National Property Report – March 2015

NEW SOUTH WALES

Sydney set to grow another 10% this year

Just when you think you’ve seen the last of the growth spurt in Sydney, experts say, better brace yourself for more double-digit growth this year.

Turns out there is still plenty of juice left in the Sydney market. While many spookers have voiced their unease about the rapid rise in the market, calling it alarmingly unsustainable, the market is defying them with a vengeance.

Granted, while the broad picture shows a general slowing down trend, a closer look at the different segments of the market shows an entirely different story.

For example, the Hills Shire District, Inner West and Upper North Shore areas are still showing healthy gains – many suburbs are recording an average of 6% growth during the past three months alone. Properties in these suburbs are literally walking out of the door, with some sold within just two weeks of being listed.

“Sydney is still pretty strong, no doubt about that. There are no signs of significant falling in price growth,” says Andrew Wilson, senior economist with the Domain Group. “In fact, we’ve seen an increase activity for investors towards the end of the year, which is interesting, considering concerns of over-investment in the Sydney market. This view hasn’t really shown in the fundamentals. We’re still seeing rent increase as yields consolidate, and vacancy rates are still low.”

Despite warning that the rising number of rental properties in the market will crash yields, Wilson points out that there’s been no sign of a shakeout as a result of a massive drop in rent or a rise in vacancy rate, even as prices grew strongly.

The oversupply myth
Some experts also have warned about the growing housing supply in Sydney, especially in the apartment sector of the inner city and the along Parramatta area. However, Wilson says this is not something to worry about, at least for now.

“Overbuilding or oversupply is a mysterious statistic from some analysts,” he says. “In actual fact, Sydney is not building enough houses. If we look at the first 11 months to November last year compared to the year before, Sydney really just approved an extra 1,700 dwellings.

“Clearly that’s not enough to cater to the nearly 140,000 migrants who moved into Sydney during the 12 months to June. It’s clear we’re still undersupplied. Sure, we’re going to see more units get off the ground in the next year or so, but not at the rate that Sydney requires. The strength of the local economy not only continue to attract migrants from overseas, but also from the jobseekers from interstate, which will fuel more demand.”

Angie Zigomanis, senior research analyst at BIS Shrapnel, agrees, adding that while we’re starting to see supply coming up as completion ramps up, the pent-up demand still outweighs the supply in a big way.

“At the level that supply is coming into the market, there’s no sign that there will be oversupply,” he says. “There are no signs that the rate of building will be sustained. There’s a lot of pent-up demand, and I think it will take a few years of building like this for the demand to be fully met.”

Zigomanis also dismissed speculations that prices will drop as a result of additional stock coming into the market.

“Supply is ramping up in Sydney, but you probably need another two to three years of stronger level of building before you get that sort of price correction to take place,” he says.

VICTORIA

Off-the-plan buyers face losses

No matter how much the marketing brochures sugarcoat it, the reality remains that some former off-the-plan buyers in Melbourne’s CBD units are now in a precarious situation if they decide to sell in today’s market.

Imagine yourself holding a unit you bought off-the-plan last year or even two years ago. Now imagine trying to sell it in this market. How would you feel if someone tells you that you’re unlikely to get your money back? Or worse, you lose your hard-earned cash?

Harsh as it may sound, this is the reality that some off-the-plan buyers are facing at the moment, according to Angie Zigomanis, senior research analyst with BIS Shrapnel.

“If you bought an off-the-plan apartment today or in the past year or two, especially around the CBD, you’ll probably struggle to get your money back at this price,” Zigomanis says. “If you allowed stamp duty and add other purchase costs and selling cost, you really would struggle to get your money back. That’s because you’re competing with new projects. Prices of new projects haven’t really moved that much. Even if you’ve got a brand new secondhand product, when someone buys your completed apartment in Melbourne, they pay stamp duty on it. If they buy off the plan, they’d pay minimal stamp duty, if at all. So your completed off-the-plan property, even if it’s brand new, [is] more expensive for buyers than the unfinished products.”

Andrew Wilson of Domain agrees that there are simply way too many units flooding the market at the moment; he advises investors to stay away from this sector if they’re looking to buy in Melbourne.

