If you are not a fan of charts then look away now because it is time for our monthly housing market update straight from our Chart Packs, in its usual 6 parts.
Of course, we present only the macro level data here out of necessity – if you are considering making an investment decision you must drill down to the regional and suburb level data too.
1 – Inflation and interest rates
Starting with inflation, we already knew before this month that the headline rate of CPI has been hitting at the top of the target band, but in short we expect to see inflationary pressures easing through the year ahead:
The RBA’s split of tradables and non-tradables inflation shows that good deal of the uplift in inflation has been related to the depreciation of the Australian dollar, but this effect should now have washed through.
With the inherent slack in the labour market and related soft wages growth we do not expect inflation to be a pressing problem for the Reserve Bank at this stage.
Indeed the latest monthly inflation reading from the TD-MI gauge was only 0.1 percent, underscoring the point. In any case, core inflation has been sitting snugly within the target band 2-3 percent band, currently at 2.8 percent annualised, and appears likely to soften.
There is no requirement here to re-cap on the full macro-economic picture here other than to note that with commodity prices falling at a startling pace and mining capital expenditure set to follow suit over the next year, interest rates are unlikely to be reverting upwards in a hurry, perhaps not for more than a year.
We know that all things being equal low interest rates could equate to increased demand in the housing market, and with out of cycle cuts to mortgage rates in recent weeks this suggests that dwelling prices are likely to continue increasing moderately in most areas in the near term.
2 – Demand population growth
Our previous analysis of demographic statistics has shown how overwhelmingly the population growth has been focused on Sydney, Melbourne, Perth and south-east Queensland, with regional population growth generally looking weak. The state level data is presented below.
The 2013 population growth was exceptionally strong on a national basis tracking at close to 400,000 persons.
Through 2014, however, we are expecting to see population growth pull back fairly considerably.
Net long term migration is holding up reasonably well with a strong number of long-term arrivals in July, but nevertheless net long term migration is now in a confirmed downtrend on a rolling annual basis.
To cut to the chase as we analysed here we are expecting to see population growth to be closer to 300,000 than 400,000 in this calendar year, with our conservative estimates broken down by state as follows:
Natural population increase 2014 (f)
New South Wales – 50,000
Victoria – 37,500
Queensland – 35,000
Western Australia – 20,000
South Australia – 7,500
Other – 10,000
Total – 160,000
Total population increase 2014 (f) (including net international and interstate migration)
New South Wales – 105,000
Victoria – 87,500
Queensland – 60,000
Western Australia – 40,000
South Australia – 10,000
Other – 7,500
Total – 310,000
Notably population growth appears to be increasingly focused on capital cities and particularly the inner and middle ring suburbs thereof, with the major capital cities centralising, a clear conclusion reached the the Reserve Bank itself.
3 – Demand – labour force
Monthly labour force data has shown jobs growth on average to be weaker than it needs to be to match the rate of population growth and the headline rate of unemployment has been rising. Net employment growth in the southern states in particular has been almost none-existent in recent years.
When we look at the cumulative jobs added by state over recent years the data shows the dramatic diversity by state.
Judith Sloan made a few more enemies in South Australia in the past week when she described the “government town” of Adelaide as an “economic backwater” and “another Tasmania”.
Certainly not the greatest PR from Sloan, but the data shows it to be absolutely true that Adelaide needs something – a lift from a Woomera, an Olympic Dam expansion or more government spend – to give it a kick up the behind.
However, the commodity price index is way past its peak in this cycle and the prospect of respite from a boom in mining capex seems remote.
The unemployment rate continues to trend up, now at 6.4 percent on a national basis, and is far too high for comfort in South Australia and Tasmania in particular.
During the month of August the ABS released its capital cities versus rest of state employment data which, with the exception of Queensland, revealed an alarming dearth in regional jobs growth as well as a total stagnation in Adelaide over the past half decade.
This concerning trend for regional Australia has clearly been in evidence in the two most populous states since the financial crisis.
