April Market Report

Australian Capital Territory

End in sight for rollercoaster ride?

The ACT’s property market has been on a rollercoaster ride over the last 18 months. But does an improved end-of-2013 result mean that ride is finally over?

Sitting at the centre of every amusement park, the dips and turns, peaks and troughs of rollercoasters are much beloved by thrillseekers.

However, the dramatic rises and falls that characterise a rollercoaster ride are not so thrilling when they encapsulate a property market.

According to APM’s Andrew Wilson, the ACT’s market has been on a real rollercoaster ride in house price growth over the last 18 months. He says that, economic issues largely deriving from the territory’s heavy exposure to the public service, mean it has been very volatile with big fluctuations in buyer activity.

In 2012, the Canberra market was showing signs of becoming a leading capital city market. However, the 2012 budget – which brought in ongoing changes and cuts to the public service – has had a significant impact on unemployment rates, job security, and buyer confidence. This has, in turn, had an ongoing impact on the property market.

The good news is that the ACT market recorded a decent result over the December quarter, Wilson says. The latest APM housing market report shows that Canberra produced a modest performance through 2013 with median prices rising by about 3%.

Prior to that result, it looked like Canberra’s market would be the only capital city market to finish last year in the black, Wilson says. “This was due to end-of-year growth, which has led to a return to a positive outlook for the market. The result also reflects lower interest rates and improved affordability.”

While Wilson believes the positive frame of mind this denotes should work its way through the first half of 2014 and break the market’s recent rollercoaster pattern, he also warns that a lot depends on the first Abbott government budget.

“There is the sense that the budget will be a bit heavy handed in terms of fiscal consolidation, which will act as a moderator on housing market activity. The prospect of job cuts is a big negative influence on the market.”

Public service cuts are more likely to impact on buyer confidence before they impact on actual housing market activity, in Wilson’s view. “I suspect the budget might add to market volatility, rather than putting it into an underlying decline.”

However, he adds that low interest rates should continue to drive buyers, as should the territory’s ongoing under-supply of housing. This shortage keeps demand bubbling along underneath everything, counteracting some of the other issues affecting the market.

The latest Deloitte Access Economics Business Outlook’s assessment of Canberra reflects Wilson’s views. It says that Canberra’s economy is still in a tug-of-war between the positives associated with low interest rates and the negatives due to public sector cutbacks.

The report notes that housing finance and building approvals are falling, vacancy rates are continuing to climb, housing prices are heading down, and housing construction activity is sliding.

Further, it records that job vacancies have dropped to record lows, and predicts that 2014 and 2015 will be lean years for the ACT economy overall.

New South Wales

Sydney scales new height

Phenomenal sales activity continued to be the theme for Sydney over much of the summer, but the market’s price peak could be in sight

How far will Sydney’s property investors go?

That seems to be the relevant question considering the city’s now one and half years of solid price growth – fuelled, not by first home buyers, but almost entirely by an active investor base.

The situation has now reached a pivotal point. AFG, Australia’s largest mortgage broker, reports that January saw its highest proportion of home loans processed for investors since records began. Figures from the brokerage show that 53.4% of its NSW loans processed went to investors, accounting for $2.58bn. It was also a 14% increase on January 2013 activity.

General manager of AFG sales and operations Mark Hewitt estimates that much of the spike in activity has come about because of the low interest rate environment.

“We’ve had a very strong start to the year, with continuing trends of high investment activity in NSW,” Hewitt says. “With most people expecting the historically low rates to remain with us for much of the year, we’re preparing for even higher levels of activity now that people are getting back to work from the summer holidays.”

Data from Australian Property Monitors (APM) shows the kind of impact that large scale investor activity is having. By APM measures, Sydney house prices grew 6% over the three months to December – the second highest quarterly house price rise on the research company’s records.

APM calculations also had Sydney’s house price rising by 15.1%, pushing the city’s median price to the highest level ever.

APM senior economist Andrew Wilson attributes the rise to low interest rates, reasonable economic performance at a national level and rising confidence. While these drivers won’t be abating soon, Wilson says that further growth in house prices is looking increasingly unlikely over the months ahead.

