). More than just a different name, this re-zoning has had a profound impact on this location. Land zoned 'Residential A' can only have one dwelling constructed on it, just like a normal house block, whilst land zoned MR can have a 5 storey multi-unit complex constructed on it. If you look up Bombery Street you will see that it is relatively small and in this location alone there are 93 units that are either under construction or approved for construction. That large number of units does not even include the other 6,483m2 of land which is up for sale in the street currently. If we assume that the remainder of the land is sold to developers who construct unit complexes also, we will expect to see that one little location explode with circa 200 units hitting the market in a tight period of time. This example illustrates what is happening in locations across Brisbane.
If we look a little bit closer at the flow on effect that this type of activity generates, the most obvious problem is in relation to supply and demand. To simplify this concept, consider the following. Imagine that the total pool of buyers looking for a unit in Cannon Hill is 100 and there are 80 units for sale. In this case, the supply of units does not meet the buyer demand which means that buyers are going to have to compete against each other to purchase an available property with some buyers invariably missing out. When buyers compete against each other one must pay more than the other in order to secure the contract, this results in higher contract prices and ultimately, capital growth. Now imagine that all of a sudden, 50 more units were listed for sale in Cannon Hill, now there is too much supply meaning that buyers will not have to compete against each other in order to secure a property. This then results in lower offer amounts, contract prices and an overall retraction in unit values.
Following on from the above example, let's assume that 100 of the 130 units for sale in Cannon Hill sold, with the remaining 30 unsold units remaining in the possession of the developers. Generally if developers cannot sell every unit in a development project, they will put the surplus stock up for rent to ensure that their cash flow is maximised. Statistically we can assume that around 50% of the purchased units were bought by investors who will also proceed to list the property for rent. As this example clearly illustrates, over supply then becomes an issue in the rental market too. When interest rates are as low as they currently are we see a decline in the rental market happen naturally, purely because people who are renting cease to do so because they are able to buy a property for essentially the same outgoing cost per month. Adding over-supply to an already softening rental market, further declines rental yields.
I don't want this to come across as all doom and gloom. Yes I do believe that there is an over-supply issue that is currently building in the unit market, however as is always the case in real estate, location is king. Properties in high demand locations will foreseeably proceed forward with a minimum of impact to their projected and actual capital worth, whilst units and developments in fringe, less desired locations will be more exposed to this supply issue.
So what is the point of alerting you to this? By delivering information that is somewhat out of the norm and not purely optimistic, I hope that I can encourage you to head in to your next real estate transaction with your eyes open to market influences that you may not have previously given thought to. Prices in real estate do not always go up as a lot of people believe/hope. The more educated you are as to the factors behind market movements, the more equipped you will be to make property transactions that will delivery you positive lifestyle and financial returns.
If you would like to discuss any part of the information contained within this newsletter and how it relates to you and your current circumstances, please feel free to contact me
Thanks for tuning in and I look forward to speaking with you again soon.
Dan Forrest |
