Is the property boom just a trendy bandwagon or is it a gravy train?

In summary, the SEQ market showed very little real growth during the period from 1992 to 2000. Quite simply, SEQ was underpriced by Australian standards.

Historically low interest rates

Sustained low official interest rates which have remained steady at 4.75 per cent now for 18 months have delivered variable housing loan rates of around 6.5 per cent. Consider that at the height of the 1988/89 boom lending rates for business were hovering around 20 per cent and home loan rates around 15 per cent and you get some perspective of the current level.

This, coupled with a highly competitive lending market, have clearly made home ownership and investment extremely attractive, the former based on affordability and the latter on a taxation regime which encourages private investment with the tenants covering the majority of the interest. In a market where capital growth is positive and favourably taxed the attractions are obvious.

Poor Alternative Returns

Clearly a knock-on effect of low borrowing rates is low deposit rates for alternative investments. During the '90s we have seen returns on bank deposits and commercial bills, particularly important to fixed-income earners, barely above the official CPI inflation levels, currently providing a real return of just over two per cent.

For the investor, the traditional forms of saving, eroded by increasing bank fees and fully taxed, simply do not compare with the lure of a fully funded, tax effective, bricks and mortar property purchase. Interest of two per cent after tax on a $20,000 deposit looked pretty ordinary in early 2000 when you could buy a $200,000 house or apartment as an alternative investment and show a gross five per cent to six per cent return with the tenant paying the vast majority of the interest.

The introduction of “equity loans”, the freeing up of existing home equity to purchase property without a cash deposit, has put property investment within the reach of the “mums and dads”.

At the same time as the banks were struggling to attract depositors, the equities market, the traditional alternative to the property market, was imploding. Losses sustained by the Telstra 2 investors, inconsistent returns and the horrors of HIH and AMP have severely dented the average investor’s faith in the market.

Superannuation returns moved into the red for the first time and average investors were aghast at the media reporting of corporate incompetence and calculated treachery. Putting your money into the traditional safe haven of bricks and mortar appeared to make a lot of sense.

Restructuring the Development Industry

While the vast majority of residential property transactions involve the sale of existing property, clearly the supply of new stock has a significant impact on the rate of price growth. In this regard the emergence in South East Queensland of the large, publicly-listed corporate developers such as Lend Lease, Australand, Stockland, Walker Corp, FKP, Lensworth, Devine, etc as the dominant players has led to a rationalisation of the land development industry, a far greater level of control on the rate of stock release and the emergence of the Master Planned Community as a dominant development form.

The builder to an extent has become a sub-contractor to the corporate developer as the only way he can access land. This “Just in Time” approach to stock control, coupled with a significant increase in the infrastructure costs applied by all levels of government and the creation of significantly more sophisticated communities, has clear implications for upward pressure on costs and prices in those communities plus a knock-on effect to the surrounding existing housing and land stock.

The Introduction of GST

Following the scramble to complete construction prior to the introduction of GST in June 2000, the building industry fell into a “black hole” due to demand having been pulled forward artificially.

The existing property market was handed a free kick by being made exempt from GST while the new housing market struggled to absorb an increase of 9-10 per cent overnight. While this increase has now been absorbed the existing housing stock has now risen to parity with new stock, once again lifting the average cost base across the board.