Part of the reason is that so much of the recent activity has come from investors. The fact that first home buyers are not responding as well to the low interest rate environment means that growth is less a reflection of a market where the bulk of would-be buyers feel they can purchase. Sydney’s high prices may have a lot to do with that.

“The Sydney market has been supercharged by record levels of investor and changeover buyer activity in the $1m to $2m price ranges – particularly in the Upper North Shore and Inner West suburban regions,” Wilson says. “The current level of price growth in Sydney is unsustainable, particularly given the likely continued deterioration of the local economy and the prospect of a flood of new rental properties overshooting underlying market fundamentals.”

Beyond ridiculous

Further confirmation of Sydney’s rapidly approaching affordability ceiling was recently revealed in a global study of house prices. Demographia’s 10th annual International Housing Affordability Survey showed (in what will likely be no news to the majority of Australians) that Sydney remains one of the top 10 least affordable housing markets in the world.

The survey ranked cities in Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the UK and the US on a decimal scale where cities that generated a median multiple between 4.1 and 5 were deemed “seriously unaffordable” and anything over 5.1 was categorised “severely unaffordable”. Sydney scored a 9.

Northern Territory

Living next door to Alice

As buyer attention stays firmly glued on Darwin, investors could be missing great opportunities in alternative Northern Territory spots such as Alice Springs

It takes a certain amount of endurance to drive from Darwin to Alice Springs. The route cuts through hellishly hot desert on 1,500km of unbending roads colloquially known as “The Track” which, until 2007, had no speed limit. To this day, sections of the highway are more than 200km from a petrol station.

It is no surprise then that Alice Springs has not always followed the growth patterns of its northern state capital.

The ebbs and flows of Darwin economic growth have filtered into Alice to some degree, but the city’s isolation has traditionally guaranteed that such affects have influenced growth rather than dictated it. This partly explains how the city’s property market has been subdued over the last three years while rapid growth has persisted in Darwin and much of the North Territory.

Hotspotting director Terry Ryder says that property in Alice Springs has a history of growth quite apart from that of Darwin and one that has been impacted by Federal government policies.

Spurred by the after effects of a government initiative, the city recorded nation-leading growth in 2010 when its median house price grew by more than 20%, but since then prices have fallen.

“Price rises for houses and apartments [in 2010] were generated largely by an influx of people working on government programs aimed at resolving local issues relating to camps and high crime levels,” Ryder says.

“Before John Howard lost government in 2007, a Federal Government policy of ‘intervention’ began. It brought new government programs into Alice Springs, adding to housing demand in a town where land supply is constrained by cattle stations, crown land and aboriginal land.”

Now that the market has corrected itself from its earlier rapid growth period, Ryder believes Alice Springs real estate could be poised for a comeback.

The major sources of work that draw people to the town are cattle stations, mining operations, tourism and government administration and Ryder says that this diversity should drive consistent growth in rents and property values.

“The region includes a number of mining and pastoral communities, the Joint Defence Space Research Facility at Pine Gap and tourist attractions at Uluru-Kata Tjuta National Park, Watarrka National Park and the MacDonnell Ranges. Transport is another major industry and employment overall is strong… Alice Springs has a strong future with definite signs of growth,” Ryder says.

Recent activity

Evidence of the city’s emerging return to form – albeit at a slow pace – was an increase in sales activity over 2013. This saw 16% more sales in the 12 months to January 2014 compared with the 12 months to January 2013, according to RP Data. Despite the increase, transaction levels are still historically low, indicating buyers can be a lot more discerning in what they choose to purchase.

Rental yields across much of the city have been improving. Rents in suburbs such as Desert Springs and Araluen have grown by a respective 6.5% and 5.5%, pushing their median rental yield figures to over 7%.

RP Data’s January figures also indicate most Alice Springs suburbs average around the mark of 6%-7% rental yield, making the city one of Australia’s most cash flow positive investment markets.

QUEENSLAND

Déjà vu in Moranbah?

This struggling Queensland mining town, once considered a miracle property market, is rumoured to be about to boom again. Could it be true?

Anyone remember an investor fairy tale doing the rounds a few years ago?

