USA Has Coughed - Have We Caught a Cold?

Australia is right in the middle of a classic liquidity crisis. A crisis not of its own doing but one borne out of a 50% reduction in the availability of funds borrowed out of the USA for financing property and business development in Australia.

More recently, the lack of confidence in the USA financial markets has caused a fall in the sharemarket by around 20% since June 2008. This in itself is not catastrophic because the sharemarket will inevitably rebound in the future and may even surpass its previous record highs.

The Australian economy is underpinned by record low unemployment, record high immigration, a stable trade union environment and moderate interest rates, which are not high by historic standards. The only real problem is liquidity and this affects new property development and re-financing of existing facilities. New projects on the drawing board are likely to be postponed until project funding can be accommodated.

Everybody wants to know the possible effects of this liquidity crisis on the value of their properties. In my opinon there will be alot less buyers around over the next 12-18 months, which will have a downward effect on property prices, moreso in the higher price brackets.

The extent of price reductions will vary on locality and price range. In prime locations (such as inner city or beachfront)with prices around $500-700,000 there should not be much change, however in fringe locations and higher price brackets there could be reductions in the order of 10-20%.

To put this in context, most property owners benefited from a 100% price increase in the 2003-04 property boom when we saw the highest rise in property values in Australia since the 1851 Goldrush! A 20% reduction now is more of a correction than a downfall.

In the Midwood Report, I have stated for some time that the next uplift in the property cycle is due in 2010 and the size of this lift is expected to be in the order of 30-40%. This will over correct the reductions we are seeing now.

In the long term property values in South-East Queensland increase at approximately 8%pa. This has occured over a long period, dating back to the 1960s. When added to rental returns of about 5%pa, the effective gross yield of investment properties is around 13%pa.

Have we caught a cold from the USA? Yes but its not terminal and with a bit of management it can be cured without too much pain.