National Property Report – December 2013

National Property Report VICTORIA

Victoria’s quiet outperformers

A number of Victoria’s regional property markets have been quietly, but consistently, recording strong performances. Perhaps the time has come for investors to take note?

An air of ongoing surprise continues to flavour commentary on the growth of Melbourne’s property market. While it may still be early days in the market’s recovery, and while that pesky apartment oversupply problem lingers, the indicators are looking positive for Victoria’s capital city.

However, Melbourne’s sunny outlook can’t help but lead those interested towards questions about the outlook for other property markets in the state. Australian Property Monitors senior economist Andrew Wilson says markets in regional  Victoria are largely solid and strong, especially Ballarat and Bendigo.

“They have been recording consistent growth for a while, even during the quieter times around 2011. Overall, there are some winner markets and some loser markets, like Shepparton. But most are robust and resilient, with signs of growth.  Ballarat is a particular target for investors, and Bendigo is to a lesser degree,” he says.

Ballarat

Known for its history, culture and well-preserved Victorian era heritage, Ballarat is the commercial capital of the Central Highlands. Primarily a service economy, Ballarat has a thriving manufacturing sector and is also a significant  tourist destination.

Wilson says that Ballarat, which is about 105km from Melbourne, has growing popularity as a commuter city. “It has high rental yields, low vacancy rates, and there is value at entry level – all of which make it popular with buyers.”

These observations are backed up by the latest Herron Todd White report. It says the Ballarat region provides a good range of options for those wanting to buy in the $200,000 price bracket within one and a half hours of the Melbourne CBD  and the coast.

Both units and houses in the $150,000 to $200,000 price bracket are available for purchase within 3km of the Ballarat CBD, according to the report. Further, it notes that several suburbs provide entry-level housing close to shops and  transport. These areas offer solid investment properties with potential for future renovation and good rental returns.

Bendigo

The historic gold-mining city of Bendigo is now Victoria’s largest finance centre outside of Melbourne. One of the state’s major regional cities, Bendigo has a growing service economy. It also boasts substantial tourism, commerce,  education, and engineering primary sectors.

Bendigo is a bit more expensive than Ballarat but is a similarly robust market, Wilson says. “There is a larger economic base, and a more diversified local economy. The local government is committed to decent economic policies, which are  reflected in the strength of the property market.”

Unemployment below the national average, strong population growth, and optimism about the local economy mean the Bendigo market is performing well, according to the Herron Todd White report. Well-located and priced properties, particularly in the CBD fringe areas, are enjoying short selling periods and strong interest.

However, the report notes the ongoing development of new estates has led to an increased supply of rental properties on the market. This has resulted in a degree of downward pressure on rents, particularly in the newer estates.

Geelong

Wilson recommends the port city of Geelong as another positive market for investors interested in regional Victoria. It is much like Ballarat, but cheaper, he says. “It is a commuter market, has a low entry point, and is also a gateway  to the Bellarine Peninsula. These features make it very attractive, and it is recording price growth similar to that of Ballarat and Bendigo.”

Down the line, there may be some issues with the closure of the Ford Australia factory (in 2016), which will result in job losses for hundreds of workers. However, Wilson says both local and federal governments are likely to step in to  offset those job losses with local initiatives.

NEW SOUTH WALES

City vs. country

Fortunes have been made and lost by property investors in regional NSW, so is now the right time to take a chance on the outback? John Hilton finds out

Broken Hill does not exactly have the same ring to it as Bellevue Hill. The former is a mining hub located in far-western NSW, while the latter is an eastern suburb of Sydney, situated just 5km east of the CBD. But for investors, opting for dirty mines over harbour views may be a wise decision in the present climate.

Firstly, regional NSW is generally cheaper and often produces greater rental returns than cities like Sydney.

Take Broken Hill. The latest   RP Data research suggests that the median house price is a highly affordable $117,250 and the current gross rental yield is a strong 9%.

Despite warnings to the contrary, the resources boom is continuing, and new mining ventures are still going ahead. Broken Hill is also increasingly diversifying its economy. Residential real estate expert Terry Ryder says that the tourism, the media and the arts scene are experiencing growth in this area.

However, the key drivers of growth for mining towns will always be the mines themselves. And if they close down, jobs and economic growth can go along with it, says NextHotSpot. com.au director Andrew Peterson.