It went something like this. Once upon a time, in a Queensland town far, far away from a major city there lived a quiet community on a grassy plain. Not all that much happened there, but that was just how residents liked it.

Because the town was small, there were few houses, but no one seemed to mind and the town stayed like this for decades. That was until a group of scientists discovered massive coal reserves nearby. Multi-national companies quickly followed and drew up plans to extract the coal. This required thousands of people to migrate to the area.

Suddenly the town having few houses was a problem. There weren’t enough places for new people coming in to live.

Those who owned properties took full advantage. They began selling their properties for triple or even quadruple the prices seen before the coal was discovered and made a killer profit. Investors soon got word of the money that could be made in the town and bought up land. They quickly erected houses on the land and made their own killer profit.

The name of that town was Moranbah. And for a lot of people that is where the tale ended. It is a story often spoken about as a reminder of what can happen for property investors who are willing to put their money in emerging property markets.

This year, whisperings of the fairy tale have returned with full force as reports are released of resurgence in Australia’s coal industry. One, commissioned by Matson Apartments, is particularly optimistic.

“Moranbah’s property market is poised for its next boom with over $17.2bn in major infrastructure projects planned and $5.6bn of these approved within a 60km radius of the township,” the report says.

This may be good news for those looking to get their share of mining town profits, but investors should consider the real end to the story of Moranbah. It is far from a fairy tale.

The tragic ending

You see, even though Moranbah expanded rapidly over just a few years, it still maintained the feel of a sweltering and small country town where not much happened. A popular option began to emerge: continue to work in the coal mine, but live somewhere else.

Mining companies loved the idea. As Moranbah property values continue their surge, prices and rents had become so unaffordable that a change was needed. The idea of fly-in fly-out workers lodged in mining camps took shape. Workers could live in a different town or city, fly to the site of the mine, stay in a mining camp and completely circumvent Moranbah township.

It was great for the mining companies but devastating for Moranbah property owners. Many had purchased property at absorbent prices, but because demand for them was waning, their rents and values plummeted. In the end, they lost hundreds of thousands of dollars.

It is for this reason that reports of a resurrection in Moranbah’s property market should be considered carefully.

The hype

The motivation for round two of a Moranbah boom is that an upward swing in coal prices may be enough to spur a new wave of mining workers into the town. The report commissioned by Matson Apartments says that new projects represent a game changer.

“Moranbah has faced a range of challenges in the last two years [but] there are signs the market is turning as nearby coal mines return to full production and new mining projects start construction,” it says.

Omega Investments principal Flynn De Freitas adds that new mining projects and increased global demand for coking coal (used in the manufacturing of steel) mean Moranbah’s economic future is looking brighter than ever.

“The large number of new mining projects in the Moranbah region is underpinning strong population growth forecasts, with over a 45% increase in the town’s population expected in the five years to 2018,” De Freitas says.

Major coking coal projects include the proposed Red Hill Mine which would employ 3,000 contractors during peak construction and up to 1,500 workers and contractors, according to De Freitas. “[Growth] is expected to see demand for 265 new dwellings per annum between 2013 and 2018.”

Behind the hype

Changes may be coming Moranbah’s way, but current indicators aren’t as encouraging. DSRScore.com.au figures show that the latest vacancy rate for the town is a whopping 6.6%. This suggests a market where an unusually high proportion of landlords have tenantless properties.

To put that number into contrast, the average vacancy rate among Australia’s 7,000-odd suburbs is between 1% and 2%.

Vendor attitudes aren’t encouraging either. The average vendor of property within Moranbah is decreasing his property’s original asking price by 23%, and considering that the average property is taking more than five months to sell, this suggests that sellers have lost hope: they aren’t seeing significant buyer interest and are lowering their expectations as a result.

Of course, if the upturn in coal mining activity has the effect on property prices that some are forecasting, such statistics could represent a perfect opportunity to get into the market at just the right time. But then, considering Moranbah’s turbulent history of prices growth is it really worth the risk?

South Australia

Brighter future on the cards

Negative reports and perceptions aside, SA’s economy and capital city property market are set to improve in the not too distant future.

Perceptions about SA’s economy might well be hurting the property markets of both the state and its capital city more than the economic reality is.

