The property market in essence is a re-incarnation of the sharemarket, a trading place that reflects consumer confidence as well as the balance between supply & demand. It’s just a different asset. The other difference of course is that you can’t live in shares. 

So residential property at least has an additional intangible factor that can be helpful during troubled economic times like those we’re experiencing now. So what will happen to the property market over the next 3 years?

The first question of course is which property market? Despite the global village contracting in size and borders between countries, states an local areas breaking down rapidly, there are significant differences between geographically proximate markets. I will be parochial and focus on my home town of Sydney for the rest of this post.

Sydney has a few market layers – vertical & horizontal. First there is the geographic divide which is predominantly Inner City and Coastal versus the Western Region. One market (West) is on its knees with more mortgagee sales than ever seen before whilst the other has held up surprisingly well when you consider the economic whack the share market has experienced in the last 12 months.

And within the City and Coastal market there are three price bands that are each affected differently. The Lower End (below $750,000), the mid range ($750-$3m) & the upper end ($3m to $30m). 

The Lower End has been predominantly affected by interest rates and to a lesser degree rising unemployment. The mid range has suffered more from a collapsing share market and shrinking bonuses than interest rates but is not totally quarantined from interest rate rises while the Upper End is in the main unaffected by most of the above. For those fortunate few who can afford a $30m waterfront home or $15m penthouse apartment neither interest rates nor the share market are likely to have significant impact on their buying decisions (these buyers are likely to have a net worth above $100m). In the main I think there will continue to be extremely challenging times for the lower end of the market for the next 3 years. There is a large overhang of property that will need several rate rises and an improvement in the job market to re-install sufficient confidence to turn this ship around. The mid range will recover more quickly as it will ride off the back of a recovering share market which seems relatively close (next 12 months). In the Upper End, the demand for the best property continues to grow (albeit slightly dampened of late) and yet supply for Harbourside and Beachside property will never increase, so the math says this market will grow ahead of the curve except for a few momentary blips on the real estate radar.

So where will be the best buying over the next 12 months? I suspect it will fall in a few categories. 

First, Getaway Homes. Predominantly owned by whippy stock brokers who have been collecting big bonuses over the last few years and these properties may now be nooses around the necks of their cash strapped, margin called owners. Whilst Palm Beach may be somewhat buffered from the storm there will be many good opportunities for cashed up buyers to finally buy into some of the exclusive coastal enclaves they may have thought had moved beyond their budget.

Also, Undeveloped Sites are out of fashion at present due to the lack of confidence by developers and banks’ temporary hesitation at lending on these properties. So, it could be a good time to land bank as a rising residential market is on the way to most parts of Sydney (especially by the time these developments are complete).

And finally I think small blocks of flats and commercial property will offer good buying. Blocks of flats have fallen out of fashion of late but offer small investors an opportunity to buy well and add value to all apartments in the building with some common area TLC. And commercial property is starting to deliver very healthy returns in the range of 7.5-8.5% and with reducing interest rates should soon be able to provide buyers positive cashflow on a 100% lend which makes it very appealing.