There’s no sugar coating it – our property markets are in a decline with property values falling around the country.
But it’s nowhere near as bad as some pessimistic media commentators are suggesting.
According to Corelogic, overall property values only nudged 0.1% lower in April, but since this is the seventh consecutive month-on-month fall since values started retreating in October last year we’re starting to see click bait headlines reporting our faltering markets.
Of course there are multiple markets, each at their own stage of the property cycle, and these declines are concentrated in the largest capitals, while regional dwelling values edged 0.4% higher last month.
To get a better understating of what’s going on in the market and what’s likely to happen to property values over the year, let’s unpack this months Corelogic Chart Pack.
A sign of decline
Capital city dwelling values were 0.3% lower over the month of April, driven by falls of -0.4% in both Sydney and Melbourne and a smaller decline in Brisbane values (-0.1%).
Now this type of price drop is nothing to write home about, especially considering these falls were offset by flat conditions in Perth and minor rises in Adelaide (+0.1%), Darwin and Canberra (both +0.6%) and Hobart property values rose 1.2% in April.
The annual rate of dwelling value growth has slowed to 0.2% nationally, which is the nation’s slowest annual rate of value growth since October 2012.
Despite the slowing conditions all capital cities except for Sydney, Perth and Darwin have recorded value rises over the year.
THE UPPER END OF THE MARKET IS SUFFERING.
As usually happens when the market turns, the higher end of the property market suffers more.
This is really an area of discretionary spending.
Maybe you don’t need to upgrade your $5 million home to that $7 million mansion at the moment.
In due course the cheaper, more affordable areas will also suffer but as you can see from the graph below, those properties at and above the median price (other than those in the top 2 deciles) are still growing in value.
Now …there’s an interesting lesson in these stats.
Properties that cost more than the median price, those that are still increasing in value, tend to be bought by home buyers who are securely employed and well paid, while there are fewer growth drivers for properties in blue collar locations, where wages are hardly going up, thereby causing affordability constraints.
The Sydney property market is experiencing a soft landing but remains fragmented.
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.
However, at the top end of the market there are fewer buyers for prestige home and the lower end markets like Sydney’s South West or the Central Coast are suffering price falls.
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.
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.
While Melbourne’s property prices are likely to fall by around 3% this year, they will be underpinned by its strong population growth and the influx of 35% of all overseas migrants.
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.
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.
The majority of the Victorian population resides in Melbourne, with approximately 75% of the total state population calling Melbourne home.
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.
The ripple effect of house price growth caused significant house price growth in Melbourne’s outer suburbs over the last few years.
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 will make the best investments.
Interestingly the anticipated oversupply of CBD apartments did not eventuate, as 144,400 new residents moved into the State over the last year helping soak up all the new construction.
There are good times ahead for Brisbane property.
Queensland property has performed admirably over the last decade considering all the headwinds it experienced – things like floods, cyclones, the mining downturn.
But things are now looking up for Brisbane — it’s finally ready to take it’s turn in the sun.
- Affordability and Lifestyle advantages;
- Rising international interest rising form migrants, investors and tourists;
- Lifting interstate and overseas migration;
- Jobs creation and a low unemployment rate;
- First home buyers are back at the highest rate in a decade;
- Strong rental yields.
While Brisbane property prices are considerably more affordable than the other 2 east coast capital cities, Corelogic forecasts that one in 10 houses sold in Brisbane will fetch more than $1 million within 2 years.
The Brisbane property market is likely to record positive grow in the order of 3% to 5% this year as the underlying market drivers are now strengthening.
Local affordability and the lifestyle advantages has resulted in strong interstate migration (+17,426 last year) up 50.5% from previous year. At the same time 12.7 percent of our overseas migrants are settling in Queensland and interest from foreign investors is rising.
Houses in Brisbane’s inner and middle ring suburbs offer the best prospects of long term capital growth.
If you’d like to know a bit more about how to find investment grade properties in the Sunshine State please give the Metropole Brisbane team a call on 1300 20 30 30 or click here and leave your details so we can be in contact.
You may be interested in watching this video with more graphs showing what’s happening in Brisbane: Brighter Times Ahead for Brisbane Property
THE ADELAIDE PROPERTY MARKET
Like the rest of Australia, the Adelaide property market is very fragmented with some suburbs showing significantly more capital growth than others.
Adelaide home prices started to slip backwards over the last quarter and overall home values are up only 0.8% over the last 12 months.
I know some investors are looking for opportunities in Adelaide hoping (really “speculating”) prices will increase, but there are few growth drivers in Adelaide which is experiencing about average unemployment rates and poor employment growth.
THE PERTH PROPERTY MARKET
The Perth property market peaked in June 2014 and has yet to bottom, with prices falling a further 2.3% over the last year.
While the market may bottom out later in 2018, it’s much too early for a countercyclical investment in the west – I can’t see prices rising significantly for a number of years.
Like the other states, Western Australia’s population trend has a significant impact on the overall performance of the 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.
