National Property Market – October 2015


Extreme growth persists in Sydney

Even with the threat of tighter lending and higher mortgage costs, buyers in Sydney continue to storm the market and are pushing prices to heady new heights

It was bound to happen that the median price of Sydney houses would hit the million-dollar mark. Experts have been forecasting this for a while, given the momentum of the market during the past two years.

What surprised a lot of people, though, is how quickly prices got there.

The June quarter results from Domain showed the median house price in Sydney surging 8.4% to $1,000,616. Units saw similar strong performance, with the median jumping by 6.6% to $656,078.

“We’ve been expecting that median to push above the $900,000 mark as the market has been showing no signs of slowing down,” says Andrew Wilson, chief economist at Domain.

“We were not surprised that we got to the million-dollar median in the June quarter, but we were surprised that we got there so quickly. We were originally looking at the March quarter next year, even the December quarter this year. The June quarter was an extraordinary result. We reported 8.4% growth over the quarter, which is the strongest rise we’ve ever recorded over a quarter since the late 1980s market boom. It’s the strongest local growth rate of the modern era.”

Wilson points to the interest rate cut this year as a catalyst for this continuing surge in prices.

“Low interest rates have improved affordability. Investors are still interested in the Sydney market due to its strong economy and high level of migration; it is essentially ticking all the boxes at the moment,” says Wilson.

CoreLogic RP Data showed similar strong results in its July Home Value Index. During the month of July alone, the median house price climbed by 3.3% to $921,500. Since January, house prices have soared by 13.5%.

“Sydney remains the hottest housing market, with dwelling values moving 18.4% higher over the past year. This is the highest rate of annual growth since 2002. House values were up by 19.8% over the year and unit values increased by a lower 11.9%,” says Tim Lawless, head of research at CoreLogic RP Data.

Investor activity remains strong

Despite the recent move by APRA to rein in investor activity, there are no signs of a massive decline in activity.

According to Wilson, Sydney is still attracting massive interest from investors, as shown by the high proportion of investment loans taken during May.

“Investor numbers have been very strong in the Sydney market, which is not a surprise. You go where the money is going. And there’s a lot of money going into Sydney at the moment. The numbers from the Australian Bureau of Statistics show investment lending accounts for 62% of all loans taken over May. This gives you a strong indication of investor activity in Sydney,” Wilson says.

“I don’t think the questionable move by the banks to raise interest rates on investor lending during a low interest rate environment will have a material impact on investor interest. I don’t think it will have an impact on the market, except perhaps to push up rent.”

All eyes on the August data

While there’s no sign of waning demand, auction clearance rates have tracked back slightly, Wilson says. However, he believes this could just be a seasonal factor at play.

“The high auction clearance rates are unlikely to be maintained, and we saw the clearance rates moving backwards at the moment. The August numbers would be interesting to see as it indicates the kind of activity we’re going to see in the spring. My sense is it’s going to be a strong market,” he says.

“Sydney is well ahead of everyone else. This is the new normal. This is the strongest market we’ve seen since the late 1980s, maybe exceeding the boom in the early 2000s. My sense is we’re in for long investor activity in the Sydney market. Yields are still attractive to investors. I think the efforts by APRA and the banks to slow the investor market won’t have much impact.”

The rise of the fringe suburbs

With prices surging everywhere in Sydney, the lower-priced, outer-fringe suburbs are now racking up huge demand from buyers.

Suburbs in the Illawarra region, such as Exeter and Jamberoo, saw median prices soar by 45% and 43% during the past 12 months, according to CoreLogic RP Data.

The Upper North Shore continues to attract buyers, with suburbs like Asquith gaining 44% during the same period.


Melbourne trumps Sydney market

Melbourne races past Sydney to become the country’s best-performing property market

So it wasn’t just a fluke. Melbourne’s small gain over Sydney last month was not just a one-off performance. It has turned out to be a precursor of what’s to come.

According to the latest CoreLogic RP Data figures, Melbourne dwelling prices surged 4.9% in July alone, clearly outperforming Sydney’s 3.3% growth. Over the three months ending July, Melbourne jumped 6.1%, well ahead of Sydney’s 5.1%.

The main reason is affordability. At the current median house price of $630,000 against Sydney’s $921,500 (CoreLogic RP Data), Melbourne is almost $300,000 cheaper than Sydney. It’s also clear that Melbourne’s fundamentals have strengthened significantly.

