Affordability issues are starting to make their mark. For the first time that I am able to remember, and possibly in history, the growth rate in units across Australia has outperformed the housing market. The unit market outperformed the housing market by 0.5%. This is a trend that I expect to see occurring more over the next decade. The First Home Buyer's Grant activity slowed during the last quarter and there was a higher level of activity in the middle market segment.

Here are the September 2009 results:

One feature that most may not be aware of is that in the last 20 years Brisbane House prices on average have provided a better annual rate of growth than either Melbourne or Sydney. In fact, Sydney has shown the poorest result of 6.34% pa while Melbourne provided the next poorest result of 6.8% pa. Brisbane, the "star", was 1% pa better at 7.8% pa. One other worthy point in this is that during this period Brisbane was the most affordable city of the three, and Sydney was the least affordable.

Staying with the affordability issue for a moment longer, I can bet that most of us will not realise how important it is to ensure the total return is high. A low property cost generally means high rental yields. Clearly, this is only a truism where the property will be in demand. So which city in Australia provided the highest total return to investors on average over the last 10 years? Yes, you probably have worked it out, Hobart with a total return of better than 17.5%pa.

Generally, the trend across Australia appears to have passed the period of correction and all markets are presenting as if there will be positive growth. However, we expect the growth to be small to minimal due to rising interest rates and the unaffordability of many markets.

Minutes of the Reserve Bank's last monetary policy board meeting were released today (20th October). They include this ominous warning: "Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the inflation target over the medium term. More generally, very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth." This is the clearest indication yet that we are in for a series of rate rises until rates are no longer at "very low levels".

Yes, comment is one way in which the Reserve Bank manages the economic situation. But it may also point to a view by the Governor and his colleagues that some moderation of house price growth would be a good thing. It seems possible that he may not be concerned if house prices stagnate or decline a little as a consequence of moves on interest rates. He has also commented that he was concerned by the fact that the recent Federal Government First Home Buyer Grant had not provided significant stock but had impacted on house prices generally. It can't be said too often that with the very large immigration intake and the stock shortages that exist, that where houses are affordable, house price growth is inevitable, and where they are not, then rental yields will significantly increase.

If the view of the Reserve Bank is as stated then we need to recognise that the mortgage belt of Australia is about to suffer and hence, no further investments in those areas should be made until such time as we see what the impact of rising interest rates is. Should corrections in these areas take place then they will present opportunity mid next year.

Again, if our view about the attitude of the Reserve Bank is right then the Federal Government should immediately review its First Home Buyer Grant scheme and probably cancel it. It should be replaced with a scheme that is only available to property which is being constructed or provide grants to people or corporations making available land for new developments.

There has been comment that Darwin is about to correct. Darwin was again to the year's end 30th September 2009, the standout performer, providing investors with a total annual rate of return of 19.5% for houses and 23.8% for units. It retains the mantle of providing the best rental yields and presents as having the highest weekly rental of anywhere in Australia.

The trend graph presented to the right does indicate that there is some slowing but the rate of downturn is mild and in line with prior movements. The population is highly mobile and home ownership is relatively low. Investors generally tend to be capable of weathering moderate increases in interest rates and the impact on them due to our tax system is not as severe as for the owner occupier. As a consequence, while there will be an impact as rates increase it will hit hardest in the areas of high first home buyer activity and not at all elsewhere. Hence, overall we can expect some price growth moderation but no price falls in this market.

The future of our housing markets is covered at length in our quarterly Residex Reports for the September quarter - in them you will find where the best opportunities are and why. And if you are an annual subscriber to our quarterly report, you'll receive the Annual Supplement free of charge, with a complete analysis of the growth history and median values of every suburb in your state. These figures will help you:

• Find the most affordable areas (not forgetting the unit market);
• Avoid the areas where the first home buyer have gone;
• Look for the trends in the annual growth data which indicate that a suburb is about to present growth;
• Consider the long term historical annual rate of growth as it is an indicator to the future.
• Identify those suburbs where rental yields are highest.

If you are not an annual subscriber to our Residex Report then may I suggest you become one, because the Annual Supplement provided to our subscribers is unique. There is no similar report provided by any party other than Residex which will allow you to undertake your own research and identify the best opportunities for investment. You will be able to pick the suburb which is most suitable for you. You will be able to do it before the majority realise the investment opportunity exists. Having made your suburb selection don't forget to obtain a Right Price Report from one of our sponsors when selecting a suitable property so you can make sure you are paying the right price for it.

John Edwards, CEO

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