April 2015 Market Report

NEW SOUTH WALES

Is Sydney heading into dangerous territory?

As eager property buyers push Sydney prices up another notch, investors are warned about

When a respected property analyst starts sounding caution about the speed and magnitude of the price gains in Sydney, it’s wise to pay attention.

“During the past 12 months we have witnessed one of the largest boom periods in the history of Sydney’s housing market,” says John Edwards, founder of Residex and consulting analyst with OnTheHouse.com.au.

“The boom conditions are usually caused by supply issues and greed. The latter comes about as a consequence of people believing there are low levels of risk and quality returns to be made by entering a market.”

With more rate cuts expected in the coming months, Edwards warns that property buyers entering the market at this level are exposing themselves to serious risks due to the inflated property prices.

“I issue a warning to all: We have passed the top of a normal growth period and we are about to have the market stimulated and have further growth. That growth is taking us into uncharted waters where affordability will be potentially worse than we have previously seen.”

Edwards points out that at the current median house value at $900,500 as calculated by OnTheHouse.com.au, you would need to spend more than half (56.9%) of the family household income servicing the mortgage and have just a meagre $734 a week to live on and pay for other necessities.

“Even with interest rates for home loans at 4.5%, the median family in Sydney would only have $789 after tax and mortgage repayments to meet normal living expenses,” he says.

From boom to bubble?

It goes without saying that the exuberant buying in Sydney is starting to create a bubble that Shane Oliver, chief economist with AMP, believes would lead to price falls when interest rates start to rise again.

“Sydney has certainly become a bit bubbly,” says Oliver. “While it’s not a full blown bubble yet, it certainly made some people worry that the strong gains are now fizzing out. The fact that rents and income levels haven’t grown to match these strong price gains is making the Sydney market even bubblier.”

Oliver expects property values to grow by another 8% this year after a further interest rate cut, but believes yield will remain low despite a tight rental market.

“The problem for investors is that the rental yields have been pretty low as a result of rising prices. I think there will be some upwards pressure on rents but I doubt it will keep up with the strong property values. At the moment, net yield for houses is just 1%, and 3% for units.

“The big risk for investors is the degree of vulnerability. When interest rates start coming up again, you could see prices falling by around 10%.”

The other dangers investors are facing include getting caught up with the buying frenzy and allowing their emotions to rule their heads, according to George Raptis, director with Metropole Buyers Agency.

“Investors may forgo their usual due diligence and get caught up in the emotions of the buying process as they lose sight of the big picture. They are willing to pay whatever it takes to make their dream purchase a reality,” says Raptis.

This could result in buying the wrong type of property in the wrong location and worst, buying one that isn’t considered an investment grade property, according to Raptis.

You could also end up being overcommitted financially and will be exposed when interest rates start rising again.

VICTORIA

Fragmented market offers rich possibilities for investors

Despite the strong rate of growth that’s continuing in some parts of Melbourne, it’s important to look closely at how the different areas are performing in isolation before making any major purchases

Don’t get too caught up in the hype about strong capital growth predictions in the Victorian capital.

While this looks likely in some cases, other areas are looking rather ominous, argues Tim Lawless, Head of Research at CoreLogic RP Data.

“When you start to dissect the market and look at the different geographies, the inner city apartment market of Melbourne isn’t functioning very healthily,” says Lawless.

“We are seeing high supply levels, and Melbourne’s inner city apartment market is making a gross loss in 20% of all resales.”

Melbourne is one of two capital cities (along with Sydney) that have recorded the strongest increase in home values in the past 12 months, while also recording the lowest rental yields.

“This seems to indicate that the majority of investment activity is premised on expectations of capital growth rather than rental return,” says Cameron Kusher, CoreLogic RP Data research analyst.

Investors should tread lightly because the capital growth will inevitably slow down and they should pay closer attention to the rental income of their property, warns Kusher.

Best and worst areas

According to Michael Yardney, director of Metropole Property Strategists, there are better opportunities in buying established apartments in southern and eastern suburbs, with many having the added benefit of potential to increase value through renovation.

“We are seeing an oversupply of newly-built house and land packages in Melbourne’s outer northern and western suburbs where buyers are showing a preference for two- to three year-old homes, which can be bought considerably cheaper than new stock,” says Yardney.

He says the inner and middle ring suburbs are set to perform well with locals who have high disposable incomes. However, the outer suburbs, regional areas and ‘blue collar’ suburbs are more likely to be affected by poor job confidence and poor overall consumer confidence, with the market in these areas likely to languish, he says.

Two relatively affordable Melbourne suburbs offering promising future capital growth and rental returns are Seaford and Frankston.

This is mainly due to the expected population growth of the City of Frankston, in addition to their convenient locations and infrastructure, according to the most recent Herron Todd White report.