“Because mining towns are small, they are prone to huge swings,” says Peterson. “You don’t see that in a massive centre like Sydney.” Peterson believes that Sydney’s proximity to jobs and transport – particularly the railway lines – means it generally should be a steady spot.

“People want to be close to the action. The really expensive suburbs like Vaucluse or Bellevue Hill or Mosmon are pretty close to the city,” he says.

7,000 reasons to move to the region

The NSW government has recently announced it will offer $7,000 to city renters who buy property in rural areas, as part of an update to their regional relocation grant scheme.

But Peterson says that the slow take-up of similar government grants aimed at Sydney residents is evidence that more must be done to attract people to the region.

Whether it’s in the city or region,  he cites infrastructure, education and medical facilities as more effective drivers of population growth. And some of those drivers are what mining towns are lacking, or at least perceived to be lacking.

Peterson claims that because mining towns are seen as blokey and boozy they generally don’t appeal to mothers who desire other attributes such as quality education, hospitals and restaurants.

“If you don’t get families going there, you don’t get a mature market,” explains Peterson.

“You might get price spikes. If you can see this coming you might want to get in and get out, which I would call trading rather than investing.”

Chinese buying in Sydney

The rising Chinese demand for Sydney property has led McGrath Estate Agents CEO John  McGrath to predict home prices could rise by as much as 10% over the following year.

According to the latest figures from the  Foreign  Investment  Review  Board, quoted  by  smh.com.au,  Chinese buyers were responsible for $4.2bn in transactions for Australian real estate for fiscal year 2012, which is a 75% increase  from  2010.

However, Peterson is more cautious about the impact of Chinese growth on Sydney property over the next 12 months.

“For Sydney, I don’t think it’s going to have too much of an impact on the lower end of the market, which has usually been better for investors. “Let’s face it, that’s what most can afford,” he says.

Peterson believes that regional NSW could actually be the future winner of this trend, through a possible demand for agriculture.

“The Chinese are becoming more aspirational. Now that they’re moving to the cities, they need to be fed,” Peterson says.

QUEENSLAND

Boom towns ready for slow death?

Sky-high property prices and the grim quality of life in many of Queensland’s mining towns have forced a change in the way mining companies accommodate their workers, with disastrous consequences for investors

Fridays are “fight night” at Moranbah pubs. That’s according to many of the local residents of this mining community in the Queensland outback, who complain that their town has become something of a haven for singlet-wearing blokes on the turps.

With men outnumbering women almost three to one, it’s no surprise that the town isn’t everyone’s idea of the perfect place to live. Summer temperatures hover around the 40-degree mark, and the local population is one of Australia’s most itinerant. Some residents report enjoying life in the bush, but just as many have a three- or five-year plan to make a shed load of money and leave.

But perhaps the biggest complaint from residents has been – at least until recently – Moranbah’s high property prices, which were fuelled by a severe shortage of land brought about by the mining boom. Last year, the median price of a house was $724,000, double what it was five years before that. The average rent was also a cool $1,800 a week – more expensive than any capital city suburb.

Today, that landscape has changed. The latest RP Data figures show that Moranbah properties are considerably cheaper than they used to be. The median house price is now just $513,000, and rents have slid to the much more reasonable average weekly figure of $650.

Nearby mining town Dysart hasn’t fared any better. The average rent crashed from $1,400 a week in August last year to $450 a week in August this year. It’s been the same in mining locale Blackwater, where the figure for median weekly rent was $900 last year but is $523 this year.

The cause One could put the sharp drops down to an oversupply of houses on the market – there has certainly been a lot of building activity in these areas – but, according to Hotspotting director Terry Ryder, the real culprit is the mining companies.

Ryder says that many of the big mining houses have been in cost-cutting mode and have turned to a growing pool of fly-in, fly-out (FIFO) workers and drive-in, drive-out workers. These workers are choosing to bypass the towns that surround the mines they work in, commuting from another location they deem more ‘desirable’ to live in.

Mining companies have also warmed to the concept of mining camps – areas where they provide nearby, temporary houses for their staff who work the mines.

“FIFO and miners’ camps were once the exception. Now they’re the norm,” says Ryder. “We’re moving towards a situation where everyone working on a new mine will be on a FIFO roster and no one will live in the local town.”

FIFO trends

A spokesman from mining conglomerate BHP Billiton confirms that FIFO represents a growing component of their workforce. “The reality is that, for many people, working remotely suits their lifestyle or personal circumstances. We often have requests for FIFO as an employment option – it is a personal choice,” she says.

