What are our property markets up to? That’s probably the most common question I’m asked at the moment.
Well, the scorecard is in for the first two months of the year with CoreLogic recently releasing its chart pack, which gives us a good overview of what’s happening as well as some of the economic factors impacting our markets.
The stats show that nationally, our property markets peaked in September last year, but while the housing boom is over, we’re in a benign correction.
This is the first time since March 2016 that overall national values had fallen for five consecutive months, but the 0.1% decline in national dwelling values in February was more moderate than the 0.3% declines recorded over each of the previous two months.
In other words, the rate of decline is slowing and while our property markets are down, they’re not out and there are definitely no signs that our national housing markets are in for a crash.
In fact, except for Sydney, Perth and Darwin, our other capital cities have recorded value rises over the year, but the annual rate of dwelling value growth is slowing to 2.2% nationally.
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 (+ 0.9% over the three months), other than in Western Australia.
The combined regional markets have recorded a faster pace (+2.8%) over the past year than the combined capital cities (+2.0%.)
Of course, this doesn’t necessarily mean they make good long-term investment locations.
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.
The high end of our markets is suffering more
As usually happens when the market turns, the higher end of the property market suffers — this is the 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 suffer also, but as you can see from the graph below, median price properties are holding their ground.
What these charts don’t show us is how fragmented the different markets around the country really are.
The Sydney property market is taking a breather after five years of exceptional growth (+72%), but there are no signs of a collapse in sight as there are still a number of growth drivers — including a strong economy, stunning jobs growth (around 140,000 jobs were created last year) and population growth supporting continued property price growth over the next few years, albeit at a slower pace.
With immigration accounting for 55% of Australia’s population growth, 37% of our new migrants are moving to Sydney, with many of them being at the household formation stages of their lives.
Initially most will rent, but eventually many will buy their own homes.
I expect the value of well located Sydney properties to be higher at the end of 2018 than they are today, meaning the current shift from a seller’s market to a buyer’s market is offering home buyers and property investors with a long-term focus a window of opportunity to get into the market before it starts rising again in the second half of the year.
The Melbourne property market grew an impressive 57% over the last five years and now has moved from fifth gear into second gear, but it’s not going into reverse any time soon.
In fact, Melbourne is likely to once again be the amongst the best performing property markets in 2018.
Melbourne’s ongoing property price growth will be underpinned by strong demand as it now rates as one of the 10 fastest growing large cities in the developed world, with Melbourne’s population likely to increase by around 10% in the next four years.
While there has been strong price growth in the outer suburbs over the last few years and the Western growth corridor has been the predominant area for population growth (in part because of its affordability), the best investment locations in Melbourne remain in the more established inner east, south east and inner northern suburbs.
The Melbourne apartment market has not performed as well as the house market, but is starting to pick up as the first home buyers grant brings a raft of new home buyers into the market to buy up established apartments.
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.
Brisbane’s property market is likely to perform a little better in 2018 than it did in 2017, when its annual capital growth of 2.4% was only a little better than inflation.
The performance gap between houses (up 3.1% over 2017) and units ( -1.2% in 2017) was stark.
With the supply of new and off-the-plan apartments in Brisbane’s CBD and inner ring outstripping demand, and estimates of another 15,000 apartments flooding the Brisbane market this year alone, there is little prospect of capital growth or rental growth in Brisbane’s apartment market in the near future.
On the other hand, there are great investment prospects buying well-located houses in Brisbane’s inner and middle ring suburbs where capital growth is likely to be higher this year, underpinned by population growth as well as rising consumer confidence leading to increased owner-occupier and investor demand.
Queensland’s strong employment growth last year (creating round 100,000 jobs) will boost consumer confidence and this can only be good for its property markets.
Like the rest of Australia, the Adelaide property market is very fragmented with some suburbs showing three times the capital growth of others.
Overall, home values are up 2.2% over the last 12 months while unit values only increased by 0.9%.
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 about average unemployment rates and poor employment growth.
The Perth property market peaked in June 2014 and has yet to bottom, with prices falling a further 2.7% over the last year.
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”.
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.
Due to the significant oversupply of new apartments, developers are offering strong incentives to lure buyers, with discounts of up to $50,000, complimentary 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.
Australia’s most affordable capital city, Hobart, delivered the highest capital growth over the last year (13.1%), 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 mainly driven by investor speculation.
I see Hobart property performing very well again in the first half of 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 5200 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 is still suffering from the effects of the end of our mining boom and our research suggests house prices are likely to keep falling for much of this year.
Darwin property values fell 7.4% over the last year. Values across the city are 22.3% lower than their peak in August 2010.
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.
House prices in Canberra are rising at at a much faster rate (3.8% over the last year) than the value of units (+1.1%).
