Overall consumer confidence levels improved strongly in November. The national Consumer Sentiment Index, compiled by Westpac-Melbourne Institute, is a good measure of how confident Australians are about the future and has been moving up since April this year. At the end of November it had reached 104.3, up from 95 this time twelve months ago. (When the reading is over 100, the number of optimists is outweighing the number of pessimists.)
The most interesting component of the consumer sentiment index is the “Time to Buy a Dwelling” Index, which is a direct measure of the likelihood of a consumer moving into the housing market. As shown in the graph below (specifically for NSW), the index has been moving up since its trough in May 2010 and looks set to continue to build over the coming six months.
These graphs are consistent with what has been happening in the Byron Bay housing market. As reported in the November newsletter, the month of October was an extraordinary month for sales of homes over a million dollars, mostly to buyers from outside the area. Potential purchasers have decided that prices are not going any lower, and now is the time to make that long-awaited lifestyle move to Byron Bay.
In addition to this shift in confidence, there is now a new dynamic beginning to drive the real estate investment market. Since the Global Financial Crisis, consumers have been saving record amounts of income and most of the savings have been channeled into interest bearing deposits with the banks. This is a very risk-averse investment strategy, but it has been giving reasonable interest rate returns of up to seven percent. Many of those investments are now reaching maturity and the banks are offering rates of about four percent to reinvest. For many people living on investment income, these levels of return are simply not attractive. The question investors are asking is, “Where can I get a decent return on my money?”
This frustration with the low returns from fixed interest investments has probably been one of the factors helping the stock market’s recent recovery. It will also result in a movement of investment into residential real estate. There are opportunities to buy residential properties showing yields of around five percent. With improving consumer confidence, the prospects for steady capital gains have also been restored, raising the likely overall returns on residential property investment up past seven per cent. It is still early days, but investors are certainly becoming active in looking for good residential properties for investment purposes. Our view is that this is the real beginning of the upturn in the residential property market.
If you would like to discuss these trends in more detail please contact Ed Silk on 0418 660 063
I wish everyone a happy Christmas and I feel we can look forward to a more prosperous New Year!