A study released last week by BankWest showed that first home buyers are taking less time to save a deposit for their home due to flat property markets and rising incomes.

Couples buying their first place took about three years and nine months on average to save a deposit in 2012 – about three months less than in 2011.

And they didn’t have to save quite as hard, with the average amount needed for a deposit falling by $3000.

Of course if you live in Sydney or Melbourne, it takes a little longer to save your deposit – five years and eight months and five years respectively. That’s no real surprise and a reason more first home buyers are turning to apartments.

If you happen to live in Queensland or Tasmania, it will only take three years and seven months to lay down a deposit on a home in both states.

The report showed that buyers needed to save an $77,600 in the 2011/2012 financial year for a 20 per cent deposit on the median national house price of $423,000.

That was almost $3000 less than the $80,500 needed the year before.

The Bankwest study used Australian Bureau of Statistics Census income data for couples aged 25 to 34 and median house prices to determine average times to save a 20 per cent deposit. Almost 15,000 more buyers secured their first home in the 2011/2012 financial year than the previous year, a rise of 17 per cent.

Of course there is always affordable housing to be found in every state – you just have to go further out or to regional towns. Fact is, that’s not where many people want to live and the desire for many of us to live in the same type of suburb in our 4 big capital cities is what is pushing up rentals.

With rising rents, lower interest rates, higher wages and signs that the property market has bottomes, it is likley that more first home buyers are going to hop onto the property ladder in 2013.

Across the 8 capital cities, the month of November saw the RP Data-Rismark Home Value index rise 0.4 per cent during the first two weeks only to relinquish these gains in the last two weeks of November and finish flat for the month.

As usual, there existed notable dispersions in the returns observed across the individual capital cities. Melbourne home values fell by -1.0 per cent over the month while all other capital cities rose.

The strongest performer over the month of November across the major capital cities was Perth where improving housing market conditions were evident with values up 1.0 per cent.

Brisbane and Adelaide values each increased by 0.5 per cent while Sydney values rose by just 0.1 per cent.

On a quarterly basis, most capital cities recorded a rise in dwelling values.

The largest capital gains being found in Darwin (+3.1%), Perth (+3.0%), Brisbane (+0.8%) and Sydney (+0.6%).

The only cities where values were down over the three months ending November were Canberra and Melbourne (both -0.7%) and Hobart (-4.5%).

What's happened over the last year?

On an annual basis, Sydney (+1.3%), Brisbane (0.3%), Perth (+3.4%) and Darwin (+13.1%) have each shown a rise. The largest fall over the past twelve months to the end of November was recorded in Hobart, where dwelling values are down -7.0 per cent.

According to RP Data Senior Research Analyst Cameron Kusher, the November market conditions highlight that the road to a market recovery will not be without pauses and those cities which performed very strongly in 2009 and 2010, like Melbourne, may show continued weakness.

"Capital city home values remain -5.6 per cent lower than their historic highs of 15 November 2010, but, up 2% from their low of late May 2012."

"Home values in Brisbane and Perth remain below where they were five years ago whereas the other mainland cities have all increased over this period. This has meant that relative to the other capital cities, Brisbane and Perth have experienced affordability improvements and subsequently we may see them become more popular from both an owner occupation and investment perspective." Mr Kusher said.

Rismark International CEO, Ben Skilbeck, commented, "With the recent sharp improvement in consumer sentiment showing that optimists now outweigh pessimists, house price to income ratios back at 2003 levels and meaningful recent housing affordability gains, it will be interesting to see the impact on the housing market if interest rates are further cut in December as widely anticipated. Given the historically weak seasonal month of December, if rates are cut in December, it’s likely we’ll have to wait until early in the new year to see the housing market response."

Australian Bureau of Statistics economic data key to the housing market, including building approvals and housing finance commitments to owner occupiers, are also showing improvement over recent months. These improvements are being reflected in an increased level of sales activity and improving home values across a number of capital cities over recent months.

Source: RPData

Despite recent figures from The Economist stating the Australian housing market is overvalued by 36%, and reports locally and abroad concerned over an apparent property bubble in Australia, now is the time for hesitant property investors, including first-time buyers, to make their move if they want in on the Australian dream.

Moreover, if Australia is to avoid the boomerang effect taking place around the world, whereby millions of adult children are returning home to reside with parents into their 30s, it is crucial that first-time buyers start considering property investment as a way into the market rather than focusing initially on home dwelling options.

