Who’s right about the property markets — the optimists or pessimists?
The media seems so preoccupied with what’s going wrong in Australia, they’re missing all the things that are going right.
The newspapers and online media outlets continually deliver house price collapse headlines because it gets clicks but our property markets are not collapsing and our economy is not going into recession.
We’re experiencing a soft landing.
See the chart below … Corelogic reports that combined capital city dwelling values fell -2.4% over the last year, while combined regional dwelling values are 1.6% higher over the year.
Sydney property values dropped 5.4% over the year – that’s not a crash and Melbourne property values fell 0.5% – hardly worth a headline.
Of course the media’s negative sentiment could end up being a self fulfilling prophecy, scaring off potential home buyers and reducing demand making the market downturn worse than it needs to be.
As you can see, some locations are still hot, and others are not:
Just to put things into perspective, residential real estate underpins Australia’s wealth:
Here’s what’s happening to property values
THE UPPER END OF THE MARKET IS SUFFERING MOST
As is normally the case at this stage of the cycle more expensive properties, which are more subject to discretionary spending, are the weakest segment of the market.
And not surprisingly this is more evident in Sydney and Melbourne, while in most other cities have seen relatively little difference in the performance of properties across the broad valuation spectrums.
As always, there are substantial differences in the housing markets performance across each of the capital cities.
The Sydney property market peaked a year ago – in July 2017 -and is now experiencing a soft landing with dwelling values falling by -5.4% over the last year.
While the top end of the market is suffering from lack of buyers for prestige home and the lower end markets like Sydney’s South West or the Central Coast are being held back by affordability issues, some of the inner and middle ring suburbs are strongly outperforming the averages.
While Sydney is the most expensive city in Australia, it is also clearly the most valuable and will continue to experience a chronic shortage of homes.
Strong economic growth and jobs creation is leading to population growth and ongoing demand for property in Sydney with underlying demand is well ahead of supply and the rental market is tightening.
At the same time international interest from tourists, migrants and investors continues.
However now more than ever, critical property selection will be more important to find an investment grade property that will outperform the property markets.
Sydney is currently offering investors an opportunity to buy established apartments in the eastern suburbs, lower north shore and inner west in a “buyer’s market” with little further downside and the prospect of the market moving forward again in 2019.
Award winning Buyers Agent Dona James Wells explains:
Of course when you talk about “the Sydney property market” you really have to take in to account that it is not a uniform real estate market – some areas will vastly outperform others.
While on a macro level capital growth potential is influenced greatly by employment, lifestyle, education and health care, to ensure you purchase the best asset your money can buy you also need to look on a micro level and consider details such as street, position, quality & size.
With 40% of our overseas migrants settling in New South Wales, (particularly in Sydney) and Sydney punching above its weight in jobs creation, property price growth will be more consistent in areas closer to the CBD, while growth in regional areas is likely to fall behind due to fewer growth drivers.
With auction clearances picking up and confidence returning to the market, the value of well located middle ring Sydney properties (especially apartments) are likely to be 3% higher over the year.
However critical property selection will be more important than ever now. You won’t be able to count on the market doing the heavy lifting any more.
Rental growth is slowing in Sydney and remains fairly steady in regional NSW
Over the second quarter of 2018, Sydney rents fell by -0.3% while they increased by 0.2% over the period in regional NSW.
Throughout the past year, Sydney rental growth has slowed from 3.9% to 0.1% and in regional NSW annual rental growth was 3.4% a year ago and has slowed marginally to 2.8% over the past year.
Rental rates in Sydney are now -0.4% lower than they were at their peak while in regional NSW rents are -0.1% lower than their peak.
Some of the positive long term influences for the Sydney property include:-
- Underlying demand is well ahead of supply;
- The rental market is tightening;
- International interest from migrants, investors and tourists is still strong;
- It is one of Australia’s 2 super star cities;
- Strong economic growth and jobs creation is leading to population growth and strong demand for property.
The Melbourne property market peaked in November last year dwelling values fell by 1.8% over the last year.
Currently the more affordable housing segments are showing much stronger conditions; likely the result of more first home buyer activity.
The most affordable quarter of the Melbourne market has seen dwelling values rise by 9.3% over the past twelve months while the most expensive quarter of the market has recorded a fall of 2.5%.
BUT he Melbourne property market is down but not out.
Even though it is taking a breather after 5 years of exceptional growth, there is no sign of a collapse in sight.