This has also been the trend in other states, with only Queensland’s thriving regional centres standing out as an honourable exception.
The quarterly wages growth data showed that wages growth remains at its softest level on record tracking at a 2.6 percent annualised pace. This adds weight to the argument that inflationary pressures are likely to remain contained and therefore there will be little pressing need to hike interest rates.
Wages growth by state has been relatively equal, especially since the great boom in mining industry wages in Western Australia is now in decline.
4 – Demand – housing finance
Unsurprisingly commentary on the housing market has focused unstintingly on why this property market cycle will be different from those past.
Yet in fact, the cycle has conformed very much as we expected, and if anything is far more notable for the predictability of its nature to date than anything remarkable.
The interest rate easing cycle has seen a clear uplift in demand from both owner occupiers and investors, with the gradient of increase slightly stronger from the investor set as one might expect given today’s record low borrowing rates.
The Reserve Bank’s Financial Aggregates data showed that the housing market rebound has been led comparatively strongly by investors through the cycle to date.
Interestingly the Fin Aggregates data also showed that although the investor share of outstanding credit is now steadily increasing again, the total split in July 2014 is exactly the same as it was precisely 10 years ago in July 2004.
The inferences of the above chart are twofold.
Firstly, credit growth has rebounded but not spectacularly so, which implies that there may be a strong demand for property which is financed offshore.
In other words, there is probably a significantly higher demand from foreign buyers than has been historically normal, which will almost certainly benefit property markets in Sydney and Melbourne disproportionately.
And secondly, this implies that if you want to pick outperforming property types and locations in this cycle, you likely need to follow the flow of investor funds.
AFG’s latest mortgage data suggested that Sydney has continued to be the speculators’ paradise, while increasingly Brisbane has been seeing investor interest from interstate.
The below ABS lending finance data on investor loans tells its own story.
The property experts have by and large called this cycle wrong so far and it is going to be mainly a Sydney story, perhaps to the extent that the Sydney markets exceptional performance requires macro-prudential measures to be deployed nationally as prices threaten to get out of control in the years ahead.
We first put forward the opinion 18 months ago that the RBA could be forced to wear a Sydney boom and potentially other housing markets could miss out on much of this up-cycle.
There certainly seems to be only a limited risk of high interest rates pulling up this property boom any time soon, especially given that both mortgage rates and vacancy rates are considerably lower in Sydney than they were at the end of the preceding boom in 2003.
Perhaps this boom will not be allowed to run out of puff naturally or die of old age – the end game may be policy intervention.
5 – Supply
The rolling annual level of building approvals, as we expected at this stage in the cycle, has boomed to an all-time record high of more than 195,000, with units and apartments playing a more material role than ever before.
At this stage in the cycle property investors and homebuyers should be considering oversupply risk.
While the below data should tell you that houses in some parts of Victoria and units in parts of Brisbane and Queensland are at risk of oversupply, we cannot analyse every housing market in Australia for you in one blog post.
It has been good to see something of a rotation towards house approvals in the last month, which is hopefully a trend that will continue.
RP Data records the median Sydney apartment price as having increased to $565,000 which is a reasonable margin in excess of developer replacement cost, and therefore the result in a functioning housing market should be a worthy increase in supply.
Based upon what we have been told by developers we are expecting the Sydney apartment approvals boom to move beyond its peak in the coming months.
The major developers will by and large be looking to have their Sydney apartment stock off their books by Q4 2016 which forms one key indicator as to when the current cycle may peak.
The Sydney apartment approvals data looks to have past its zenith but we will not be able to confirm this for sure after the spring data to September is in given that traditionally in Sydney there can be a spring uplift in approvals (the below data is presented on a rolling annual basis, but is not seasonally adjusted).
The dwelling commencements data is flowing through nicely which is lovely to see, and this bodes well for construction activity and its related economic multiplier effect, particularly in New South Wales, Victoria and Queensland.
Better news for the under-performing housing markets in southern states in terms of vacancy rates.