Potential investors sitting tight for a bubble to pop could be waiting a long time.

According to a recent study by KPMG, 60 years ago house values in Australia stood at roughly seven times the yearly household income and today that figure stands at a very close 6.9%.

Property values have remained on an upward trend with modest corrections within a cycle, and there are no signs to suggest we are heading for a major downward turn.

High living standards, low and controlled interest rates, relatively high population growth, undersupply and a healthy banking system are only a few reasons why buying property in Australia is an attractive option for personal occupancy or investment. In fact, demand is undeniably set to grow.”

Some of the key drivers contributing to the rise in housing demand include:

• Retirement of the baby boomer generation and the widening skills gap left behind require further skilled talent to replenish skills and the tax base, which will inevitably come from abroad;

• The wealth and opportunity offered by Australia, which attracts skilled migrants from neighbouring countries each year;

• The steady entry of five million Generation Ys into the market, which, according to projections by the Australian Bureau of Statistics, will raise the demand for housing by 15% on the previous generation, as more attempt to edge away from the family home;

• A diminishing amount of available land for new housing, as people flock to city hubs;

• A lack of government initiatives to ensure Australia has an adequate housing supply; and

The sum of these things will keep the value and cost of existing housing high.

Given growing demand, smart buyers will invest now, but too many assume the first property they buy is going to be the one in which they live and grow old and so they hold out for the Australian dream to come along and potentially either miss the boat or pay a higher entry price.

In the current landscape, investors – particularly those buying for the first time – become more strategic in their approach. For example, a first property could be used for rental purposes as opposed to becoming a buyer’s first home.

This would not only generate income, but allows investors to use that property as a security for funds to buy a more desirable home down the line. These investors must do the numbers as the ability to purchase a more strategic property may outweigh any grants available. The tail should not wag the dog.

Property acquisition should be treated as a business process as opposed to an act of the heart and realise that it can be a stepping-stone towards acquiring the perfect home later in life.

Property is the biggest asset most people will own, and so they need to surround themselves with professionals who can offer advice in making considered and informed decisions, such as buying in the right market and property cycle or choosing a property with the opportunity to create equity through renovation or improvement, boosting both capital value as well as rental yield.

Parental support may be an option for adult children lacking sufficient funds to get on the property ladder, but this requires caution. A simple and formal loan agreement to help with a deposit is considered safer than becoming co-guarantor – 100% liability for the debt and no assets can lead to a negative equity trap in cases of bankruptcy or where the child splits from a partner the guarantor could be left holding the debt with no asset.

While for the likes of the UK, the rise of the ‘boomerang generation’ is driven predominantly by high levels of unemployment and a poor economy, Australia could find itself experiencing a similar effect, not because our economy is weak, but because not enough is being done by the government to prevent a housing shortage.

The Harbour city has led the way in constructing higher density dwellings for the last few decades, so when senior economist for Australian Property Monitors Dr Andrew Wilson, recently stated that  Sydney’s renewed love affair with apartment living and investment is continuing, it came as no surprise to me.

Australian Property Monitors reported that, although the median price for units in Sydney fell just 0.2 per cent in the June quarter, they surged 3.6 per cent over the first six months of this year.

Sydney is clearly the best performer for median unit price growth of all the major capitals over the year to date, with Perth the next best, rising by 1.7 per cent. Conversely, Melbourne apartment prices fell by 1.7 per cent and in Brisbane they fell by 3.6 per cent over the first six months of 2012.

Sydney’s median unit price is tracking around its peak level of $465,221 recorded over the March quarter this year.

Investors are back

A big influence on rising apartment demand in Sydney this year has been an increase in investment activity. Latest Australian Bureau of Statistics data shows the value of residential investor finance for NSW up by 6.6 per cent over the first half of this year against last year. Investor loans are also 3.8 per cent higher to June compared to the first half of 2010, which makes NSW the only state in positive territory.

Dr Wilson expects buyer activity and price growth to continue for the rest of the year in Sydney’s apartment market.

At Metropole we’ve been noticing an increasing demand from investors keen to buy into the Sydney market, where apartments are more affordable than some initially thought and in general yield strong rental returns.

Particularly popular right now are areas around Sydney’s inner west, which is going through significant gentrification and showing strong capital growth, along with the ever popular inner eastern suburbs.