“Growth conditions have picked up over the past three months, with Melbourne recording a higher rolling quarterly rate of growth than Sydney,” says Tim Lawless, head of research at CoreLogic RP Data. “Detached houses continue to be the main driver of Melbourne’s appreciating home values.

House values were 12.3% higher over the year compared with a 4.8% gain in unit values.”

Domain’s numbers show similar strong performance, recording 3.5% median house price growth during the June quarter. Unit prices also grew strongly at 3.2%.

“The strong price growth in the Melbourne market over the last 12 months has been generated primarily by aspirational buyers, particularly in Melbourne’s eastern suburban regions.

Rising buyer activity in suburbs west and north of the city also contributed to the house price growth,” says Andrew Wilson, chief economist at Domain.

While the negative impact of the recent apartment-building boom is set to play out, Wilson says there are a number of factors contributing to Melbourne’s stellar performance.

These include:

  • Improving local economy
  • Falling unemployment
  • Low interest rates
  • Rising confidence
  • Surging population
  • Increased investor activity

“These have been key ingredients in the Melbourne market’s upswing this year,” says Wilson. “It was a surprise to see it surge back this year after trending down towards last year. It has certainly picked up a lot thanks to the recent two interest rate cuts.

“A lot of investors are now looking at Melbourne. I think there’s a lot of entry-level opportunity in Melbourne at the moment, especially for new houses on the fringes. Suburban units also have reasonable prospects.”

Just like in Sydney, Melbourne’s strong performance is spreading outwards to the budget suburbs, which have missed the party during the past three years because of a shake-out in the manufacturing sector.

“There were concerns about unemployment and job security, which kept these suburbs on the sidelines. They’re up and running now. They’re recording a healthy auction clearance rate over July and are on the rise.”

While the auction clearance rate has also tracked back a bit in July, Wilson believes it’s simply a seasonal factor.

“The Melbourne market generally goes on a buying holiday through July and then it starts to pick up again in August and September.

“I think Melbourne still has a reasonable spring market, given its affordability compared to the Sydney market and also the upside of the budget markets, which have been flat till this year,” he says.

Suburbs in the Banyule and Moreland areas have led the top performers during the past 12 months. Briar Hill recorded an impressive 19% growth in the median unit price, followed by Pascoe

Vale. Buying momentum has continued strongly in Niddrie, with unit prices soaring by 22% during the past three months alone. During the year ending July, prices jumped by a whopping 22%.


Mediocre growth set to continue

Brisbane’s modest growth persists as investors wait for more signs of recovery in the market

The latest results don’t look too bad. At 3.9% growth in dwelling prices during the past 12 months, Brisbane was the third best performing capital city in Australia.

But investors were expecting more than low single-digit growth. And it’s long overdue.

“We were expecting Brisbane to be one of the top-performing markets this year behind Sydney. We’re expecting it to grow by more than 10%, certainly at least 10%. Unfortunately, it’s certainly not going to happen at this stage. Brisbane has really flattened this year. There was hardly any price growth,” says Andrew Wilson, chief economist at Domain.

Wilson points to the underperforming local economy and fragile buyer sentiment as reasons for the lack of buyer momentum and price growth in Brisbane.

Low investor confidence

While prices are attractive in Queensland compared to Sydney and Melbourne, this is not enough to lure investors into the state just yet.

“I think, overall, confidence remains fragile in Brisbane,” says Wilson. “I think Brisbane still has a bit of a journey before it’s up and running. Brisbane is suffering because Queensland is suffering. There’s no doubt about it. The resources sector is really winding down in Queensland, especially the coal industry. That’s really having an impact overall on most housing markets.

“It’s just a big-picture economic issue. I think the job shedding that has been going on in the resources sector in central and northern Queensland has really weighed on confidence.”

Reasons to be optimistic about Queensland’s prospects

The numbers may not reflect it yet, but the Sunshine State has some powerful positives working in its favour, according to Deloitte Access Economics.

“Queensland’s economy is in better shape than most people realise,” it says in its Business Outlook report. “It is true that there are some important negatives revolving around a slowing China, as well as low commodity prices in general and rotten coal prices in particular, and the associated drop-off in mining-related construction work, yet those factors are still only half the story. But that lower commodity prices and weaker spending on resource projects have generated responses by both markets (the lower Australian dollar) and by the authorities (the Reserve Bank has cut interest rates almost a dozen times since 2011). That combination means pretty powerful positives for Queensland. In particular, its tourism and farm sectors are lapping up a lower dollar, and the weaker currency also spells good news throughout the mining sector too.”

Beware of Logan?

