By Tristan Marshall, Director, Platinum Property Solutions

Happy New Year and for the parents, don't those school holiday's last a long time these days? Writing about the state of the current market poses an interesting quandary - one person says sunshine, another says gloom; but very little of it has a basis in fact.

To me, markets tend to be driven by a number of factors, so I will address each as an individual topic and then look at these both from an investor and owner-occupier point of view. The factors that I believe most influence the market are supply and demand, affordability and sentiment.

It is very difficult to look forward in any situation without looking back to see where you have come from. In the case of the Victorian Property Market, it looks very much like the following. Firstly, we had two years of phenomenal growth (about 21.3%), followed by one year of being the worst performing of the capital cities, with a growth of -6.9%. So what caused this to happen? In 2009, the Global Financial Crisis hit the world. America's property market was on the skids - the majority of which was caused by an 8% vacancy rate across the country and NINJA loans (no income, no job).

This, combined with the world's largest economy having no recourse for a bank on loans once the keys to the property just financed were handed back, becomes a recipe for disaster. Suddenly, the asset books of banks are written back - credit becomes scarce, and the world realises there is not as much credit to go around.

So how does this effect Australia sentiment-wise to stop people spending? The supply of developer and purchaser finance dries up, with companies such as Capital Finance (owned by Bank of Scotland and one of the worst banks hit) out of the market. This means that new developments stall due to a lack of available funding. At the same time, the Reserve Bank slashes Interest Rates, and the State Government starts throwing around large chunks of cash for first homebuyers.

This in turn, means that suddenly affordability is at a level we haven't seen for some time; with lower interest rates and extremely low vacancies of 1.4% (3% is considered a balanced market) across Melbourne. Demand by investors is at a high, as is demand for owner-occupiers, with the First Homebuyers Grant spurring the market. Also, affordability of an upgrade in housing becomes a very real possibility for many Australian's.

This continues throughout 2010, with the economy booming due to mining. Supply of finance starts to ease towards the end of the year, as global markets settle and the U.S.A doesn't default.

Then there are a few political shenanigans, and we suddenly have a new Government. As someone who has a partner in mining, I get to see first-hand, the effect of a two speed economy. In keeping with tradition (no slow take offs, no soft landings), the Reserve Bank raises rates. Although many outside of the booming industries are suddenly struggling to make ends meet, and have realised that they have perhaps bitten off more than they can chew. Developer's resume business as the supply of funds is back, and towards the end of the year, we coin the phrase 'The PIGS of Europe'(Portugal, Ireland, Greece and Spain).

2011 begins and rates are up again, and mysteriously, the first homebuyer market that should be there is gone, as we pilfered it several years before. Suddenly, as a multitude of properties hit the market, the supply levels far outstrip the demand; rental rates start to drop, and investors who are faced with higher rates and less rental demand, withdraw from the market.

The press pick up on sentiment, and in the finest Australian tradition; try to build as much doom and gloom out of the situation as possible. This talk of recession makes people stop spending (the most likely thing to cause a recession), and retail sectors dry up. Unemployment levels climb, demand for housing falls, whilst supply levels keep increasing; as developers have committed a year at least, in advance.

Then, rates are cut again, so developers stop building to wait and see what will happen. This means that the massive oversupply of properties at the start of the year, begins to slowly level out as consumer sentiment returns. Investors who had left the market previously start to return, as the world's share market has now become a 'night at the casino', for even the best of stock pickers.

The newspapers still continue with the doom and gloom sentiment, but these articles are now sporadically interlaced with items reflecting a brighter future. For example, Japanese banks are looking to move into the Australian market, meaning more credit and better affordability.

Then 2012 rolls around. We are currently in Gong Xi Fa Cai, the Year of the Water Dragon, and a year which is said to bring great abundance and good fortune. Sentiment, I believe for the year to come, is less affected by the press; as people have become somewhat immune to the dreary spin of the Australian media, and for most, very little has changed in our day-to-day lives. The oversupply of properties that has existed to this point has begun to redress itself, and the first homebuyers market has started to balance itself out, as standard demand returns, without too much undue influence of Government.

Smart owner-occupiers looking for a home are also now realising that, if you sell in a bad market you will buy in a bad market, and vice versa. We have also noticed an upsurge in enquiry; meaning that demand is slowly, but surely, returning as sentiment gradually improves.

According to the Reserve Bank, the savings ration in the last two years has been higher than any other stage in the past two decades. The Central Bank is not sure if we will continue to save, or start to spend; my personal belief however, is that spending is a great Aussie traditions. Last July, Westpac Chief Economist Bill Evans, predicated a 0.25% interest rate cut by December, followed by the same interest rate cut early this year - the other banks predicted rates to stay on hold.

Either way, affordability in the immediate term is not going to be adversely affected. Whilst there are areas of Melbourne that still hold an oversupply of rental properties, this should slowly dry up as the surge of land releases eases. Demand for good quality property near transport, along with employment levels remain strong, with generational change meaning that more people will ride, train or tram to work nowadays.

In short the worst is over, and all statistics point to a recovering market; with growing demand for well-located and well-presented properties, steadily increasing. If you are trying to sell, you still need to be realistic and understand that as long as you are buying again, what you may lose on the swings, you pick up on the roundabouts, when it comes to pricing your home for sale.

Investors this year take note: one of Australia's fastest growing demographics is the single person household. I think that this is an excellent time for investors, provided they choose wisely and look at what it costs them, rather than what it costs. Remember that the structure of your finance, entity and portfolio is just as important as the physical structure you are looking at.

Fear not doom and gloom merchants! Looking at the numbers, the Year of the Water Dragon does hold some good signs. Whilst the outlook for the market may not be the brightest of all time, rest assured that the sun is at last beginning to peek from behind the clouds.