Peace and profits

A great example of the investment gems to be found in Sydney at present is this 2-bedroom apartment recently purchased for a client in Ashfield.

Located at the rear of a small boutique block, the unit has a lovely leafy outlook, is close to all amenities and best of all, had an existing tenant providing guaranteed instant returns for the investor.

With its own car space and the potential to rent for between $400 to 420.00 per week with a bit of a minor makeover, the proven capital growth of Ashfield will ensure this investment ticks all of the client’s boxes for years to come.

The purchase price of $420,000 was negotiated prior to the auction and settlement occurred in July.

Seven of Australia’s eight capital cities have registered capital gains over the last three months with the exception being Adelaide.

After recovering by one per cent in June and 0.6 per cent in July following the RBA’s back-to-back rate cuts, dwelling values across Australia’s combined capital cities were unchanged in August.

At the end of August, dwelling values across Australia’s combined capital cities were down just  -0.6 per cent in the first eight months of the year compared to a -2.2 per cent year-to-date loss in May.

The year-on-year numbers have also shown a substantial improvement. Dwelling values were down -2.4 per cent at the end of August compared to -5.3 per cent in May.

Dwelling values in both Sydney and Melbourne both increased by 0.1 per cent over the month of August, with the two biggest capitals recording 2.4 per cent and 2.5 per cent capital growth, respectively, over the last three months.

In August gains were also seen in Adelaide (+1.4 per cent), where housing values had struggled in recent months, and Canberra (+1.2 per cent).

The markets weighing down the result were Brisbane (-0.2 per cent), Perth (-1.2 per cent), Hobart(-1.2 per cent) and Darwin (-0.5 per cent). However, all cities except Adelaide have experienced a net increase in home values over the last quarter.

According to RP Data research director Tim Lawless, Sydney is proving to be one of the most consistent performing capitals this year.

“Sydney dwelling values have increased over five of the past eight months providing a cumulative capital gain of 1.9 per cent over the year to date. Canberra (+1.4 per cent), Hobart (+3.9 per cent) and Darwin (+8.4 per cent) have also yielded owners capital gains over the first eight months of 2012. In contrast, other capitals, like Adelaide (-1.3 per cent), Brisbane (-1.4 per cent), Perth (-2.5 per cent) and Melbourne (-2.6 per cent), have recorded tougher conditions this year.”

Mr Lawless noted that the rebound in Melbourne was encouraging given more worrying signals earlier in the year:

“In May 2012, Melbourne home values were down 5.1 per cent in just the first five months of the year. However, the bounce in the period since the RBA’s May and June rate cuts has helped Melbourne values claw-back about half of these losses to be off a more palatable -2.6 per cent,” Mr Lawless said.

Highlighting the improved affordability over the past quarter, Mr Lawless points out that almost every capital city has recorded capital gains over the last three months.

“Improved affordability since June has helped dwelling values rise across every capital city over the three months ending August 2012, apart from Adelaide. The big question is, ‘can this growth be sustained?’ On the one hand, winter is seasonally slow, so these results have been encouraging.”

“On the other hand, we know that there is likely to be an increase in new supply over Spring, which may introduce some headwinds for a recovering market. How the market plays out over the Spring season will be an important litmus test for its resilience,” Mr Lawless said.

A spokesman from Rismark added, “Late last year we forecast that housing conditions in 2012 would deliver a material improvement over the -3.8 per cent loss suffered in 2011. Despite the fact that the RBA did not cut rates again until May, and we had the banks hike rates by about 25 basis points in the intervening period, the national market has clearly stabilised.”

“Substantially improved housing affordability combined with new demand deriving from the self-managed superannuation and Asian markets are a positive. Price adjustments in the luxury market in concert with global economic uncertainty are demonstrable negatives. We remain of the view that 2012 will yield better outcomes than those experienced in 2011.”

Source: RPData.com

Here’s what he said…

Nationally, 58% of flats, units and apartments are owned by investors. That is quite an amazing statistic, especially when you compare that with detached houses where only 21% are investor owned.

Across the capital cities the proportions are even higher. Darwin tops the list with 70.6% of all units being rented followed by Brisbane where 70.2% of all units are rented.

The lowest proportion, 60.3% in Sydney, is still significant. I would presume Sydney’s proportion is probably lower due to the city having the highest house prices (more owner occupiers choose units over houses thanks to the lower entry price), as well as the fact that Sydney is the most mature unit market in the country.