“I would stay away from the unit market, particularly around the Melbourne CBD,” Wilson says. “In November alone, there were about 4,000 units approved in Melbourne. That’s absolutely extraordinary. That’s huge supply going in to flood the apartment market for at least the next two years.”

QUEENSLAND

State of mixed markets

While many commentators are shouting about the outlook for the Sunshine State, one expert is more wary – and urges careful analysis of the state’s many and varied markets.

With most commentators talking up the future prospects of Queensland, it might seem like the sky is the limit for the state’s property markets.

However, not surprisingly, the reality is more complex.

According to the latest CoreLogic RP Data Home Value Index, home values did rise in Brisbane in both the last month of 2014 (0.8%) and in the final quarter (1.8%). The city’s year-on-year result was a solid 4.8% increase in home values.

These results are steady – but far from breathtaking.

Domain Group senior economist Andrew Wilson’s view of prospects for the Sunshine State’s market is somewhat removed from the trend.

“My outlook for Queensland is not as bullish as many commentators. There is light and shade there because the state’s many different markets offer up a mixed bag when it comes to housing market performance.”

On top of this, the state itself is carrying economic baggage, he says, a view that’s supported by the latest CommSec State of the States report. Ranking Queensland fifth of the states for economic performance, it notes that the soft job market and relative underperformance on population growth are constraining growth.

Wilson says the big disparity in performance between different regions of Queensland means it is necessary to analyse each of the state’s major markets. In that spirit, he provides the following breakdown of Queensland’s markets for Your Investment Property readers.

Capital city prospects
Brisbane’s property market experienced a much better year in 2014, with reasonably solid growth. Growth has been best in areas close to the CBD, and that should continue in the coming year.

There is some catch-up going on. Also, low interest rates haven’t had as much impact as elsewhere. “Therefore Brisbane has been late in coming to the party, but it is finally getting there.”

Markets in the outer suburbs – like Ipswich and Logan – are quiet. Job security remains an issue; plus, there is lots of stock on such markets. This will impact on the city’s overall price growth. Over 2015, Brisbane will still be one of the better performers of the capital cities.

“I would forecast that Brisbane will see around 5% growth in the coming year, similar to the year just been. In terms of performance, it should move into second place behind Sydney.”

However, Brisbane’s economy is waiting for significant improvement. “That will continue to drag on the market, so it will be those value perceptions that keep kicking it all along.”

WESTERN AUSTRALIA

Negativity trumps weak fundamentals in this market

WA faces a crisis of confidence as it continues to grapple with the weakening resources sector.

It’s not a surprise to see negative sentiment dominating the Western Australian market at the moment. After all, there hasn’t been any let up in the flow of gloomy reports about the resources sector.

When you throw in a dose of weak statistics – such as falling population growth, rising unemployment and overall slowing economy – into the mix, you’ll end up with a lot of scared people.

“There is a lot of negativity in the Perth housing market at the moment, which is understandable,” says Andrew Wilson of the Domain Group. “Perth recorded nearly two years of strong price growth before affordability kicked in. The local economy is really having an impact. There’s a huge rise in unemployment, and the unemployment rate in WA is now higher than NSW for the first time in a long time.”

Wilson says that while the fundamentals have dramatically shifted downwards, the situation is nowhere as dire as many people believe.

“The fundamentals don’t look good. The economy will continue to struggle, and affordability issues will still bite. But I don’t think we will see price falls this year,” he says. “I think these weaknesses will wash themselves through the system. First, homebuyers are particularly active, at around 18% of all activities in the state. I think the Perth market may not have an exceptional year, but it will have a reasonable year with 3-4% growth this year.

“I believe there’s just too much negativity in the Perth market,” he continues. “All we need is a turnaround in resource prices, and that economy will pick up again. There’s also a lot initiatives from the local government to boost economic activity. The market will be flat and sluggish, but I’m not convinced that prices will fall. I believe Perth has reasonable prospect, and I can’t see any longer term shakeout.”

SOUTH AUSTRALIA

Market flat but not out

Thanks to South Australia’s economic woes, Adelaide’s market is plodding along at a slow pace – but changing perceptions could help improve the situation.

