Essay: Factors Influencing Australian Property Market Price And Investment Returns.

Demand and Supply in the Australian Property Market

Question:

Discuss about the Property Investment Report ?

The property market of Australia is at a booming stage in the current scenario. The high demand in the market and the low rate of supply has been identified as the primary factor for the rising price of the Australian property. On the other hand, there are several other key economic indicators that influence the aggregate price of Australian property (Colliers.com.au, 2017). Hence, it is important for property investors to understand the factors that influence the price of the property and the investment returns. The paper has been developed for Colliers International to understand the current scenario of the Australian property market for making productive investment.

The demand for property is booming in the major cities of Australia due to the ultra low interest rates charged by the banks on for the high amount of housing loans. The availability of money in the hand of the consumers has increased the purchasing power that further leads to high demand in the market. According to Bleby and Tan, (2016), the NSW capital has posted that an auction clearance rate of 84.3 percent has been achieved, which is the highest rate in the last 14 months (Bleby and Tan, 2016). It has raised an expectation that the banking regulator APRA will have to tighten the credit rates for the investors to control the uprising demand in the Australian Property market.

In order to understand how demand and supply influence the price of property in the Australian market, a diagram has been presented below with detailed explanations:

                                                                          Figure: Increase in Demand for Property in Australian Market

                                                                                     Source: (Armitage and Skitmore, 2013)

It can be seen from the above figure that the easy availability of loan and low credit rates have increased the purchasing power of the Australian investors leading to increase in the demand for the properties. The increase in the quantity demanded has resulted in a rightward shift in the demand curve from D1 to D2. On the other hand, the supply remains inelastic because it is not possible for the property makers to build new house or commercial buildings within a shorter period of time (Newell and Acheampong, 2011). Hence, an increase in the aggregate price can be evident from P1 to P2 in the Australian market. Additionally, the increasing demand and constant supply is the primary factor for the high rate of capital growth in the residential property market.

The key economic indicators affecting the Australian property industry have been described as follows:

• Gross Domestic Product: The GDP of Australia is a major indicator to describe the economic production of the country. Precisely, growth in the GDP will influence the market buyers to purchase the property so that the standard of living will be improved. Moreover, the income status is also denoted by GDP influencing the property market (Warren-Myers, 2016).
• Inflation: The Consumer price index of the nation indicates the cost of living and demand side from the consumers. The Reserve Bank of Australia has set the inflation target at 2-3 percent. As a result of the scenario, higher rate of inflation and cost of living can reduce the consumer spending. Therefore, the prices of property will go down due to lack of sufficient demand (Armitage and Skitmore, 2013).
• Interest Rate: Meanwhile, the interest rate can be identified as a stimulus for any real estate market. Due to falling interest rate, the Australian public can save more money to buy property. Therefore, the rate of interest is a decisive indicator affecting the real estate market.
• Employment: For a stable property market, employment is a crucial indicator. Decisively, increase in the rate of unemployment has made an adverse impact on the housing market as the demand for the asset will go down in a substantial order (De Francesco, 2017).
• Consumer Confidence: Finally, the consumer confidence is another significant parameter affecting the housing industry. Due to improved business confidence and consumer confidence, the sales will go up (Kim, 2013). On the other hand, lack of confidence may lead to inferior market affecting the property sales.

The primary reason for people investing in commercial property is the higher return on investment. A residential property could provide a return of investment from 4 to 5 percent in the major Australian cities. On the other hand, the commercial properties such as office space, warehouse or factories could provide return on investment between 7 to 8 percent. The investment returns depends upon several factors such as quality of the tenant, quality of the building and finally the location of the property (Duke, 2016). Additionally, the residential properties can be used only for rental purpose or personal use. But, doing business in the commercial properties can earn the investor significant returns depending upon the success of the venture.

Key Economic Indicators Affecting the Australian Property Market

Capital growth is an important factor that must be considered while making investment on properties. Considerably, the capital growth potential for commercial property is quite less than residential property due to the high rate of growing demand for residential property as compared to the supply of homes. A residential property in Adelaide usually has a capital growth rate of 20 percent and even can reach up to 40 percent per annum (Janda, 2016). On the other hand, the capital growth rate of a residential property in the major cities of Australia is below 20 percent. Hence, if long term investment is considered, the investor can make a huge amount of profit by investing in residential property as compared to commercial property.