The high rate of investor ownership of apartments begs the inevitable question… why?

Similar to owner occupiers, it partly comes back to price points.

The unit market generally offers a lower buy in price (investors face affordability hurdles too!) than detached or semi-detached homes. Based on median selling prices across the combined capital cities over the June quarter, units are 12% or $59,000 more affordable than houses.

The gap is widest in Sydney where unit prices are almost 23% or $139,000 lower than house prices.

Yields are also important

Another valid reason is the fact that rental yields have historically been higher for units compared with houses.

The latest RP Data-Rismark indices show unit yields across the combined capital cities are currently at 4.9% compared with 4.2% for detached houses. In fact, across every capital city, rental yields on units are higher than yields for houses (except Darwin where both are at 6.1% which are the highest rental yields across the capital cities).

Finally, it is often the case that units are located in more popular locations for both renters and owner occupiers. The majority of unit developments are located close to transport networks, major working nodes and retail amenity.

The high proportion of investors really doesn’t come as a surprise!

The warning follows research by RateCity, which found that the overall cost for loans with introductory rates were more expensive on average than basic and standard home loans.

In fact, it would potentially cost an extra $6,556 for a $250,000 home loan over 25 years for the average introductory variable home loan compared to a basic or standard home loan.

RateCity comparison of average introductory home loan and standard/basic home loans

Source: RateCity.com.au, excludes packaged home loans

*Based on comparison rate for a $250,000 home loan over 25 years

Michelle Hutchison, Spokesperson for RateCity, said introductory rate home loans generally end up costing borrowers more because they have a much higher revert rate compared to the average standard and basic variable home loan rates in RateCity’s database.

“Some borrowers, particularly first home buyers, are attracted to introductory home loans because they appear to be a cheaper option for getting your foot through the door of the property market with their reduced interest rates at the start.

“While they may save borrowers a small amount of money in the first year, most intro home loans revert to a much higher rate and then end up costing borrowers more money over the life of the loan,” she said.

Many packaged home loans are also marketed by discounts rather than the actual interest rates, according to Ms Hutchison.

“Most borrowers with the major banks are believed to be in packaged home loans, where borrowers pay a higher annual fee, often between $350 and $400, in return for a discount for the life of the loan. Often fees on other products such as credit cards and transaction accounts are also waived.

“While home loan packages can be good value for some borrowers, higher discounts are generally only given to borrowers with bigger loan sizes often over half a million dollars, and in some cases are also restricted to larger deposits.

“That’s why it’s so important to compare home loan comparison rates rather than the size of a discount. Comparison rates are a more accurate way of finding out how much a home loan will cost because it takes into account the loan size, upfront and ongoing fees and averages out the interest rates over the life of the loan.”

Sydney leads the way to apartment living

Greater Sydney remains the apartment capital of Australia. More than a quarter of greater Sydney residents (25.8%) live in this type of dwelling, and this proportion is virtually unchanged over the last 5 years.

Apartments as a percentage of the total housing mix in greater Melbourne have in fact fallen as a dwelling type from 16.1% in 2006 to 15.3% in 2011 despite the total number of flats and units rising from 217,836 to 219,111 during this period.

According to the census, 11.7% of greater Brisbane residents live in flats, followed by Adelaide (10.4%) and Perth (9.1%).

If we compare this to the number of people living in apartments in other major capitals around the world, you can see that we have a long way to go to catch up.

Our lifestyles are changing

For generations backyards, barbecues and big houses have been the norm for Australian homeowners, but that’s all changing and now as our lifestyles are changing there is evidence of a growing preference toward apartment-style accommodation in Australia.

Since more of us are swapping our backyards for balconies, apartments are my preferred style of residential investing today.

A 2012 report from the Grattan Institute aptly entitled The Housing We’d Choose, indicates a growing preference toward apartment-style accommodation in Australia. The study found that Australians want more apartment-style housing and are moving away from detached housing.

The report found we’re not building enough of the type of accommodation more and more people want. It suggests there are potentially thousands of tenants and home buyers out there who simply cannot find the type of accommodation they are seeking in the places they most want to live.

Over the years our perception of townhouse and apartment living has changed.

Where once we saw medium- and high-density developments as “slums” intended for lower socio-economic classes, in the last 20 years or so apartment living has become the practical and trendy alternative, in particular sought after by young, upwardly mobile professionals.