Media focus on Holden’s closure announcement and its impact on the SA motor manufacturing industry has overshadowed coverage of all else relating to the SA economy in recent times. Buyer confidence and, thus, property market activity could suffer as a result.

Hotspotting’s Terry Ryder says he understands why many observers don’t expect much from the SA market. “It doesn’t have the economic oomph that other states have. So its performance has tended to be a bit below par and it gets downgraded by some commentators.”

Those commentators are not taking a long-term view of the state and its prospects. Rather they focus on events such as the impeding Holden closure.

But SA does have a strong future – with some big events in the pipeline – and will be taken a great deal more seriously in 3 to 5 years’ time, Ryder says. “The Holden closure will have some impact, but it will be absorbed. The real future of SA is in the emerging resources sector. When that really kicks into gear the benefits of it will flow back into Adelaide in a big way.”

As an example, he cites the much-plagued Olympic Dam development. While the project may have been temporarily deferred due to the need for greater cost efficiencies, it will not be on hold forever. The potential benefits and profits are simply too big.

Ryder says that, once projects like Olympic Dam, are back underway SA will be on track to become one of the top resources states in Australia after Queensland and WA. Capital city Adelaide – and its property market – is set to be a major beneficiary of any such development activity.

Further, there are other emerging, growth industries and opportunities in the pipeline for the SA economy. These include defense hardware manufacturing, alternative energy, agribusiness, education and wine.

Capital property focus

In the meantime, Ryder believes that Adelaide’s property market is set to have its best year since 2009 over the coming year. “There should be solid growth. It won’t be a massive year, but there should be maybe 5 to 7% growth.”

One cause of this will be a ripple effect from improved markets in other capital cities (particularly Melbourne). The Adelaide market should follow suit as its cycle is overdue for improvement.

Also, Ryder says he has noticed increasing sales volumes in the city. “Rising sales lead to rising prices. We have seen a pattern in many Adelaide suburbs of risings sales over the last 15 months, and that means that we are likely to see some rising prices too.”

He adds that Adelaide’s ongoing affordability makes the city a good bet for canny investors. “It is too simplistic to say it doesn’t have great population and economic growth. There are some standout areas – like Onkaparinga in the city’s south – which investors should take note of.”

However, according to the latest APM Housing Market Report, Adelaide’s market remained relatively subdued over 2013 despite the stimulus of low interest rates.

The median house price increased by a moderate 3%, which was the first annual increase since 2010. This is just 3.4% below its previous peak, which is a good reflection of the relative stability of the market’s price cycle.

Adelaide continues to have the lowest median house price of all the mainland capitals at $446,153. This affordability translates into the highest levels of first home buyer activity of all the mainland capitals.

The report predicts that the city’s relatively high unemployment rate and weak economy will continue to subdue buyer activity during 2014, although prices should still increase by between 2% and 3%.

Adelaide rental affordability

Meanwhile, APM’s latest rental price report shows that Adelaide’s average weekly asking rent of $350 for houses and $285 for units makes it the most affordable mainland capital city for renters.

While these prices are particularly good for tenants, it seems that landlords are not missing out. According to the report, median prices in Adelaide were increasing, with rents rising 2.9% for houses and 1.8% for units over the December quarter.

Tasmania

 Better times ahead?

More good results for Tasmania’s market builds further hopes about the prospect of a genuine recovery, but will the overall economy hold improvements at bay?

Increasing flickers of light continue to pierce the clouds still hanging around the Apple Isle’s property market. Recently, these flickers have been contained in news of some more surprisingly good markets results.

In the RP Data-Rismark January Home Value Index, Hobart was the best performing capital city over the December quarter, with a rise in home values of 5.8%. This result was comfortably above the national average of 2.7%.

RP Data’s Tim Lawless says that, while the result was positive, it was yet to be seen whether it indicated a turnaround in the market. He believes more data is necessary before the result could be described as a trend.

However, the latest APM Housing Market Report was the harbinger of further good news for Tasmania.

The report shows that, after a long period of subdued buyer activity, Hobart house prices increased solidly over the year by up to 6%, with a noticeable rise in buyer activity over the second half of 2013. This brought the median house price close to its previous price peak in late 2010.

