Today I’ll present a macro view on what’s happening in Australian property in 5 short parts.
We’ve analysed more than enough of the macroeconomic picture of late to know that the labour market remains soft (even after further revisions to the data) and to be clear that interest rates will be at best be stuck on hold for the foreseeable future.
Part 1 – Demand: Demographics
The latest demographic data shows the impact of the fading of the mining construction boom.
While the mining states are to benefit less than has historically been the case from net interstate migration, on the other hand migration away from Sydney and New South Wales has fallen to the lowest level on record as Australians elect to follow their best employment prospects.
As a result of this, New South Wales is in the midst of a state population boom, threatening to hit record levels of population growth in 2015, while population increase in the mining states is easing back.
Part 2 – Demand: Housing Finance
Low interest rates continue to thrust the gross value of property investor loans higher more quickly than the gross value of owner-occupier loans, although low borrowing rates have clearly set both loan types on the course of a strong upwards trajectory, with expectations of future price gains having reinforced the trend.
Owner-occupier commitments in most states are now trending higher, although finance commitments have slipped in South Australia to be back below the levels seen way back in early 2007.
For reasons I haven’t really gotten a handle on, Nine News Adelaide once again chose to report that Adelaide had recorded the biggest housing market gain in September, with values “increasing by almost 1 percent” – somewhat misleading given that it was already evident that those supposed ‘gains’ had been more than reversed out by a 1.1 percent ‘decline’ through the month of October.
While it’s always possible to torture the figures from a daily home value index until they confess, the bigger picture is that prices in Adelaide have increased by ~11 percent over nearly six full years since December 2008, a compounding annual increase of ~1.8 percent per annum, and a clear decline in real terms.
If we really want to cherry-pick data, imagine the returns from $100,000 lobbed into 3500 CBA shares in late December 2008.
Not only would those shares today be worth north of $286,000, shareholders would have collected a romping 70 percent return from the dividends alone, some $70,000 of tax-favoured income.
In any case, the latest round of Housing Finance data showed that underlying owner-occupier demand for housing is generally stronger and strengthening in other markets, but has actually been declining in South Australia over the past five months.
If you are looking for second tier markets which are likely to outperform in 2015, then the Brisbane property market appears likely to be the superior bet according to the trends evident in the data.
Meanwhile, the investor loans data shows that while loans in South Australia have declined for the past four months in spite of the availability of record low borrowing rates, New South Wales recorded the greatest ever volume of investor loans in the month of September to perpetuate the vast sweeping uptrend of investor demand for Sydney property.
North of the border, investor loans in Queensland have quietly moved back up to levels not seen since 2007 as interstate investors gradually come to the party in Brisbane, lured by lower entry prices and more attractive yields.
Next year looks to be a brighter one for Brisbane, following a slow half decade.
Part 3 – Supply: Stock
We’ll need to try hard to refrain from using the now standard industry phrase “tale of two cities” here, but the divergence between the respective dwelling supply of Melbourne and Sydney is becoming increasingly apparent. Stock on market is waaay high in Melbourne, and even higher than it was this time last year:
Similarly, vacancy rates in Melbourne are considerably higher than those in Sydney, and indeed are higher than the respective vacancy rates of the other capital cities:
Part 4 – Supply: Approvals, Commencements and Completions
It has been more than clear for the past four years or so that Victoria has been building – by which we mean here “actually completing” – many, many more houses than has been the case in any other state.
And over the past three years, the same has also become true of attached dwellings, with much of this supply being inner city high-rise stock. The end game here is oversupply and vacancies.
Interestingly, as dwelling prices in Melbourne have continued to rise, nobody has ‘rung the bell’ to slow the flood of development, and even today house building approvals in Melbourne continue to track at the highest level of any city in Australia.
While Sydney has at last approved a decent number of attached dwellings over the past year following a truly woeful supply response since the preceding boom ended in 2003/4, the approvals peak has now passed in the harbour city.Sydney unit and apartment approvals have been declining for many months – the peak was way back in September 2013 – and is trending back towards a 22,000 or fewer unit approvals on a rolling annual basis, a volume which can comfortably be absorbed by Greater Sydney population growth.
Melbourne unit approvals, however, are refusing to lie down, despite large pockets of oversupply now apparently becoming fairly common knowledge.
Whether or not all approvals make it to completion will depend on price action and market sentiment, but it is worth nothing that completion rates for units have been declining in recent times, gradually sagging towards a “9 in 10” ratio of completions to aborted proposals.
The divergence of the fundamentals of the Sydney and Melbourne housing markets therefore continues.
In New South Wales the population is exploding higher, yet to date in this cycle the number of new dwellings completed has continued to lag versus rapidly increasing underlying demand quite diabolically.
This is only the macro picture, of course, which disguises just how top-heavy with investors the market in Sydney is right now, and has been throughout the year.
There have been record numbers of auctions in both Sydney and Melbourne in recent weeks, but the low ratio of dwelling completions to population increase in Sydney looks set to keep momentum in the harbour city rolling into the new year, as does the volumes of new mortgages written, with records tumbling by the month.
The most timely Australian Finance Group (AFG) data has suggested that further mortgage volume records may tumble in Sydney through October and beyond.
On the other hand, there is an increasing sense that when sentiment in Melbourne reverses, a sharp correction may fall due, with this being particularly the case in the generic unit market.
Part 5 – Dwelling Prices
The ABS released its residential dwelling price indices and while prices have increased in Sydney, momentum has been far less robust elsewhere.
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