Just like Melbourne, Brisbane is also seeing the return of buyer activity to the budget markets west and north of the city.

“These areas are showing early signs of a sustained revival,” says Wilson. “We’re seeing a bit more investor activity there now.”

However, Wilson warns about buying in Logan at the moment.

“I know there’s been a lot of talk about Logan. I think the publicity doesn’t reflect the reality there to a certain extent. We’re seeing prices falling in Logan. I think investors need to be circumspect about looking there now.”

Wilson says the high level of unemployment in Logan is causing the market to stagnate.

“Until there’s a sense of a revival, and that would come off the back of an improving unemployment rate, I would think twice about buying there now.”

A better place to look in his view is the suburb of Ipswich, as it continues to attract buyers and its fundamentals are more solid.


Things aren’t that bad, apparently

The numbers may be bleak at the moment, but Perth’s medium- to long-term prospects aren’t that dire, according to experts

The painful cycle of market correction continues in Perth, with the latest data from CoreLogic RP Data showing a drop of 0.7% in the median dwelling price for the July quarter.

Since the beginning of the year when dwelling values fell 0.3%, property investment has only delivered a measly 3.9% in total returns, compared to Sydney’s 22.8% total gross returns.

Tim Lawless, head of research at CoreLogic RP Data, says Perth’s home values have remained relatively steady over the past year; however, the unit market suffered a big drop of 5.7% over the year.

Stats from other data providers show similarly weak trend. Domain logged a 0.9% drop in the median house price over the June quarter, while the Real Estate Institute of WA recorded a $20,000 drop in the median house price during the same period.

“I expect modest buyer activity and weakening house price growth for the remainder of 2015. The weak local economy is certainly weighing on the housing market. With the resource sector declining and unemployment rising sharply, it’s going to be a soft market,” says Andrew Wilson, chief economist at Domain.

Crisis of confidence

While the figures are grim and are expected to remain that way in the near term, Wilson believes the Perth market still has reasonable prospects.

“The Perth market has been talked down a lot lately,” he says. “Even the local industry body are talking themselves into a downturn. And this could turn into a crisis of confidence. While the results are not strong yet, they’re pretty reasonable.”

Deloitte Access Economics agrees that WA’s economy has weakened significantly, but it sees three things that are working the way of the West:

  • Most notably, hundreds of billions of dollars in investment might be moving out of the construction phase, but the production phase is underwriting good growth in export volumes.
  • At the same time, low interest rates have been a boon for the state’s retailers and housing construction markets.
  • And the Australian dollar’s fall has reduced what would otherwise have been even greater pressures on miners and farmers.

“That’s why the outlook are still pretty positive. Growth slows sharply until 2016, but this still mostly looks like a passing storm rather than troubles that will stick around for too long,” Deloitte Access Economics noted in its recent report.

Wilson adds that the key to restored confidence in the Perth housing market is improved economic performance, early signs of which are now emerging. In addition, first home buyers are still active in the market, and the unemployment rate is still relatively low at 5.3%.

“They still have the unemployment rate with a ‘5’ in front of it. A lot of capital cities would love to have the jobless rate that Perth has. I’m not saying it’s a good market now, but it’s a flat market.

“In my opinion, Perth is not a falling market. I don’t see the prospects of a sharp shake-out in prices, which was being predicted this year.”

Construction activity holding up

Despite the falling commodity prices, WA still has the lion’s share of engineering work due for completion between now and 2017.

According to Deloitte Access Economics, the $112bn worth of projects underway in WA is more than double the total value of engineering work in NSW, Victoria, SA and Tasmania combined.

“For now at least, construction activity is holding up thanks to ongoing work in a small number of very large projects in the gas sector,” it says.

The combined value of the Gorgon, Wheatstone and Prelude LNG projects alone is estimated at over $102bn, and accounts for around $1 in every $3 invested in engineering projects across the country, says Deloitte.

In addition, the report noted that around $400m worth of new utilities infrastructure and transport projects was announced in the recent state budget. And despite the soft price environment, Woodside has approved the $1.2bn Persephone gas project, with construction to begin in 2018.


Recovery hopes dashed amid weak economy

The nascent recovery in the housing market appears to have stalled as the weakening economy takes its toll on confidence

If only Adelaide could snag some of the investor money currently going into Melbourne and Sydney. Alas, despite its affordable offering, investors remain wary of putting their money into South Australia.

It’s easy to see why. SA’s performance has been pretty muted, even in a supposed ‘boom cycle’. Understandably, investors would prefer to be in ‘exciting’ markets where there’s a lot of momentum, even if it means they’re paying more for their investments.