APM’s Andrew Wilson says the continuing price growth indicated Hobart’s housing market is heading in the right direction at last – and was likely to be continuing trend over the coming year.

“There is no doubt that improvements in affordability* and lower interest rates have activated buyers. The perception that it is time to move and buy is there now, especially for buyers who have been postponing making a decision.”

Buyer activity had picked up pace over the second half of 2013, Wilson says. “We should see a similar type of moderate growth going into the middle of this year, driven by expanded confidence and momentum.”

Unfortunately for Tasmania, its soft short term economic outlook and unemployment rate are likely to continue to be a drag on the market for some time yet.

On a brighter note, Wilson says that Tasmania’s market is showing resilience in the face of an underperforming economy which was not working against buyer activity.

“The economic situation seems to be counter-balanced by the improved affordability and low interest rate factor. Gathering momentum from those factors, and the perception that now is the time to buy, is helping the market to pick up, as a consequence.”

Broader, national economic issues – like potential government spending constraints in the budget and the lower Australian dollar, which will lead to higher prices for imported goods – could also act to moderate the Tasmanian market later this year.

However, Wilson says the Tasmania market should see its best first half year since 2010.

Further, APM’s report found that signs are emerging of a slow regeneration of economic activity. If that regeneration continues, the report predicts Hobart house prices should rise by 3 to 5% over 2014.

[* Hobart remains the most affordable capital city with a median dwelling price of $340,000.]

More good news further down the track

Meanwhile, the latest Deloitte Access Economics Business Outlook, notes that, while recent data from Tasmania has been better, the state continues to be the biggest victim of Australia’s “two speed split”.

The state has been suffering from the strength in interest rates and exchange rates, which have weighed on exports, retail and housing construction. This has had significant impact on population growth, employment rates and the overall economy.

Although Tasmania’s economy will continue to struggle for awhile, things are beginning to improve, according to the report. It says the lower the $A falls, the less drastic the pressures on Tasmania’s economy – with tourism and manufacturing set to benefit.

Further, it notes that housing construction and housing finance approvals have both picked up, residential vacancy rates are improving, and business investment spending is no longer falling.

Victoria

Rapid growth could exact a toll

Recent data hints that Melbourne’s stellar growth in 2013 might have reached a peak, but commentators see life in the market yet.

Much like a comet, the Melbourne market has blazed suddenly and in spectacular fashion. But could its stellar trajectory across 2013 and into 2014 also be as brief as that of a comet’s across the sky?

According to the latest APM Housing Market Report, Melbourne’s housing market recorded a solid year of buyer activity, in 2013, with most price sections, buyer types and suburban regions reporting growth.

There was price growth of up to 8%, which is the best result since 2009’s 15% increase. Yet, despite this, the median house price remained around the levels recorded in 2010.

While the report predicts solid market activity through the autumn period and growth of between 3 and 5% over 2014, it expects buyer activity to moderate and notes some indications of waning.

The RP Data-Rismark January Home Value Index results tell a similar story.

Impressive growth saw Melbourne values up 11.9% over the 12 months ending January 2014. RP Data research director Tim Lawless says these results show Melbourne is well advanced in its growth cycle.

“The current exuberant conditions will wind down over the coming year due to the very low rental yield environment, increasing affordability constraints and higher levels of housing supply impacting on the market.”

It could well be that the surprising strength of Melbourne’s market could also be its downfall.

Michael Yardney, from Metropole Property Strategists, is more optimistic in his assessment of the situation – but he too is worried the market will reach its peak too soon and simply fizzle out.

Market life

More positively, Melbourne’s market is only now reaching its previous peak (of 2010), he says. This means the market is moving into its expansionary phase, while housing is still affordable and interest rates are still low.

“Although first home buyer activity remains low, strong demand from owner-occupiers and investors continues. In fact, there is more demand for properties than there are good properties for sale.”

Overall growth should continue to be solid, to the order of 5 to 7%, in 2014, Yardney says. “While it depends on buyer confidence, interest rates, and broader economic  issues, and there could be speed bumps along the way, there is still quite some life left in the Melbourne market.”