“The rental and investment demand is strongly supported by close proximity to public transport and amenities, as well as local employment opportunities,” says the report.

The median prices for a three-bedroom detached house in Seaford and Frankston are $435,000 and $370,000 respectively.

Meanwhile, Noble Park and Box Hill North are also showing increasing signs for popularity, says the report.

Infrastructure plans are being put in place to improve the appearance and development of these suburbs, which is being strongly encouraged by the local government.

QUEENSLAND

The Sunshine State embraces change

With new economic drivers and a new government, Queensland is starting to look like a different state. So how will the property market respond in the next 12 months?

The Sunshine State is in somewhat of a transition at the moment. For one, its mining sector is dwindling, while recent drops in the exchange rate are being warmly welcomed by the more optimistic tourism industry.

Indeed, major tourist centres in the southeast are increasingly showing signs of life, with property prices reacting accordingly. According to the Real Estate Institute of Queensland, two of the state’s strongest performers have been the Gold and Sunshine Coasts, with their median house values up 5.3% and 7.2% respectively over the past 12 months.

“Southeast Queensland and Cairns real estate had a strong 2014 and the State’s major tourism centres are also starting to hit their straps,” says Antonia Mercorella, CEO of REIQ.

“These improving conditions in the southeast generally kick-start growth in regional Queensland and we expect 2015 will be no different.”

Secondly, there has been a change in state government with Campbell Newman’s Liberal National Party making way for the Labor Party, led by Annastacia Palaszczuk. However, it’s still too early to see what impact Labor will have on property-related legislation and new infrastructure.

Despite the near-term political uncertainty, Linda Phillips of Propell is upbeat about the prospects for the state.

“We expect conditions to improve during the year. Inbound population growth continues and the relatively low prices will benefit from lower interest rates. We are forecasting house price growth of 6% during the year,” she says.

Shannon Davis of Metropole Property Strategists also believes that the Brisbane property market’s solid performance in the back half of 2014 doesn’t look like slowing down soon.

“I think this growth may continue in the near to medium term,” says Davis. “Interest rate cuts would drive investors to property and shares, and Brisbane is showing value presently. I would expect a better year than 2014. I expect around 7–9% growth.”

And with the currency dropping, Australian property is 20–30% cheaper than 12 months ago for many overseas investors, who could also help push up capital growth, says Davis.

Areas poised for growth

Inner city areas and south-east inner Brisbane suburbs are set to see strong growth in the order of 10% over the current year, according to Phillips. This will be offset by weaker growth in the outer north and south, and south-west stretching to Ipswich. “Growth in Brisbane is a balancing act between the relatively low prices and healthy inbound population growth, versus employment prospects and weak mining sector growth,” explains Phillips.

“Ipswich and further west are directly impacted by the resources sector, where commodity industry growth is struggling, but the agricultural sector is growing.”

Investors urged to remain cautious

Despite the positive prognosis for the Brisbane property market this year, it still deserves some caution because there will be a lot of new supply coming into certain areas.

Experts warn specifically of poorly designed investor product that will be coming onto the market in massive quantities in some parts of Brisbane’s inner ring suburbs.

This is especially evident in Brisbane’s northern corridor, says Tim Lawless, Head of Research at CoreLogic RP Data. “We haven’t seen much new supply prior to this cycle so there is a bit of catch-up happening in that area, and of course the area is zoned for higher densities now – it’s partly a renewal strategy of Brisbane,” says Lawless.

However, vacancy rates in the area are still quite low at the moment which shows that the market is still relatively healthy from both an investment demand and a rental demand, says Lawless.

WESTERN AUSTRALIA

WA braces for life after the mining boom

It may be battling some rough headwinds, but the Western Australian economy is not all doom and gloom. Just ask the experts

The phrase “all good things must come to an end” appears quite appropriate when taking a glance at the Western Australian economy. In this case, some would argue the “good things” could refer to the mining boom, strong population growth and low unemployment to name a few. Now those things have weakened to a point where the state is arguably in recession.

Thankfully, the recent rate cut is already having an impact, according to Linda Phillips of Propell.

“WA is a dynamic state and it’s following the American boom/bust model. The lower interest rates are already having a measurable impact that should hold prices up,” she says. Unit prices were down 1.9% in the past year, and Propell forecasts a 5% decrease in 2015 overall.

“Unit prices are affected by the vast oversupply of new apartments coming on to the market,’ says Phillips. “While this is creating price weakness, we are also seeing a demand increase, especially from Singaporean and other Asian purchasers.”

Bright spots emerging

While the overall trend still points to a period of weakness in prices, there are areas that are starting to see demand ramp up.

Phillips says properties within about 8km of the CBD remain in strong demand. “Areas with river views such as parts of Maylands and neighbouring suburbs are also seeing increased demand,” she says.