Perth currently has at an unemployment rate of 5.7% which is a 0.7% decrease over the past 12 months and is now only slightly above the national unemployment rate of 5.5%.
Due to the significant oversupply of new apartments developers are offering strong incentives to lure buyers, with discounts of up to $50,000, complementary solar panels, appliances and air-conditioning, but these buyers will not experience capital growth for years, so these short term incentives won’t make up for the lost opportunity.
THE HOBART PROPERTY MARKET
Australia’s most affordable capital city, Hobart, delivered the highest capital growth over the last year (2.7%), allowing some property pundits to say “I told you so!”
This was supported by an upswing in the Apple Isle’s economy spurred by tourism and strong retail sales, but was mainly driven by investor speculation.
I see Hobart property performing very well again throughout 2018 as investors chase the “next hot spot”, 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.
It is a small place and it doesn’t take much to influence it – 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.
THE DARWIN PROPERTY MARKET
According to Kate Forbes, national director of Property Strategy at Metropole, there are few growth drivers for regional Northern Territory, and indeed even looking to the broader Metropolitan region of Darwin doesn’t provide much better reading.
Darwin’s dwelling prices are 21.1% below their peak in Jan 2013, and in the past year alone dwelling values have declined 7.7%
Poor growth and employment prospects have meant that Darwin hasn’t benefited from either internal or international migration and this lacklustre population growth (zero in fact) is unlikely to change soon.
Darwin faces an oversupplied situation currently as a result, with more properties being delivered to the market than are being sought and this will cap any chances of meaningful growth for the short term.
What it does have going for it though, is the best gross yields available in Australia (houses 5.6% and units 6.3%).
Unfortunately, this is due to dwelling values falling faster than weekly rents and so on balance it wouldn’t be a location we would recommend investing in currently.
THE CANBERRA PROPERTY MARKET
Kate Forbes, national director of Property Strategy at Metropole reports that whilst Canberra’s population is relatively small, it’s growing at a rate of 1.8%- second, only to Melbourne’s pace of population growth and this, combined with strong incomes (and employment) has been supportive of the recent capital growth Canberra has experienced.
The growth has been quite polarised though, with houses significantly outperforming units.
High land tax rates have dampened investor enthusiasm for ACT property as they eat into cashflows despite the rising rents (investors already in the market there are seeking compensation for the higher land taxes).
Vacancy rates are low as there are very high levels of demand for rentals, and this points to even higher rents going forward.
Recently demand has been very strong for outer Northern suburbs as the ripple effect kicks in and families move there choosing it over suburbs closer in due to value for money.
“Despite this, we would still recommend seeking area’s where the residents can afford to keep pushing the prices up, rather than area’s where the property is affordable. Buy in the best possible location you can afford, as this is what will underpin your capital growth,” says Forbes
REGIONAL MARKETS OUTPERFORMING IN THE SHORT TERM
While most individual capital cities recorded declines in property values over the past three months, the story was different in the larger regional property markets around Australia with dwelling values holding their own (+ 1.3% over the three months) other than in Western Australia.
The combined regional markets have recorded growth of +2.4% over the past year while the combined capital cities slipped in value (-0.3%)
Of course, this doesn’t mean regional Australia is a good place for long term investment.
I strongly recommend investing in the capital cities where our economic growth is concentrated as this leads to jobs growth, population growth and demand for property.
OUR PROPERTY MARKETS ARE SLOWING
Our quieter markets have translated into fewer property sales with transaction volumes much lower over the year (down -5.7% nationally), with Adelaide and Perth the only capital cities in which sales volumes were higher over the year.
Rental growth is slowing
Rental rates increased by 0.2% over the month to be 1.1% higher over the past three months and 2.0% higher over the past year.
The 2.0% annual growth in rents is the slowest rental growth in 12 months.
Rental rates rose over the year across all capital cities except for Perth and Darwin.
Rental yields have started to lift from their record lows as rental growth outpaces value growth, yields are currently recorded at 3.69% up from 3.66% in April 2017.
Other market indicators:
The length of time it takes to sell a property has increased relative to a year ago in all capital cities except for Perth, Hobart and Darwin where properties are selling quicker and Melbourne where there is no change.
The volume of new stock listed for sale nationally is higher than a year ago while total listings are higher. Across the cities, total listings are much higher than they were a year ago Sydney and Melbourne, slightly higher in Canberra and lower elsewhere.
Auction clearance rates are falling, especially in our big 2 auction capitals – Melbourne and Sydney.
However, within these cities, well located “A Grade” homes and investment grade properties are still selling well, while auction clearance rates in the outer suburbs are suffering.
Population growth remains strong however, an increasing number of residents are leaving NSW with interstate migration to Qld accelerating.
Dwelling approvals increased by 2.6% in March 2018, with the number of houses approved for construction continuing to trend higher.
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 slowed over the month of March with credit to investors expanding at its slowest annual pace since October 2016.
Official interest rates remain at 1.5% with the market currently expecting a 25 basis point increase in official interest rates by August 2019.
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.
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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