Precisely, the return on a rental of the property can be substantially different from residential property and commercial property in Australia. If an investor invests in residential property, the investor will earn 5 percent per annum as a rental. Alternatively, the rental return for commercial property can be identified as 8 percent per annum. Meanwhile, the risk factors in both the sectors can be different, to say the least (Danaher, 2016). For instance, a comprehensive number of tenants are available for residential property rental whereas, for a commercial property, it may take a week or two to arrange a new tenant in case of a vacancy. 

According to the CBD Office Research and Forecast Report 2017, rental for office property may find substantial challenges during the upcoming years as the vacancy of office property has increased. The situation is different in States and Regional sectors. According to the report, in Sydney, the rental growth for office spaces will be remained steady despite increasing vacancy. In order to identify the net income of the property investment fund, rental growth has fuelled significant profit though incentives are falling sharply. In the city areas, Standard Annual Net Effective Rental Growth will be increased by 26.2 to 31.2 percent based on premium, A Grade, and B Grade office spaces (Colliers.com.au, 2017). Moreover, due to increase in net tenant demand, the overall market will look suitable for investment funds investing in the office properties.

Precisely, in the regional territories, the trends are not influencing enough. Due to lack of consumer confidence, the sales and net income in the regional property industry has reduced due to decline in demand (Penny, 2012). Although, lower incentives and growth in the rental market will stabilise the market sustainability attracting more investment funds in the local sectors. 

Conclusion

Through the identification of the current property industry in Australia, it can be stated that the opportunities are there for the large investing funds to come forward. Moreover, in the real estate market, the residential rental returns and income are lower than commercial and office rental. Therefore, investors must target the commercial real estate and rental market validating the associated risks. Meanwhile, the increasing demand and consumer confidence of the rental tenants have influenced the large investors to increase their profitability in the city areas. Conclusively, focusing the office rental market, the forecasts are substantial, to say the least as far as sales and net income is concerned.

References

Armitage, L. and Skitmore, M. (2013). Property Market Analysis in the Valuation Process: A Survey of Australian Practice. Pacific Rim Property Research Journal, 9(4), pp.330-347.

Bleby, M. and Tan, S. (2016). Why housing demand in Sydney is so strong. [online] Financial Review. Available at: https://www.afr.com/real-estate/residential/nsw/why-housing-demand-in-sydney-is-so-strong-20160825-gr0sks [Accessed Mar. 2017].

Colliers.com.au. (2017). Metro Office Research and Forecast Report. [online] Available at: https://www.colliers.com.au/find_research/office/cbd_office_-_first_half_2017/ [Accessed Mar. 2017].

Danaher, C. (2016). Where to get the best rental returns. [online] www.realestate.com.au. Available at: https://www.realestate.com.au/advice/get-best-rental-returns/ [Accessed Mar. 2017].

De Francesco, A. (2017). Gearing and the Australian real estate investment market. Journal of Property Investment & Finance, 25(6), pp.579-602.

Duke, J. (2016). Five graphs that show why Australia's property price growth is over. [online] Domain. Available at: https://www.domain.com.au/news/five-graphs-that-show-why-australias-property-price-growth-is-over-20160713-gq5ayk/ [Accessed Mar. 2017].

Janda, M. (2016). Housing supply and demand in balance: Fitch. [online] ABC News. Available at: https://www.abc.net.au/news/2016-11-30/housing-supply-and-demand-in-balance-fitch/8080218 [Accessed Mar. 2017].

Kim, J. (2013). The Dynamics of the Australian Industrial Property Market. Pacific Rim Property Research Journal, 9(4), pp.398-408.

Newell, G. and Acheampong, P. (2011). The Dynamics of the Australian Property Trust Market Risk and Correlation Profile. Pacific Rim Property Research Journal, 7(4), pp.259-270.

Penny, R. (2012). Intravenous Immunoglobulin in Australia Supply and Demand. Vox Sanguinis, 83, pp.447-451.

Warren-Myers, G. (2016). Sustainability evolution in the Australian property market. Journal of Property Investment & Finance, 34(6), pp.578-601.