Adelaide’s ‘steady’ market is just not cutting it when investors know they can get better returns on their money.

This subdued investor activity is on full display in the recent stats from both CoreLogic RP Data and Domain.

During the month of July, Adelaide’s median house price fell by 1.5%, the biggest drop across capital cities in the country. While unit prices grew by 2.7% during the same period, the overall return on investment is relatively modest at about 8%, compared to Sydney’s 22% and Melbourne’s 15%.

Adelaide rents have remained virtually flat over the past year, with house rents rising by just 0.4% and unit rents up by 0.3%.

The sluggish rental market has seen gross rental yields across Adelaide slip a little further to 4.2% gross for houses and 4.7% gross for units, according to CoreLogic RP Data stats.

Domain also reported modest growth in the Adelaide housing market, with just a slight increase in the median house price over the June quarter and a 3.3% rise over the 2014/15 financial year.

“The prospects of a solid recovery in buyer activity for the Adelaide market have lessened, with recent results indicating generally fragile buyer sentiment,” says Andrew Wilson, chief economist at Domain.

“A sustained improvement to the local economy would be the key to driving house prices — in particular a fall in the high levels of unemployment.

“Adelaide remains the most affordable mainland capital city, with relatively high yields and low vacancy rates likely to attract increasing numbers of investors.

“The outlook for the market remains mixed for the remainder of 2015, though price growth for the year is likely to match last year’s result.”

Reasons to be concerned but hopeful

SA is no doubt suffering from low confidence amid the state’s slow-moving economy.

According to Deloitte Access Economics, the state is currently facing pressures coming from:

  • The demise of its car manufacturing sector, which has taken a heavy toll on parts manufacturers
  • The recent announcement by Alinta Energy that it will be closing its Port Augusta power station
  • The uncertainty over the state’s defence manufacturing sector, which is at risk of losing tens of thousands of jobs as shipbuilding work dries up

The timing couldn’t be worse for SA (coming at roughly the same time as Holden exits manufacturing in the state and Alinta makes its closures). However, these events are not make or break for the state’s economy and its job base, according to Deloitte Access Economics.

The economic forecaster points out there are two big positives that investors shouldn’t overlook:

  • Interest rates are at record lows and will be staying “lower for longer”.
  • The Australian dollar has also come well down from its earlier peaks.

“These cyclical shifts in interest and exchange rates are increasingly working in South Australia’s favour, providing support for businesses in the farming sector, tourism and the manufacturing sector more broadly,” Deloitte says in its Business Outlook report.

It also noted that despite the weak economy, retail sales are solid and housing construction and population growth are holding up amid a national slowdown.

“South Australia’s growth is slow, but the economy is in better nick than it’s given credit for,” the report says.

“But keep an eye on the job market. While employment growth has been positive over the past year, it isn’t shooting out the lights, while job vacancies have been flat and unemployment has been on a rising trend.”


Price growth gathers momentum

While Tasmania is still facing economic headwinds, its property markets appear to be on track to stage a long-awaited recovery this year

Being a small market, it’s always going to be tricky to get an accurate reading of the trend in Tasmania.

In the May quarter prices dropped slightly, but they recovered in the June quarter. The July data from CoreLogic RP Data showed dwelling prices edging even higher. During the past 12 months, median dwelling values have risen by 2.5% and added 1.1% during July alone.

Tim Lawless, head of research at CoreLogic RP Data, notes that the housing market across Hobart is once again on an improving trend. However, he points out that the market still has some way to go before staging a nominal recovery, with dwelling values remaining 6.6% lower compared with the previous 2009 peak in dwelling values.

Another promising trend, according to Lawless, is the sustained high rental yields that Hobart is achieving. Both houses and units are currently racking up a 5.2% gross rental yield.

“Hobart is the most affordable city, with the median house price sitting at just $320,000,” he says. “It’s also the only capital city where yields haven’t deteriorated over the year and where rental growth has kept pace with value growth.”

However, the data from Domain shows a slower market, with house prices falling by 1.6% during the year. Andrew Wilson, chief economist at Domain, blames the weak local economy for the underwhelming results.

“The underperforming local economy continues to hinder a sustained revival in buyer activity and price growth in the Hobart housing market,” he says. “Increased investor activity and higher numbers of first home buyers are set to support the market over the remainder of 2015, though median house price growth is likely to be moderate at best.”

Economic bright spots

Despite the volatile stats, there are signs that Tasmania has strengthened.