She adds that a FIFO approach has been born out of necessity. There has been a growing awareness that some of the local towns surrounding mines do not have the amenities their workers crave.

“Many of BHP’s operations are remotely located and do not have a nearby regional centre with the population, services or infrastructure sufficient to attract the numbers of people required. This means it is not practical to have a residential-based workforce for these operations.”

The town that could have been A sign of changing times has perhaps been best illustrated in Alpha – a hamlet in the Galilee Basin that’s roughly 100km west of Emerald and in a patch of outback most would consider the middle of nowhere.

Five mining companies recently turned up in the town, eager to exploit its thermal coal reserves; but evidence that Alpha is unlikely to be the next boom town is that all five have indicated they will operate FIFO crews and accommodate their workers within on-site camps. The town’s airstrip is to be upgraded, but mining activity will completely bypass the town.

Terry Ryder comments in Hotspotting’s Ryder Report that the way local residents have responded may become something of a theme for mining areas. “Locals have got over their early euphoria,” he says. “Otherwise it looks like business as usual for the town.”

WESTERN AUSTRALIA

Can tax policies address WA imbalances?

The Western Australian issue with the GST rate has unearthed a debate on many of the other taxes on property purchases, with some commentators saying they impede growth

It’s lonely on the West Coast. Surrounded by desert, and time zones away from Australia’s largest cities, Perth can stake a claim to being the most isolated major city in the world – or at least in the southern hemisphere.

While this is hardly a revelation for most Australians, the fact that this isolation stretches well beyond the realm of geography has been a frequent emotional issue for Western Australians. The prevailing view is that WA has been the stand out economic performer for the country over the last decade, but the benefits of such strength have often been diverted – some would say to WA’s detriment – back to the East Coast.

What else can explain WA premier Colin Barnett’s plea for a lift in the Goods and Services Tax (GST) rate? Barnett made headlines in September for telling the government to “man up”, saying that something needed to be done about long-standing imbalances among states. His logic was that Australians wouldn’t mind too much if the GST rate were raised in an effort to maintain a high quality of services.

While some have agreed that a review of the GST rate would be timely, others have criticised his recommendation, saying a lift in GST would be disastrous for a number of sectors – including property.

Ken Raiss, director of national accounting firm Chan & Naylor, says that in reviewing the GST rate, both the federal and state governments must contemplate the state taxes and duties that the GST was originally set up to replace.

“We need to review the GST and how it is allocated, which does not mean increasing the rate or the base of the tax,” Raiss says.

Raiss adds that what the Treasury should really be considering is its approach regarding taxes he believes are “regressive”. These include stamp duty and land tax, both significant government charges made on property purchases, which Reiss claims to be disincentives to commercial activity and economic growth.

“Australia requires stable and sensible regulations for SMSFs, labour, banking and tax,” Raiss says.

“It is this combination that will grow confidence to generate spending, business cash flows and employment.” Real Estate Institute of Australia president Peter Bushby is also of the view that stamp duty should be abolished or reviewed, arguing that the tax inflames long-standing imbalances among states.

“Stamp duties on property transfers are not only inefficient; they are costly to manage, reduce national competitiveness and productivity and are unequally and unfairly applied,” he says.

He adds that property taxes set by all three tiers of government have an impact on housing affordability, and that stamp duties, land taxes, risk premiums and finance charges push up the cost of new housing and restrict supply.

“The average tax burden on the new housing sector is estimated at around 31% of the value of output. It’s estimated that the removal of some inefficient taxes could reduce the cost of housing by around 10%.”

SOUTH AUSTRALIA

Adelaide remains at strong price point

The SA capital is the urban property market that investors are probably the least excited about right now, but that belies the affordability of Adelaide property prices, which shouldn’t be underestimated as a market driver

If a market starts booming, but no one notices, does it make a sound?

That’s something Adelaide investors will have to consider as the city, while far from ‘booming’, shows considerable strength that has been downplayed so much over the years that it is almost forgotten. Amid frequent talk of a flat, uninspiring SA property market, it has been easy to lose sight of the fact that Adelaide has the most affordable mainland property prices, and by a long shot.

With a current median house price of $394,000, city prices are galaxies away from the likes of Sydney and Perth where $390,000-odd will scarcely give you more than a toehold in the market – a shoebox apartment in the inner city or a house in a far-flung or lower-income locale.