Property markets do cycle naturally and with half a decade of negative real price growth and a lack of construction activity in Adelaide and Hobart these markets are now in the midst of a tightening cycle.
On the other hand Canberra, Brisbane, Perth and particularly Melbourne all face issues of varying magnitudes in terms of their vacancy rates being at or above the national average.
Sydney’s vacancy rate remains at only 1.8 percent which is a world apart from the 4-5 percent vacancy rates seen at the end of the last property boom in 2003, suggesting that comparisons of an imminent equivalent downturn are distinctly dubious.
The Darwin market also remains right, although it has eased considerably from its wretchedly tight vacancy rate nadir.
Sydney appears better placed than Melbourne on most metrics. Sydney’s stock on market is low and falling, tracking at around half of Melbourne’s equivalent figure. Elsewhere stock on market has generally tightened in the last month.
6 – Dwelling prices
And finally onto dwelling prices. The ABS released its much-awaited residential property price data for the June quarter which showed Sydney to be once again the strongest performer.
Since 2008, markets in Adelaide, Hobart and Canberra have failed even to match inflation while Sydney and to a lesser extent Melbourne have performed very strongly.
Indeed, the latest data from other providers including Residex is increasingly accumulating evidence to suggest that the majority of property markets outside of the two major capitals are struggling to match household incomes growth over the past seven years.
The quarterly and annual ABS data in columnar format shows Sydney to by the market leader on both a quarterly and annual basis as expected.
And finally, we benchmark our 2014 forecasts against RP Data’s Daily Home Value Index.
There will no back-pedalling or pointless attempts to rewrite history – if we’re wrong we will acknowledge so and endeavour to analyse why.
Firstly, our 6-9 percent capital growth forecast for Sydney looks set to be on the low side.
The first auction market of spring produced more thumping results across the board suggesting that market momentum will continue for the remainder of the year and likely beyond.
For that reason it appears likely that our 2014 Sydney forecast will probably prove to be under-cooked.
The only thing we can say about that in our defence is that we had been warning for some years about the potential risk of the market getting away from those who opted to sit on the sidelines based on spurious crash predictions.
After half a decade of chronic undersupply the Sydney market was simply way too tight for a drawn-out correction.
Median apartment rents have increased by a quarter in the last five years and prices have increased by an even greater magnitude which at long last is now leading to a supply response.
The RP Data index for Melbourne continues to leap around a little like a demented cat. The seasonal May downturns which once again head faked observers were even more exaggerated in Melbourne’s case.
The Melbourne market’s performance appears to have been fairly robust and will probably end the year 5 percent or so higher than where it begun on a median price basis.
Brisbane’s market has been steadily improving over the past two years. Our forecast of 2 to 5 percent growth looks alright.
Residex showed Perth’s house prices to have increased over the last quarter but unit prices declining. Essentially Perth been a flat market through 2014 to date as the mining construction boom fades away taking much of the interstate migration with it.
Adelaide has experienced issues with rising unemployment, weak population growth and zero jobs growth on a net basis, but property do markets tend to cycle and with no construction boom to contend with vacancy rates in Adelaide have tightened.
Low interest rates have encouraged a steady increase in transactional activity, so median prices look set to finish 2014 a few percent higher than where they started the calendar year.
With mortgage rates falling outside of the monetary policy cycle demand continues to rise in aggregate.
Unfortunately for the lagging markets the stunning outperformance of Sydney may eventually result in cooling measures being deployed meaning that many smaller markets could fail to experience the full benefit of this up-cycle.
Macquarie pulled together a few scenarios for the Sydney market this week and the “no rate hikes” scenario suggested that the Sydney cycle potentially has quite a way to run yet.
However, for all the talk of property bubbles, most markets across Australia outside of Sydney and Melbourne have seen little or no capital growth in real terms since 2008, suggesting an increasingly two-speed market.
This mirrors quite closely what we have seen in the United Kingdom which has very much become a case of London versus the rest.
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