Poor old Adelaide has long labored under the genteel, but unexciting, moniker of “city of churches”. But progressive infrastructure-related changes mean the times, they are a-changing – and so are perceptions of Adelaide.

Last year the city scored a number five spot on the Economist Intelligence Unit Global Liveability Index 2014. Now, the New York Times has named South Australia’s capital one of its top “places to go” in 2015.

BIS Shrapnel senior research analyst Angie Zigomanis says that, while it is intangible, the effect of changing perceptions could impact favourably on the city’s flat property market.

“It might slow down the amount of people moving out from Adelaide to eastern states,” he says. “It might also increase the number of people migrating to Adelaide.”

Economic struggles
Unfortunately, the city is suffering from the impact of the significant economic headwinds – in particular, a struggling manufacturing sector – which are plaguing the state.

Adelaide lacks the type of economic and employment opportunities that attract the Gen Y / Millennial demographic, Zigomanis says. “Arguably, that demographic wants to do exciting jobs in sectors like finance and IT – and South Australia doesn’t have a good base for those. This is a big negative.”

Yet, as a place to live, Adelaide is an increasingly attractive option, he says.

Not only has the state government been modernising its public transport system, but the redevelopment of the city’s oval has generated an exciting buzz, and some good cultural events have been developed. Further, it is not congested, and it is affordable. But the current lack of strong industry drivers to attract people to work is a major problem.

In the latest CommSec State of the States report, South Australia is ranked seventh on economic performance – despite coming in third on population growth and in the middle on unemployment.

It all sounds a bit bleak, but Zigomanis says some economic positives can be found in the state’s solid overseas migration rate; the falling Australian dollar, which should benefit the agricultural sector; a strong overseas student sector; and the ever-present spectre of the Olympic Dam project, which will happen one day.

TASMANIA

Improvement on the horizon

Could the tide finally be turning for Tasmania? One expert says yes, while another recommends caution.

Years of coping with a besieged economy and bleak forecasts have conspired to make Tasmania seem doomed. But increasingly, there are some encouraging indications for the island state and its property market.

While the latest CommSec State of the States report still ranks Tasmania at the bottom of the Australian economic performance table, it indicates that there are brighter signs for the state.

Tasmania held its third-ranked position on unemployment; the jobless rate is now at 28-month lows. Construction work is expanding at the fastest annual rate in eight years. And population growth has lifted. The lower Australian dollar is expected to help the Apple Isle’s ecotourism and agricultural sectors.

These flickers of economic hope could already be making a permanent mark on the state’s property market – particularly in Hobart.

The latest CoreLogic RP Data Home Value Index shows that, while Hobart remains Australia’s most affordable city with a median dwelling price of $341,500, price growth is occurring. In December 2014, Hobart dwelling values increased by 2.7%, and they were up 3.5% year-on-year.

Flickers of light
Domain Group senior economist Andrew Wilson can definitely see light at the end of the tunnel for Tasmania’s market. The overall performance of the Launceston market has been pretty good for a while, he says. But he is now also tracking improvement in the Hobart market after a few years of flat to modest performance.

“It is no coincidence that a better performing economy is lifting the Hobart market, which is starting to record quite reasonable price growth again,” he says.

Several other factors are contributing to the market’s improvement. Wilson says affordability and value perceptions are playing a big part. Alongside that, unemployment is falling, and there is a lot more confidence in the market.

“I would expect those trends, and the related growth, to continue at quite reasonable levels this year. Probably round about 3% to 5% – although 5% might be a little optimistic.”

However, that continued market improvement does depend on how the local economy goes. Wilson says the Tasmanian economy, and that of Hobart particularly, tends to go slightly against the grain when compared to other state economies. “So it has been improving, albeit from a lower base.”

In his view, that economic improvement is working its way into house price growth and improved buyer activity. The changes to the first home buyer incentives also have had a small positive impact.

“Overall, it is more to do with value perceptions and greater confidence in the market. Plus, those low interest rates are finally starting to generate interest from buyers who have been sitting on the sidelines.”

NORTHERN TERRITORY

Opportunities in a quiet market

Darwin’s market may have come off its spectacular recent highs, but the market can still offer up a host of opportunities for canny buyers.