Canberra’s strong economy and above average population growth should underpin its property markets over the next few years.
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 horrendous land tax rates chew into your cash flow more than anywhere else in Australia.
Fewer property sales
Our quieter markets have translated into fewer property sales, with transaction volumes much lower than they were a year ago — down 7.3% nationally with Adelaide, Perth, Hobart and Darwin the only capital cities in which sales volumes were higher over the year.
Similarly, the number of properties listed for sale nationally is lower than a year ago.
Across our capital cities the trends vary substantially, with 27.4% more properties for sale across Sydney while Hobart has 36.0% fewer properties for sale than a year ago.
Another sign of our slowing markets is the increased length of time it takes to sell a property, especially in Sydney and Melbourne.
Our rental markets
Although property values have been falling over the past three months, rental rates have been increasing. In fact, rental rates were higher over the year in all capital cities, other than Perth and Darwin, and within all regional markets, except for regional Western Australia.
Rental yields are lifting from record lows in Melbourne and Sydney because property value growth has fallen, while at the same time rentals achieved have continued to rise.
Auction clearance rates holding up
In February, auction clearance rates, which are a good barometer for market sentiment in our big capital cities, averaged 65%, compared to 75% in February last year.
But this is still significantly higher than the 50% clearance rate that normally signals a weak market like we experienced in 2011 and 2012.
Broader economic data also affects housing market conditions
Population growth remains strong and this will continue to underpin our housing markets.
However, an increasing number of residents are leaving New South Wales, with interstate migration to Queensland accelerating to its highest level in many years.
The Australian Prudential Regulation Authority (APRA) has quelled our property boom and demand for investor finance is waning, leaving owner-occupiers as the dominant source of finance demand.
In NSW and Victoria, recent removals of stamp duty for first time buyers has resulted in a surge in demand from this sector.
With investor demand for finance clearly trending lower, only in the last week all our major banks decided to lower rates in a bid to increase demand and chase new business.
The official interest rate remains at 1.5% and that is unlikely to change over the year. However, the financial the markets are expecting a 0.25% increase in the Reserve Bank’s official cash rate by May 2019.
As our mining boom ended, the government encouraged the apartment construction boom by lowering interest rates.
This created many new jobs for the displaced mining construction workers but this building boom is now over; dwelling approvals fell by 20% in December, driven by a large fall in apartment approvals.
However, even though new building approvals are lower than they were a year ago, they remain well above long-term average levels.
Where to from here?
Overall, performance across Australia’s housing market remains as diverse as ever.
Historically, periods of booming property prices have generally been followed by a period of falling prices, but there are a variety of factors that are likely to support a soft landing across Australia’s housing market.
The Reserve Bank and APRA have done a good job slowing down our markets, while also keeping us in a very low interest rate environment.
And it’s unlikely that official interest rates will change over the year or that APRA will interfere with further macro prudential controls.
In the absence of rising interest rates, our economy continues to grow, as do jobs and income, and at a time of limited detached and semi-attached housing supply, that suggests we’re unlikely to experience significant falls in home values.
We’re experiencing a soft landing — and that’s good news for home owners and property investors.
The bottom line
Despite our low interest rate environment, Australia’s property markets are very fragmented, driven by local factors including jobs growth, population growth, consumer confidence and supply and demand.
We’re clearly in the next stage of the property cycle, one of moderate growth in some regions and virtually no growth in others.
The market needed to calm down — its five-year run in Melbourne and Sydney was unsustainable and continued growth would have been dangerous, possibly leading to that “bubble” that the property pessimists have been worried about.
But while house price growth has lost momentum, we are yet to see any signs of a material downturn.
On the other hand, the rental growth turnaround will be welcomed by property investors.
I’ve now been investing for over 40 years and every property cycle I’ve experienced has come to a halt because of finance or difficulty getting it. In general, booms are stopped when the Reserve Bank increases interest rates to slow down the economy, and in the past it’s been quite effective at doing this. Over recent years, APRA has also attempted to put the brakes on investment lending, in particular by putting investor limits on lenders creating a “credit squeeze.”
Affordability is another a factor that comes to the fore near the end of the cycle. And I’m not talking about first home buyers who often face affordability challenges, but established home buyers who are looking to trade up (or down), but who find high prices and stamp duty too much of a disincentive. Instead they choose to stay put and renovate instead of trading up.
Having said that, there’s likely to be some life left in this cycle. And there is more likely to be moderate price growth in some areas and stabilisation in others, rather than a significant fall in property prices.
It’s not too late to buy an investment property, but at this mature stage of the cycle, careful property selection will be critical for investors. Remember, our markets are very fragmented and not all properties will grow in value, and some will make very poor long-term investment choices.