What of the future?

Today, the inner suburbs in our capital cities built out and the cost of constructing new apartment buildings is prohibitive – land costs more, construction costs have increased, and town planning regulations mean it’s much harder and more expensive to build new apartment complexes.

The skyrocketing cost of new construction means that the values of established apartments are being pulled up to maintain the price differential between established and new apartments.

Apartments make great investments

With the number of Gen Y’s looking for accommodation continuing to rise, rental demand for near city and inner suburban units and apartments will grow significantly in the coming years. And our old friend the supply and demand equation will ensure that rents for these types of properties keep rising, as will their values, as higher yields will entice investors back into the market.

Today apartments make great investments and in general appreciate in value equally, if not more, than houses in our capital cities and interestingly during the recent property slump apartments held their value better than houses.

And this trend is likely to continue as it’s about much more than affordability. As I’ve already explained, significant changes in our population profile and lifestyle priorities are creating a strong demand for apartment living.

Today, our lifestyles are vastly different to those of our parents. We’re working longer, we’re increasingly time poor and we’re starting families much later in life. This means proximity to work, transport, entertainment, cafes, shops and beaches is becoming more important than owning a piece of land. At the same time apartments are continuing to improve in design and size and are generally closer to the CBD than affordable houses.

It should be fairly obvious that more single households, smaller families and the impact of the baby boomers downsizing will continue this trend in the long-term. People are getting married later in life and apartments suit their busy lifestyles; and when a baby comes along, they will often stay in their apartment or buy a bigger one in the same location.

Case Study of a great investment

Here’s an example of a great apartment we bought for a client as an investment:

This 2 bedroom apartment is located in Summer Hill, a primarily residential suburb of the Inner West region, adjoining two of Sydney’s major arterial roads, Parramatta Road and Liverpool Road.

Despite formerly being working class, Summer Hill and many of the surrounding suburbs have gradually undergone gentrification over recent years. It features a mix of federation-era houses, as well as medium density apartment blocks near the railway station.

This great 2 bedroom apartment will make a first class long term investment for our client who secured it at an excellent price and a strong yield.

This is the type of property that has a level of scarcity, meaning it will be in continuous strong demand by owner occupiers (to keep pushing up the value) and tenants (to help subsidise the mortgage); bought in the right location (one that has outperformed the long term averages), at the right time in the property cycle and for the right price.

According to Australian Property Monitors (APM) the median weekly asking rental for Sydney units rose by +4.4% over the quarter to $470. Unit rents in Sydney are now approaching those for houses, currently at $500 a week after a flat quarter and largely flat over the previous year.

Increasing demand by tenants for Sydney apartments reflects growing interest for this type of accommodation that typically is located closer to the CBD and provides more established urban infrastructure. Sydney’s rental market remains highly competitive for prospective tenants with low vacancy rates being recorded in most areas.

By contrast rental growth in Melbourne and Brisbane has remained flat over the June quarter, with Brisbane unit rents falling by -1.4%.

Brisbane’s current median weekly asking rents at $380 for houses and $360 for units are higher than those in Melbourne at $360 for houses and $350 for units.

According to APM Melbourne remains the most “tenant friendly” market of all the mainland capitals with rental growth for both houses and units having been subdued for some time. With comparatively high vacancy rates in most areas and a glut of new apartments in the pipeline and a slew of vacant properties in the outer suburbs as over zealous builders delivered too many new house and land packages, this is expected to continue.

There is also concern of a looming oversupply of apartments in the inner-Brisbane market, where there are more than 40 projects in various stages of development.

In Perth, median weekly asking rentals have risen markedly over the June quarter with house rents up by +7.5% to $430 and unit rents up by +8.6% to $380.

These rises will likely continue with Western Australia’s population set to grow by over 3% in 2012 placing upward price pressure on a Perth rental market already characterised by a shortage of accommodation.

Other capital city markets have largely recorded benign results over the June quarter although Adelaide house rents rose by +1.2% over the quarter to $340, while Canberra unit rents rose by +2.3% to $440.

Canberra continues to track Sydney’s rental growth indicating a tight rental market with similar high rents.

Although Darwin recorded significant rental growth for both units and houses over the June quarter, much of this can be attributed to seasonal effects that are characterised by extreme quarterly fluctuations typical of this market.