While Melbourne’s property prices are likely to fall by around 3% this year, they will be underpinned by a robust economy, jobs growth (around 72,000 jobs were created last year), Australia’s strongest population growth and the influx of 35% of all overseas migrants.
While the national population grew by 1.6% in the year ended 30 June 2017, the highest growth was in Victoria, with a 2.3% increase in population and experts have predicted it is likely to surpass Sydney as the largest city of Australia by as early as 2031.
Melbourne now rates as one of the 10 fastest growing large cities in the developed world, with its population likely to increase by around 10% in the next 4 years.
The ripple effect of house price growth caused significant house price growth in Melbourne’s outer suburbs over the last few years.
Today one in three Melbourne suburbs have a median house price of at least $1 million, with 90 per cent of suburbs within 10km of the CBD have a million-dollar median house price and almost 50 per cent of suburbs in the middle ring also in the million-dollar club.
Similarly, some regional centres including Geelong have performed well, but moving forward it is likely that the more affluent middle rings suburbs which are going through gentrification are likely to exhibit the best property price growth.
As Melbourne residents trade their backyards for balconies and courtyards, villa units with renovation potential and townhouses in Melbourne’s middle ring suburbs will make excellent investments
Rental growth has accelerated in regional Vic while it has slowed in Melbourne
Over the second quarter of 2018, Melbourne rents fell by 0.9% while they increased by 0.7% over the period in regional Vic.
Throughout the past year, Melbourne rental growth has slowed from 4.4% to 3.1% and in regional Vic annual rental growth was 2.1% a year ago and has increased to 3.4% over the past year.
Both Melbourne and regional Vic are seeing rental rates continue to rise however, there is a clear slowing of rental growth in Melbourne and an acceleration in regional Vic.
Growth in Brisbane dwelling values has slowed over each of the past two financial years with an increase of 1.3% over the past twelve months.
However Brisbane is the market with the most potential for growth over the next 3 years
Queensland has led the nation in net interstate migration over the past year
The population of Qld increased by 81,461 persons over the 12 months to December 2017 with Qld accounting for 21.0% of the nation’s population growth over the year.
The 81,461 person increase in population was split between: natural increase of 29,602 persons, net overseas migration of 29,349 persons and net interstate migration of 22,510 persons.
Over the year, natural increase was the lowest it’s been since June 2006, net overseas migration was the lowest it’s been since June 2016 and net interstate migration has increased for 12 consecutive quarters and is at its highest level since September 2007.
In another positive sign Queensland’s job creation is quite strong but the unemployment rate remains stubbornly high
The trend unemployment rate in Qld was reported at 6.1% in June 2018, slightly higher than the 6.0% recorded a year earlier.
Over the past 12 months, Qld has created 62,739 jobs.
Based on 62,739 jobs created over the past year, total employment has increased by 2.6% which has accounted for 19.6% of all jobs created nationally.
ADELAIDE HOUSING MARKET
Adelaide dwelling values increased by 0.7% over the last year, marking the 5th consecutive year in which values have increased.
Like the rest of Australia, the Adelaide property market is very fragmented with some suburbs showing three times the capital growth of others.
I know some investors are looking for opportunities in Adelaide hoping (“speculating”) prices will increase but there are few growth drivers in Adelaide which is experiencing above average unemployment rates and poor employment growth.
There are better places to invest than Adelaide.
PERTH HOUSING MARKET
Perth dwelling values fell by -2.3% over the last year and although values have now fallen for four consecutive financial years, declines over the most recent year were the most moderate of those four years.
The Perth property market peaked in June 2014 and now, more than four years later, has yet to bottom, with dwelling values 12.1% below their June 2014.
While the market may level out in the next six months, it’s much too early for a countercyclical investment in the west – I can’t see prices rising significantly for a number of years.
Due to the significant oversupply of new apartments there is little to no prospect of capital growth or rental growth in the Perth apartment market for many years.
Like the other states, Western Australia’s population trend has a significant impact on the overall performance of its property market.
To get people back into the State more jobs will need to be created, but even though Western Australia created around 50,000 jobs in 2017 consumer confidence is low with buyers still waiting for signs that the market has hit “rock bottom.”
The predominant dependence on the one industry is something that WA is trying to move away from by diversifying economic reliance into other industries.
Today health care, construction, retail and education are the industries responsible for the majority of Western Australia’s employment.
HOBART MARKET UPDATE
Hobart has been the strongest performing capital city over the last year returning overall capital growth of 11.5% and is likely to be the top performer this year, driven by investors chasing the “next hot spot.”
