Sharemarket Volatility May Drive Another Surge of Investors to Property. But has the market peaked?

Real estate agents couldn’t wipe the smiles of their faces, as investors – up to dozens for some properties, according to agents, outmuscled the less aggressive “owner occupier” home buyers to pay what seemed at the time – astronomically high prices for property.

The situation was most noticeable in Perth and Melbourne, but across the board in almost all regions of the country (history is yet to tell us whether 2007 would be remembered as a boom, or a surge).

But one thing is certain, interstate investment – again from Western Australia but also from Queensland, chasing investments in Melbourne and Sydney, became a feature of the 2007 real estate market.

Ironically, the recent push by investors to buy into the market has pushed owner occupiers out, where they are flocking with other outpriced home buyers for rental properties they had to pay about 15 per cent more to lease.

The long-term effects of this trend are yet to surface. And I think it could go two ways:

1. On the one hand, sharemarket volatility is more likely to drive more investors to bricks and mortar, creating another strong surge in the market. Recent real estate prices and strongly rising medians may shock many people in the market as being high – but relative to Sydney, Perth, Canberra and, increasingly, Brisbane – suburbs in a city like Melbourne may not seem so shocking.

2. Investors will have concerns the 2007 property price surge may be unsustainable, and decide instead to invest in bank bonds, which are offering plenty of plusses, in around the property and sharemarket turbulence.

Residential property yields (annual rent, divided by purchase price) have fallen from about 6 to 8 per cent ten years ago, to between 3 and 4 per cent today.

Whereas in 1998, a property investor could roughly cover the interest rate they had to pay with the rent they received, today a property investor has to tip in a lot more. This is only going to go up too, with interest rate rises – of which experts are tipping at least two next year.

So, with the share market in turbulence, and with the dawn of a new year…what are investors and prospective property investors thinking? Is the residential property market in shallow waters anymore? Is it the cycle for the bank bond?

Have Australian real estate prices peaked?

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Marc Pallisco

A former property analyst and print journalist, Marc is the publisher of