Sitting on the northernmost reach of Australia, Darwin remains somewhat of an outpost. As a result, the city tends to move the beat of its own drum, often confounding expectations along the way.

And so too does Darwin’s property market.

Towards the end of 2014, data showed the city’s market was slowing, but the latest CoreLogic RP Data Home Value Index recorded a rise in home values in all capital cities except Darwin, which recorded a -0.6% fall. Further, over the final quarter of 2014, home values in Darwin declined by -1.7%.

CoreLogic RP Data head of research Tim Lawless says that, while Darwin has had the highest rate of capital gain of all the capital cities over the past decade, growth in dwelling values trended lower over the second half of 2014.

In his view, prospects for further growth in Darwin over 2015 are diminishing. This is due to a wind-down in the major infrastructure projects that are currently underway in the Northern Territory.

“The city’s housing market is still providing the highest gross rental yields of any capital city market,” he says. “However, it is likely that investor demand will taper in line with capital growth.”

Don’t count the city out yet, though. Just like any rebel, this tropical hub is one prone to defying forecasts.

For example, according to the latest CommSec State of the States report, the Northern Territory has overtaken Western Australia to become the joint number one performing economy in the country.

In fact, the Northern Territory is top on five of CommSec’s key indicators, including the job market – thanks to the huge gas projects that continue to drive the territory’s economy.

Unfortunately, the territory lags on population growth, which affects home building activity. The report adds that attracting labour to the Top End remains a constraint on growth.

REINT chief executive officer Quentin Kilian agrees. Economically, there is a lot happening in Darwin and the territory, he says. “We just need to get more people up here. Migration tends to be based around the flux and flow in the resources sectors. We need to get a steady migration stream.”

However, Kilian is upbeat about Darwin’s property market, due to the overall strength of the territory’s economy.

While he concedes the market has been a little slower in recent months, he does not feel there is cause for concern.

“Agents tell us that properties are still selling and well, but in the lower price bracket. So areas and properties that offer buyers a good value proposition are in demand.”

He adds this means there are currently good buying opportunities for investors in Darwin, particularly in some of the older suburbs, as well as in nearby Palmerston.

AUSTRALIAN CAPITAL TERRITORY

Bad news outweighs the positive

When it comes to the Canberra property market, bad news dominates, but investors are urged not to overlook the positives as well.

If you’re looking for rosy forecast for Canberra, you’d be sorely disappointed. Experts are unanimous with their view that it will be another flat year for the country’s capital at best. At worst, there will be a decline in property values over the next 12 months.

The latest CoreLogic RP Data Hedonic Home Value Index certainly confirmed this view – its results showed that Canberra was the weakest performing capital city during the three months ending December. While every capital city rose, Canberra and Darwin were the only ones that saw a drop in property values during the same period.

Median dwelling values plunged 3.4% in Canberra, while Darwin fell by 1.7%. Canberra is also the only capital city that recorded negative growth during the 12 months ending December.

“There is not a lot of good news coming out of Canberra at the moment,” says Andrew Wilson, senior economist with Domain Group. “The market has been the underperformer this cycle, since the beginning of 2011. I think we’re in for another flat year,” he says. “There are roadblocks everywhere. The government has nowhere to run but to cut costs, and that means cutting jobs – not good news for Canberra.”

The positives behind the bleak economic numbers
While it’s tempting to pronounce the demise of Canberra’s property market, it would be wrong to suggest that it’s all downhill from here, considering the strength of the local economy.

For example, while the ACT has the weakest job market in the country with the unemployment rate at 4.9%, the territory is still lower than all other states except NT (3.6%). ACT also has some of the highest wages in the country, so affordability remains relatively good.

“Affordability is still good in Canberra,” says Wilson. “It’s still got a low unemployment rate, relatively speaking, but it’s just high in Canberra’s standard. It will mean people are still going to buy houses, and we’re still going to see price growth, but it’s coming off the bottom. At the moment, there’s no sign of relief in terms of the federal budget, so things are looking bleak.”

ACT is also the third fastest-growing economy in the country behind NSW and WA, racking up growth of 2.5% during the past 12 months.

There has also been some material improvement in the housing finance, and population has grown a solid 1.2% in the 12 months ending June 2014.

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