“The Apple Isle has been going from strength to strength,” says Deloitte Access Economics in its Business Outlook report. “The value of work underway has held steady so far in 2015, with the value of engineering construction projects underway staying above the $1 billion threshold. That’s a pretty big deal when you consider that in 2010 the total value of investment projects was well under $500 million.”

Deloitte Access Economics also points out that the subsequent fall in the Australian dollar and the shift to lower interest rates has been instrumental in turning around Tasmania’s fortunes.

“Growth in the economy has been rather better for a while now, and unemployment is less of a drama than it used to be. Indeed, better news has been seen across a number of areas, including in retail, where turnover growth in Tasmania has largely been matching national gains of late, and in car sales which have also shown a solid recovery in recent months. Visitor arrivals have risen on the back of the lower $A, and occupancy rates in Tasmania are up.  And as some of the gloom surrounding Tasmania’s economy has lifted, small business confidence has been showing signs of improvement.”

Outperformers near the CBD

Sydney and Melbourne are not the only capital cities recording high double-digit growth in prices. Hobart’s inner-city suburbs have also racked up massive gains during the past 12 months. Hobart houses led the top performers, with median prices surging by an eye-watering 20% during the year. In the July quarter alone, it added another 10%.

Mount Nelson and Bellerive also recorded strong gains of 16% and 14% respectively.


Darwin market weakens further

The recent spike in prices appears to be short-lived as property values have taken a dive in the latest results

You could blame the volatile data for the seemingly mixed results coming out of the Darwin market.

However, there’s little doubt that it’s well into a downturn phase.

The latest CoreLogic RP Data stats show that median house values have plunged 5.37% over the past year. Units have also suffered a hefty 3.2% fall in values.

“Over the past 12 months, we’ve seen several cities enter a correction phase, with Darwin values falling the most,” says Tim Lawless, head of research at CoreLogic RP Data.

Home prices are not the only thingsthat are losing ground. Landlords are also earning less, with weekly house rents sliding by 9.5% over the year while unit rents dropped by 8.1%.

The slowdown in the resources sector over the past year has clearly weighed on housing market activity. The unemployment rate, though low compared to the rest of Australia, is rising at a time when affordability barriers are constrained. Darwin is also currently experiencing rapidly declining population growth, which further weakens demand.

Bright spots

Despite the overall weakness in the market, there are notable outperformers in Darwin. Suburbs like McMinns Lagoon and Fannie Bay were the biggest gainers, racking up 48% and 42% respectively. The higher price points didn’t seem to deter buyers who are keen to get into these desirable suburbs.


Sustained recovery on the cards

The recent upbeat results have prompted some experts to declare the worst is over for Canberra’s property market

While Sydney and Melbourne have continued to hog the limelight, Canberra has been quietly making strides towards recovery.

The recent stats from CoreLogic RP Data show a rising market with median dwelling values climbing by 2.3% in the July quarter. Since the beginning of the year, property values have risen 5%, making the capital city the third best performing market behind Melbourne and Sydney.

“The housing market in Canberra has been on an improving trend,” says Tim Lawless, head of research at CoreLogic RP Data.

“The annual growth in dwelling values has been driven entirely by a rise in house values, which are up 1.4% over the past 12 months.”

Domain also recorded strong growth in buyer activity over the June quarter, continuing the significant momentum the city has experienced over the last 12 months.

“Canberra is certainly up and running,” says Andrew Wilson, chief economist at Domain.

“Canberra has now recorded three consecutive quarters of house price growth for the first time since 2009. The winter market has been the best I’ve seen for a very long time, and I think this has been building towards quite a solid market. Restored confidence in the local housing market is likely to result in increased buyer activity over the remainder of 2015.”

Despite the positive numbers, the apartment sector remains weak. According to the Domain data, the median unit price fell sharply by 6.3% during the June quarter.

“The recent high levels of apartment construction continued to push supply ahead of demand, with downward pressure on price growth,” says Wilson.

A new factor in play

According to Deloitte Access Economics, there’s another factor driving Canberra’s property market at the moment: asbestos.

It says 1,000 homes affected by asbestos are being bought by the Territory government and demolished at a cost of $1bn.

“That’s the equivalent of one in every eighty free-standing homes in the ACT. The need to rebuild that group of homes will add a new lease of life to housing. That explains why new building approvals which bottomed in late 2014, have risen rapidly ever since. It also explains why housing prices got a second wind amid a flurry of public sector job losses. And it is why we would expect rental vacancy rates to tighten,” Deloitte says in its Business Outlook report.



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