But it’s not just the actual numbers that make Adelaide prices affordable (affordability does depend on several factors); it’s that residents are well within their means to pay them.

A study by Demographia shows that Adelaide prices enjoy one of the largest margins of affordability among capital cities in terms of the gap between average income and house prices.

Using a methodology called “median multiple”, Demographia divided median house prices by average household income (before tax) to determine which cities had the best and worst relative affordability. The result was an Adelaide affordability score that was markedly better than that of Sydney and Melbourne, Australia’s two least affordable markets.

Demographia also revealed that Adelaide property is more affordable than properties in many regional areas, such as Coffs Harbour and the Sunshine Coast.

Interest rates step in

The benefit of Adelaide’s strong affordability is not simply that investors can purchase property at reasonable prices – it’s that the buying market as a whole lacks the same ceiling on price growth that is evident in Sydney or Darwin. Prices are more within reach of local residents’ income and offer better encouragement for people to get into the property market.

Provided local economic conditions are good, potentially higher market activity leaves more room for price increases because prices can climb a lot higher before they are considered unaffordable.

Trends forecaster BIS Shrapnel reveals in its Outlook for Residential Land, 2013–2018 report that improved housing affordability fuelled by low interest rates is likely to result in a “moderate” increase in demand for housing in Adelaide.

The report’s author, BIS Shrapnel senior residential manager Angie Zigomanis, explains that increased buying activity brought about by interest rate cuts could have a stronger impact on price growth if it weren’t for the excess supply of Adelaide properties already on the market. Since the GFC, development has slowed down, paving the way for “subdued, although growing” demand for housing.

“The weaker market [in] Adelaide reflects activity falling from unsustainable record levels,” Zigomanis says. Zigomanis adds that Sydney and Perth should lead the nation in demand for residential land over the next five years, but Adelaide (along with Melbourne) should follow in their footsteps, and see more modest activity.

TASMANIA

Market’s low has attractions

Tasmania’s market continues to flounder, but good deals abound for the astute bargain hunter. And political changes could help the situation further

Several positive business and economic development stories have emerged from the struggling state of Tasmania in recent times, but it would be ill-advised to place too much emphasis on them.

Australian Property Monitors senior economist Andrew Wilson says his sense is that regional markets in Tasmania remain flat in a reflection of the state’s economy overall. “There have been recent reports of a bit of a pick-up in  activity, but I think the market is just continuing to bounce along the bottom.”

Local supply-and-demand issues have a big impact on the market, Wilson continues. “Suburban Hobart markets have low-activity drivers and the population shake-out exacerbates this. This filters out to the regional markets.”

The negative impact that continuing job losses are having on the state is unavoidable. Policy initiatives by the new government could impact on this situation, but that would be a medium-term outcome, Wilson says.

“Low interest rates could help with a slow recovery but, again, that would be in the medium term. Tasmania’s property market is currently an insipid market looking for some improvement in the state’s economy. There is a real need to create some enthusiasm.”

The most positive thing is that the markets have stopped falling and stabilised, Wilson adds. “So it is good if you look at it from that point of view. When the market is at a low point, this does invite value property buyers.”

According to the latest Herron Todd White report, Tasmania’s property market remains steady with regard to pricing, and there has been an increase in sales volumes. The report states that record low interest rates, good gross yields and comparatively low capital outlays mean the state is actually an attractive investment proposition – particularly for new entrants into the property market.

The charms of Launceston

Dissection of the state’s property market often focuses on the affordability of Hobart. However, Tasmania’s second city of Launceston shares that attribute.

Further, data from the Real Estate Institute of Tasmania show that the city has had a particularly sharp increase in house sales recently (up 34.4% over the June quarter and 11.8% over the year.)

Riverside-situated Launceston is the commercial hub for the northern part of the island state. Settled in 1806, it is one of Australia’s oldest cities and is full of well-preserved historic buildings and architecture.

Rental yields in suburbs across Launceston sit at 4% and above, with some reaching 8%, according to the latest figures from RP Data. These yields should serve as one of the market’s more attractive features for investors.

The Herron Todd White report notes that it is possible to pick up a range of older-style houses in the Launceston suburbs for under $250,000, while inner-city houses can be found for below $200,000. Modern units are available for around $250,000, while older units can be found for $150,000 up.

AUSTRALIAN CAPITAL TERRITORY

The ‘axeman’ cometh

Tony Abbot’s plans for large-scale public sector cuts were always going to  have an effect on Canberra property values, but how deep will the blade be  felt?

