Puzzle Finance Blog


Buyers need to take a broader interest


Consider all factors in a property market before committing to a purchase.

It's  easy to become fixated with interest rates when you're shopping for real estate.

Yet the cost of borrowing money isn't the only factor that motivates people to buy houses and invest in property.

Far from it. The unemployment rate is a more reliable indicator of confidence in real estate than a 25 or 50-basis-point move in interest rates.

That's why it can be a big mistake to interpret a fall in rates, even a large one, as the harbinger of the next boom in housing prices.

It seems obvious to point out that investors should buy property in areas with low unemployment rates. Always check out the demographics of a suburb if it is full of bargains.

Areas where a high percentage of people are jobless quickly become unstable. People move away and these areas face other challenges, such as higher crime rates and declines in overall economic activity.

To achieve high rates of capital gain, you need to look for strong employment across a diverse range of industries. This is usually a clear sign that the economy is vibrant and able to withstand short-term shocks, such as factory closures or the decline of single industries.

Healthy employment levels in an area where there is only one big industry can give a false sense of security.

The recent mass lay-offs of workers in Victoria's auto industry and threats of more retrenchments certainly won't help property prices in parts of Melbourne's west or in Geelong. Victoria's unemployment rate hit 6.2 per cent this month - its highest level in three years.

Australian Bureau of Statistics data shows there is a jobless rate of 9.2 per cent for males in south-eastern Melbourne.

The strongest areas for jobs are Melbourne's eastern and southern suburbs, where unemployment among males is at less than 4 per cent.

Peter Rogozik, of Peter Rogozik Property Consulting, says most people with mortgages can reduce their discretionary spending and find the money to cover an increase in loan interest.

''However, the threat of losing your job, whether it be real or perceived, will put an end to any thoughts of buying property,'' Mr Rogozik says.

''Property is a big-ticket item compared to other asset classes and confidence plays a major role in such a large purchase. The public is being regularly bombarded with negative sentiment, such as news of the job cuts at Toyota, and it is affecting buyer confidence.''

Professor Richard Reed, who lectures on real estate at Deakin University, also stresses that employment has a large influence on housing demand.

Housing affordability is about being able to meet mortgage payments, he says, and a lack of employment especially affects the lower end of the market.

Investors need to recognise that the structure of the economy - as represented by the relative sizes of different industry sectors - is constantly changing. Prices of primary commodities, such as minerals, energy and food, are being driven more by emerging economies than by rich, established economies.

This means that where jobs are lost in manufacturing in a rich country such as Australia, they can increase sharply in other areas, particularly in service industries.

There are implications in this for anyone who buys and sells residential property. The services sector is more likely to outsource work and to establish ''satellite offices'' in the suburbs and regions.

The more jobs there are, the more productive an area becomes and this, in turn, generates higher spending within a micro-economy, opening up new investment opportunities beyond the inner suburbs.

Posted by Chris Tolhurst - The Age on 5th May, 2012 | Comments | Trackbacks
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