“Properties with proximity to, and views of, the river or the ocean will sell quickly if priced well. Well located, inner suburbs are attracting strong demand and overall we expect this to maintain or slightly improve unit prices.”

Weak markets to avoid

“These are especially to the south, extending out to Byford which are home to the entry-level 4-bedroom, 2-bathroom stock standard cookie-cutter houses.

“These suburbs are 30–50km from the CBD and with plentiful supply of land; price growth depends on continuing population growth. That growth has dried up for now and as such, these markets are likely to experience price weakness,” says Phillips.

Some regional areas are also likely to continue to struggle, especially those home to mining operations such as the Pilbara region. For example, Port Hedland saw prices dropped by a hefty 14% over the year according to the Real Estate Institute of Western Australia.

Karratha has been hit even harder, with its median price dropping by 15.4% in the quarter and down by almost 30% over the year to $499,000.

SOUTH AUSTRALIA

Is it now South Australia’s time to shine?

South Australians have endured the last few years taking body blows for its nonperforming economy and property market. This may soon change as a slew of positive factors make their way into the economy

Despite having one of the most affordable housing markets in Australia, investors haven’t paid much attention to South Australia’s offering amid the onslaught of negative news coming out of the state.

When just about every headline screams of impending disasters amid car manufacturing closures, it’s hardly a surprise that South Australians have been pretty gloomy for a while.

The poor performance of the property market certainly hasn’t helped sentiment either. The January results by CoreLogic RP Data shows Adelaide dwelling values falling by 1.2% for the three months ending January and growing by a measly 3.1% year-on-year. Adelaide joins Darwin and Perth as the country’s weakest capital cities during the same period.

Positives starting to emerge

Despite the negative headline-grabbing news, there are powerful forces making their way into the economy according to a Deloitte Access Economics report.

It points out that the recent shifts in both interest rates and exchange rates are almost equally powerful positives that could rescue South Australia’s economy from the doldrums.

“Interest rates and exchange rates are pretty powerful levers for the South Australian economy,” says the report. “Not only are the twin engines of interest rates and exchange rates now fired up in a way that they haven’t for well over a decade, but over the longer term, South Australia is relatively well-positioned to sell into Asia’s maturing boom.

The report points out that there are now tangible signs that the economy has bottomed out and is starting its slow recovery as shown by the following:

•        Unemployment rate starting to trend down amid some better gains on the job front

·         Population growth rate starting to pick up as migration to Queensland and WA started to tail off

•        The recent surge in dwelling starts may soon fade

Despite the shelving of a number of planned projects including the mammoth Olympic Dam, the number of projects underway is still fairly healthy and in Deloitte’s words “potential abounds”.

These projects include:

•        Upgrade of the Port Pirie smelter at a cost of $514 million

•        Duplication of the Southern Expressway at $408 million

•        Redevelopment of the Lyell McEwin Hospital and Queen Elizabeth Hospital, and the new Royal Adelaide Hospital slated for 2016 are all underway with a combined cost of over $2.1 billion according to Deloitte

TASMANIA

Island state is showing signs of life

Many signs are indicating that Tasmania is on the rebound, but experts agree that it may not be all smooth sailing

Years of economic struggles in Tasmania clearly had a detrimental effect on the property market and the local psyche. A lack of economic growth has forced locals to look for employment on the mainland resulting in population losses and corresponding stagnation in market activity. However, more and more signs are painting a mending picture of Tasmania’s financial woes.

Recent economic data is relatively positive with unemployment at 6.8%, its lowest rate since February 2013. A number of large-scale projects are in the pipeline, including $42.5 million in repairs to north-east freight roads, the $12 million Burnie Port project and five new irrigation schemes likely to get funding within 12 months.

Propell economist Linda Phillips says economic boost is crucial for long-term growth in Tasmania’s property market.

“Unemployment is the main factor here,” she says.

“Improved retail spending and a lowering of the unemployment rate will need to become evident for this to be of any real benefit to the local market.”

The past 12 months have shown some positive indicators that the local market is improving.

Positive Real Estate property coach Carolyn Weston can see an encouraging shift in momentum for Tasmania’s reviving market. “Just recently, particularly in the Hobart area, there’s better market sentiment,” she says.

“The houses are selling a little bit more quickly and the rental yields have increased massively.”

Weston says the Tasmanian Government’s First Home Builders Boost has been very influential in aiding growth in the area.

“There are lots and lots of houses being built when you drive through. There’s growth happening there.”

This may prove beneficial in the short term, however, unless population rates increase, the ensuing loss of activity in the rental market could only exacerbate an oversupply.

Tasmania currently has a population growth rate of 0.34% per annum, the lowest of any state. However, progress is looking on the up with the latest CommSec State of States Report indicating the strongest annual growth in 2.5 years.