He sees another indication of the “life” in the Melbourne market in the pick-up in the prestige market. This has been driven by stock market confidence and dividend payouts.

“It is a more volatile market, but it has started to pick up and will continue to do so. For example – there are now 26 suburbs with median prices of over $1million, and we expect that number to grow.”

However, Melbourne remains a particularly fragmented market with some segments that should be avoided, Yardney warns.

There continues to be an oversupply of new and off-the-plan inner city apartments, yet there is less demand from the tenant demographic that rents in the CBD. There is also an oversupply of newly built house-and-land packages in the outer northern and western suburbs where buyers appear to prefer older, cheaper houses.

In Yardney’s view, investors looking to buy into the Melbourne market will find the best investment opportunities in established apartments with renovation potential in the city’s southern or eastern suburbs.

Struggling rental market

Meanwhile, the latest RP Data-Rismark home value data paints a somewhat worrying picture of Melbourne’s rental market.

The data indicates that the city’s rental rates continue to grow at a pace much slower than property values area. This means that rental yields have essentially remained static.

Melbourne now has the worst rental yield of any of the capital cities. Gross yields for houses are below 4%, while gross yields on units are slightly higher at 4.2%.

RP Data’s Tim Lawless says that such a yield environment could start to act as a disincentive to investors. “With gross yields low, together with the fact that the market is well advanced in its growth cycle, it would suggest that the investment fundamental in this market is waning.”

Western Australia

Perth figures throw a curveball

Things aren’t exactly as they seem as seemingly good growth figures fail to translate into gains at the lower end of the market

There are three types of lies, according to an old maxim. There are lies, damned lies and then there are statistics.

Perth investors should keep this in mind when examining the most recent statistics concerning house price growth in Perth which, while far from “lying”, could easily be misinterpreted without some context.

A simple glance at the latest data on house price growth in Perth shows that city median property values are continuing to grow, but Real Estate Institute of Western Australia (REIWA) president David Airey says the reality is not as simple.

By REIWA’s calculations, which use a simple index that ranks all sales from high to low and plucks out the middle or ‘median’ figure, the December quarter saw growth in house prices of 6%.

Normally this would suggest that sellers have been trying their luck with higher asking prices and that buyers have been prepared to accommodate them, but Airey says this has been far from the case with recent property sales.

“[Growth in values] has largely been driven by two key factors,” says Airey. “The number of first home buyers has actually dropped 12% since the June quarter with a notable fall in sales under $400,000… at the same time there was an increase in sales over $600,000. Together, this compositional change in sales acted to pull the median price upwards.”

Rival RP Data figures, which are calculated on a hedonic index that includes property attributes rather than just a simple median index, also show that growth in Perth’s median house price has been driven by increased activity at the top end of the market.

According to RP data, Perth’s top performing market between January 2013 and January 2014, recording a 41% increase in the median price, was hardly in the range of what could be considered an affordable market. That suburb was mansion strewn Peppermint Grove, which boasts WA’s most expensive median house price: $3.5m.

Other strong performers recording growth in excess of 20% included houses in Mount Pleasant, North Fremantle, Watermans Bay and Menora – all of which have a median house price over $1m.

First home buyers

For commentators such as Australian Property Monitors senior economist Andrew Wilson, Perth’s drop in lower end activity shows a city that is starting to mirror patterns in other capitals.

Up until recently, Perth had been the only capital city market where first home buyers were primarily responsible for driving an increase in prices – not investors and upgraders. Now it is likely that first home buyer activity is going to fall as affordability constraints impact the market, Wilson says.

“Last year there was a surge in job seekers into Perth and WA and that pushed up rents to extraordinary levels. In this environment it was no surprise that significant levels of first homebuyers moved into the Perth housing market and this encouraged prices growth as a result.

“Tapering off of first home buyer activity in Perth, I think, reflects capacity constraints. That first home buyer surge has moved its way through the market and buying power is becoming constrained. We’re also starting to see rents fall in Perth.”

REIWA’s David Airey agrees. “I think the fall in turnover with sales under $400,000 has largely been a reaction to both low levels of housing stock and also affordability pressure on some first home buyers.”

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