National Property Report – March 2016

NEW SOUTH WALES

Sydney a buyer’s market … What?

Sydney’s good fortune has finally come to an end, with the latest stats showing the biggest drop in values across all capital cities. One analyst even calls it a buyer’s market

While some may still have their misplaced faith that the Sydney market will continue to grow strongly, the latest stats from CoreLogic RP Data are sobering evidence that this is no longer the case.

Sydney’s exceptional run over the last couple of years started waning three months ago, and the latest data shows the biggest drop yet.

According to the CoreLogic RP Data Hedonic Home Value Index, Sydney lost 1.2% during the month of December alone. During the December quarter, values dropped 2.3%, the largest fall across all capital cities. This brought median dwelling prices back to $800,000.

While Sydney still racked up the biggest year-on-year gain at 11.5%, the recent decline is the most solid proof that the boom is truly over.

“Sydney was the main drag on the December results,” says Tim Lawless, head of research, CoreLogic RP Data. “Sydney’s 2.3% fall in the December quarter was in stark contrast to the first quarter of 2015 where values surged 14.1%. It also made Sydney the weakest performer of any capital city.”

Lawless blames affordability issues and regulatory pressures for the ongoing decline in values in Australia’s biggest capital city.

“The slowdown in the housing market conditions across Sydney and Melbourne is being driven by affordability pressures, rental yield compression and cyclical factors,” he says. “External influences such as the regulatory framework introduced by APRA have made it more difficult and expensive for investors to access housing finance. Added to this are the higher mortgage rates and more restrictive lending policies and loan servicing requirements by the banks.”

Andrew Wilson, senior economist at Domain, sees a similar trend in Domain’s results. “All good things come to an end. For Sydney, it’s come to an end,” he says. “Our results show prices have fallen as well in the December quarter. The trend has been apparent, there’s no doubt. The auction clearance rate has been tracking back, so we’re always going to see lower prices as a result of that.”

Wilson points out that the market is currently driven by fragile sentiment, but he believes it will pick up towards the middle of the year.

“The tapering of the market has really been a confidence issue, not much an affordability issue,” he explains.

“We haven’t seen significantly higher interest rates or a shake-out in unemployment or loss of population that has driven lower demand. Buyers are just a little wary about the market, which is not good news for those who want to sell their property now. I think a lot of buying and selling was brought forward during the boom, so now there’s a sense of pause in the market. Buyers and sellers are now sitting on their hands.”

Wilson went so far as to call Sydney a buyer’s market. “There’s a bit of a buyer’s market now in Sydney, but that’s the nature of the game. They shift. I think the prospect of a flat market will continue till the middle of the year,” he says.

VICTORIA

Melbourne to outperform in 2016 but oversupply set to worsen

Melbourne is expected to lead the country in 2016 in terms of capital growth, albeit at a slower pace. But investors who bought units in inner Melbourne face a tough year ahead

Just like Sydney, Melbourne put on a stellar show in 2015, growing by 11.2%, behind Sydney’s 11.5%. However, just like Sydney, Melbourne is now facing slower growth in 2016.

While dwelling values managed to grow by 1% in the month of December, values fell by 1.9% over the quarter, joining Sydney in the biggest fall in values of all capital cities, according to the latest stats from CoreLogic RP Data.

This weak performance is in stark contrast to Melbourne’s showing during the first quarter of 2015 when values surged by 13.3%.

Andrew Wilson, senior economist at Domain, expects to see Melbourne dominate the market over the next 12 months, but by a narrow range compared to the other capital cities.

“If Melbourne will lead the pack, it’s because it may grow by 6%, Brisbane maybe by 5% and Adelaide maybe 3–4%, those sorts of numbers,” he says.

Unlike Sydney, there’s still some affordability left in Melbourne, he says, with the median still sitting at around $700k, compared to Sydney’s $800k.

“It’s a balanced market; all sectors get buyers, from first home buyers to upgraders to investors. There’s a sense that the Melbourne market is a little bit more optimistic this year, and this will continue. Melbourne will be the best-performing, if not one of the better-performing, cities this year. But this will not be as strong as last year. I’m expecting to see half of 2015’s performance.”

Apartment glut set to worsen

Despite the more upbeat outlook overall, Robert Mellor, managing director at BIS Shrapnel, remains pessimistic about the apartment sector in the Melbourne CBD.

“We’re still very concerned about the apartment markets in the CBD, Docklands and Southbank areas,” he says. “We think the sign of significant oversupply is already developing, and you can see it in the rising vacancy rates. There’s a lot of vacant dwellings that are not showing up fully in those vacancy rates.”

Mellor says BIS Shrapnel numbers show that Melbourne’s inner-city apartment sector is already heading into significant oversupply in 2016. “The oversupply will only get worse in 2017. The apartments in these areas are already in for a substantial downturn and significant price correction.