When Tony Abbot was sworn in as Australia’s 28th prime minister in  September, it didn’t take long for the media to start branding him “Axeman  Abbot”. And it’s stuck.

Swept into power by a pledge to the electorate to rein in spending, it was  well known that the new prime minister was going to initiate a large range  of cuts, and that meant stripping the public sector – Canberra’s largest  employer – to a shadow of what it was under Labor.

“There is a very serious deterioration in our budgetary situation… I want  to stress that we will bring the budget back into surplus,” Abbot told  reporters in Canberra during his first press conference after winning office.

Since then, the Coalition leader has been true to his word. September saw  the dismantling of agencies for tackling obesity and capital city planning,  and the unwinding of so-called “nanny” state agencies such as the Australian  National Preventative Health Agency.

The absolute depth at which such cuts will impact on the property market is  not yet clear. What is known is that as government agencies, the majority of  which are based in Canberra, continue to be scaled down, many Canberra  residents will lose their jobs.

Confidence in the ACT economy will take a hit as a result and, faced with an uncertain economic  environment, less people will purchase property.

But what will that mean for property prices?

SQM Research property analyst Louis Christopher says the outlook isn’t  promising. He forecasts that Canberra property prices will start falling,  but says the situation is about a lot more than just job cuts. Still reeling  from a construction boom in 2010, the market lacks the kind of dwelling  shortage that could steady it through the coming tough economic times.

Christopher’s view is that city’s property prices – including units and  detached houses – will drop between 1% and 4%. This is as property prices  across Australia as a whole rise by an expected 7% to 11%, buoyed by massive  activity in the country’s biggest urban market, Sydney.

“The housing recovery that commenced in the third quarter of 2012 for most  capital cities is now about to enter into a more accelerated phase from what  has generally been modest price rises to date,” Christopher says. “The  results will [vary] from city to city … Canberra will record price falls of  between 1–4%.”

Post-election results

In the meantime, Canberra prices have held their ground. RP Data figures show that unit prices are 1% down for the September quarter, while prices of  detached houses are up 2.8%.

Looking at the suburb level, prices have fallen by the greatest margin at  the more affordable end of the market, with units in suburbs Campbell and  Harrison seeing the largest falls after values dived 9% and 10%,  respectively.

Among more exclusive markets, price falls have been led by Griffith houses, which fell 9% over the September quarter.

NORTHERN TERRITORY

A lucrative alternative to Darwin?

The Northern Territory’s market might be dominated by its capital, but the  state can offer up another attractive option to investors

High-performing Darwin dominates the NT’s property market. With a marked  shortage of available property relative to demand, yields and values are  continuing to grow solidly.

Investors who think Darwin is too hot may now want to consider a more  affordable yet lucrative alternative outside of the capital – in particular,  Alice Springs.

As the NT’s third-largest town and a popular tourist destination, Alice  Springs is less dependent on seasonal economic factors than Darwin.

The latest RP Data figures show the median house price in Alice Springs is sitting at just $435,000, while the  median unit price is currently $325,000.

The Herron Todd White report notes that the unit rental market is  tightening, thanks to strong demand for new units in the area.

In addition, the RP Data figures show that both house and unit rental yields in most suburbs of Alice Springs  sit at a healthy 6%. In the suburbs of Gillen, Araluen, Desert Springs, The  Gap and Larapinta, unit rental yields sit at 7%.

These yields offer investors the opportunity to get positive cash flow or,  at the very least, to be cash flow neutral.

The Alice Springs market has a good track record, according to Hotspotting’s  Terry Ryder. Long-term growth has been solid, and the market is now moving  into another growth phase.

This is backed up by the region’s strong and diverse economy, which  encompasses cattle stations, mining operations, tourism, transport and a  number of government programmes, Ryder says.

“Alice Springs is a worthwhile option for investors to explore. It has a  strong future with definite signs of growth. It certainly ticks all the  right boxes.”

Traditionally, the Alice Springs market has provided very strong returns for  investors, agrees Real Estate Institute of Northern Territory’s Alice  Springs representative Andrew Doyle.

Further improvement in returns could be on the horizon. A number of mining  companies are in discussion with the government about exploration in the  area south of Alice Springs, and it is hoped something will eventuate from  that scenario, Doyle says.

“Because the Alice is a very tightly held market, one big project can  stimulate major growth in our market. So a mining venture like those  proposed would have a significant impact on the market.”

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