The Hobart has almost 30% fewer homes currently on the market compared with a year ago and the median time a home in Hobart remains on the market has fallen, selling 20 days quicker than they were a year ago, showing supply isn’t keeping up with demand.
But keep in mind it is a very small market, so learn for the past…this year’s hot spot can easily become next year’s “not spot.”
Last year, some 5,200 dwellings sold in Hobart, which is just 1% of the Australian market.
It also accommodates a 1% share of Australia’s annual population growth. Hobart is a small place and it doesn’t take much to influence its property market – in both directions.
Despite the current fast rate of growth, dwelling values in the Apple Isle have barley kept up with inflation over the last decade and with few long-term growth drivers, I would avoid investing in Hobart.
DARWIN HOUSING MARKET
The Darwin property market peaked in August 2010 is still suffering from the effects of the end of our mining boom today 8 years later falling a another 6.2% over the last year, and our research suggests that house prices are likely to keep falling for some time yet.
As opposed to the east coast capital cities where many jobs are being created, Darwin had a net loss of jobs last year, showing how its economy is languishing.
Darwin does not have significant growth drivers on the horizon and would be best avoided by investors.
CANBERRA MARKET UPDATE
Canberra’s property market is a “quiet achiever” having grown 3.5 % over the last year, and is likely to continue to perform well underpinned by a stable economy which has led to steady employment and to above average population growth (=1.8% per annum.)
Houses price growth has outpaced its flatter apartment market.
The ACT Government predicts ongoing strong population growth of 6% in Canberra by 2020. Around 60% of this growth will be due to natural increase and about 40% through net overseas and interstate migration.
Having said that, I don’t consider Canberra a good place to invest as their horrendous land tax rates chew into your cash flow more than anywhere else in Australia.
CLEARLY OUR PROPERTY MARKETS ARE SLOWING
Our quieter markets have translated into fewer property sales with transaction volumes much lower than they were a year ago
RENTAL GROWTH HAS STALLED
- Rental rates fell by -0.2% over the month to be -0.1% lower over the past three months and 1.6% higher over the past year.
- Rental rates rose over the year across all capital cities except for Sydney and Darwin with Sydney recording its largest annual fall in rents on record.
- Rental yields have started to lift from their record lows as rental growth outpaces value growth, yields are currently recorded at 3.72% up from 3.63% in July 2017.
- Perth and Hobart are the only capital cities in which gross rental yields are now lower than they were a year ago.
Another sign of our slowing markets is the increased length of time it takes to sell a property with the length of time it takes to sell a property having increased relative to a year ago in all capital cities except for Adelaide, Hobart and Canberra where properties are selling quicker.
The volume of new and total stock advertised for sale nationally is lower than a year ago.
However with fewer property sales occurring across the cities, total listings are much higher than they were a year ago Sydney and Melbourne and marginally higher in Brisbane and Perth while they are lower elsewhere.
Auction clearance rates are another sign of the depth and strength of our property markets.
Population growth remains strong however, an increasing number of residents are leaving NSW with interstate migration to Qld accelerating.
Dwelling approvals increased by 1.6% in June 2018, with increases for houses and units. Although approvals are down from their peak they remain at elevated levels that are well above long-term averages.
APRA has quelled our property boom and demand for investor finance is waning, leaving owner occupiers as the dominant source of finance demand.
In terms of housing finance, investor demand is waning with owner occupiers now the dominant source of demand.
In NSW and Vic, recent removals of stamp duty for first time buyers has resulted in a surge in demand from this sector.
The expansion of housing credit continued to slow in June 2018 with credit to investors expanding at its slowest annual pace on record.
Official interest rates remain at 1.5% with the market currently not expecting a full 25 basis point change in the cash rate over the next 18 months.
THE BOTTOM LINE…
We’re clearly in the next stage of the property cycle, one of moderate growth in some regions and virtually no growth in others and falling prices in yet others.
Australia’s property markets are very fragmented, driven by local factors including jobs growth, population growth, consumer confidence and supply and demand.
This makes it an opportune time for both home buyers and investors to buy property at a time when they’ll face less competition.
However correct asset selection will be more important now than ever, so only buy in areas where there are multiple growth drivers such as employment growth, population growth or major infrastructure changes.
Similarly suburbs undergoing gentrification are likely to outperform.
WHAT CAN YOU DO TO STAY AHEAD?
As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
Source of graphs and data: CoreLogic
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