NORTHERN TERRITORY

Mighty Top End loses momentum

Boasting both high rental yields and strong capital growth in recent times, Darwin has been a godsend for many investors. But how will it fare in these tough days?

Darwin’s recent property market performance can only be described in two words: roller coaster.

At its peak, property values were growing faster than anywhere in the country. It even came close to matching Sydney’s lofty prices.

But then the resources boom ended. And new supply entered the market. As is the case with smaller markets, even a small imbalance in supply and demand can significantly impact the market.

“Darwin’s rampant price growth at its peak was always unsustainable, but, being a small market inundated with unprecedented high demand from inbound workers on Inpex and other projects, prices just kept going up,” explains Linda Phillips of Propell.

“The new supply, combined with a reversal in demand from resource projects, has seen demand evaporate.”

Phillips added that with up to 7% of stock currently on the market for sale, it is a buyers’ market, and properties are taking up to four months to sell, which indicates continuing price weakness.

“Were it not for interest rates forecast to fall in 2015 by another 0.25–0.75%, and for the lower Aussie dollar exchange rate, Propell would be forecasting price falls for 2015/16.

“The saving grace is that the lower exchange rate may rescue some of the resource projects, as well as increasing tourism employment, while lower interest rates will improve affordability.”

Growth inhibitors

Phillips points out that while external forces are working against Darwin’s favour, its success is actually preventing further growth.

“It is the absolute level of prices that prevents more growth,” says Phillips. “The median house price is $564,500, the median unit price is $530,000. This is the third highest in the country after Sydney and Melbourne. Looking at historical trends, the median house price should be about $80,000 lower. The unit price is higher than Melbourne’s and second only to Sydney. Again, using historical trends, it should be about $125,000 lower.”

Good news

Fortunately for Darwin, the low level of unemployment, at 3.7%, is 0.3% lower than this time last year, and easily the lowest in the nation says Phillips.

“It is the continuing level of employment that is maintaining house prices,” she says.

The recent drop in the Aussie dollar should also provide some good news for both agribusiness and tourism – two sectors which also have pretty good longer-term potential in the Top End.

International and domestic visitors spent $1.85 billion in the NT for the year ending September, 2014. This represented a 13% increase in expenditure compared to the previous 12 months, which is the biggest spend by visitors to the territory in five years.

AUSTRALIAN CAPITAL TERRITORY

Handbreak slowly easing on housing market

Despite a dreary few years in the housing market over the past few years, Canberra could be ready to make a comeback. Alastair Lynn reports

In a state held under duress by activity in the public services, Canberra’s housing market is looking to negotiate its release. Significant fiscal consolidation, job shedding, cutbacks in services and concern over job security has impacted the local economy over the last three years. Fortunately in the early stages of 2015, there are signs indicating that this subdued market may be on the mend.

The latest CoreLogic RP Data Home Value Index shows Canberra’s housing and unit values increased by 0.9% and 3.68% respectively last month. While overall dwellings are down 0.34% on this time the previous year, experts are confident that the indicators for growth are present.

“Certainly early signs have shown improvements in activity in the Canberra market, says Andrew Wilson, senior economist at Domain Group.

“The prospects are becoming more positive that the volatility in house price growth, particularly buyer activity, will end and we’ll see a more consistent outcome from the market that I think will be driven by lower interest rates.”

Data released over the last three months has certainly presented a reason for optimism.

Domain Group’s house price report for the December quarter showed the median house price grew 1.4% while units saw a 1.1% increase.

Wilson says that strong auction numbers at the end of 2014 and numbers tracking higher this year indicate that buyer activity is increasing. “There are early signs that confidence is gradually returning to the Canberra market and starting to filter back into prices growth,” he says.

With the CoreLogic RP Data Home Value Index showing the median house price at $580,000 and $410,000 for units, property in Canberra is not cheap.

However, Wilson pointed to buyer activity being generated more prominently in the middle and upper price range suburbs.

“There’s some positive signs for the Canberra market, however, it will always be hostage to what happens in terms of spending in the public services, so we need to be mindful of that.”

It’s not all doom and gloom

While Canberra has felt some impacts from the federal government’s plans to cut the public service, it does not spell the demise of the capital’s workforce.

“As is typical, when time passes by during the first term of a federal government, it finds it more difficult to implement cuts than intended,” says Linda Phillips, economist for Propell.

With unemployment levels at 4.5%, this does show a rise of 0.8% from 2014. However, ACT still holds the second lowest unemployment rate in the country, second only to NT.

Phillips says that as the situation is returning to normal, some growth in 2015 should be expected.

“Canberra in general has better prospects for investment in the next year, though newer properties, or those with redevelopment potential, will do better than average.”

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