We’re quite pessimistic and our outlook is negative towards this sector. I think going forward developers will find it harder to get projects off the ground because they won’t get enough precommencement sales in Melbourne.”

On the other hand, the established housing market remains balanced at the moment, in Mellor’s view. However, he warns that growth in house prices, particularly in entry-level suburbs, will be limited by availability of land.

“Suburbs in the northern and western suburbs … are being targeted by homebuyers. There’s a substantial pipeline of houses being built in these areas. The demand for land has been strong because people are moving into these areas and building, so it will probably limit the price growth going forward,” Mellor says.

He adds that in order to see any stabilisation in the apartment sector, there has to be a substantial drop in the level of construction. “Residential construction, particularly in the high-density sector and also across the board, has been running very high over the last six years or so. It needs to drop dramatically, otherwise the market will become even more oversupplied.”

Despite worries about oversupply, Mellor doesn’t think there will be a lot of foreclosures in this market.

“The thing with this cycle is that the interest rate is so low, so it’s cheaper to hold on to a property. However, people get caught and make assumptions that prices will grow, and they don’t; and that they will able to rent out the property, and they can’t rent it out. Eventually, they’ll have to sell.”

Wilson agrees that even now vendors of these properties are struggling.

“CBD apartments are struggling to find buyers, which is not a surprise. Melbourne had record construction in the CBD, and more will come online. The apartment sector is really the weak link … While foreign buyers are still active, I doubt it’s strong enough to support prices,” he says.

QUEENSLAND

Brisbane the new investor favourite, but experts warn of risks

With Sydney and Melbourne now in a downturn, all eyes are on Brisbane to lead the country’s property markets. But there are risks to be aware of, according to experts

At a time when the country’s biggest markets are faltering, could a smaller city like Brisbane take the mantle and lead this year?

Many experts have been predicting Brisbane’s resurgence for two years now, but so far the city has underwhelmed with its subpar performance.

However, there are now stronger signs it may finally be rising to the challenge. In the month of December when many markets fell, Brisbane’s property values grew by 0.9%. This may seem small, but compared to Sydney’s loss of 1.2% during the same period, it’s a solid performance.

Brisbane’s performance during the December quarter was even more impressive. Values rose by 1.3% – the strongest growth of all capital cities.

During 2015, Brisbane investors racked up a total of 8.8% total gross returns, the third-highest in the country, behind Sydney and Melbourne.

Tim Lawless, head of research at CoreLogic RP Data, predicts a brighter year ahead for Brisbane.

“The city showing the most promise for capital gains in 2016 is Brisbane, and for that matter, the broader Southeast Queensland region,” says Lawless. “Yields are much higher compared to Sydney and Melbourne; the rate of capital gains has been moderate but sustainable to date, and affordability is far superior to the two larger cities as well.”

Further helping demand is the positive interstate migration into Queensland, which is likely to increase with growth in the job market last year, says Lawless.

Andrew Wilson, senior economist at Domain, sees a similar trend in the market, and adds: “The market has shown some improvement in December, which is usually the strongest month for Brisbane. The unemployment rate fell due to the construction boom in inner Brisbane, similar to Melbourne,” he says.

“I think Brisbane is truly now in catchup mode, particularly with the improving economy and buyer sentiment, as we’re seeing in the rising activity in budget suburbs. Brisbane prices are still half of those of Sydney. With prices like that, it’s almost irresistible to buy.”

Negatives remain

While the numbers are promising on the surface, Wilson remains wary about Brisbane’s long-term prospects.

“The investment market is now softer in Brisbane,” he says. “Yields are still higher compared to Sydney and Melbourne, but vacancy rates are rising and yields are starting to fall. Interestingly, Melbourne now has lower vacancy rates, and there’s no problem getting tenants there. There’s still upwards pressure for rental increases in Sydney and Melbourne. In contrast, Brisbane’s been flat for a year now, and that will only push yields lower. Rental growth flatlined, and vacancy rates are rising, not just units but also houses.”

Wilson says this is a by-product of significant growth in first home buyers, which inevitably took the heat out of the rental market.

Robert Mellor, managing director at BIS Shrapnel, is equally downbeat about Brisbane’s prospects.

“Brisbane is a place where we’ve changed our minds the most over the past 18 months,” he says. “About 12 to 18 months ago we would have said Brisbane would be the place to invest to get significant price growth if you picked wisely in that market. But now we think price growth is going to be modest. Population growth is very weak. We’re seeing much lower overseas migration going into Queensland compared to, say, three years ago. We’re seeing lower numbers of people coming in from interstate – now only about 6,000 people compared to the peak when it was 20,000–30,000 people.”

Mellor also points out that construction recovered strongly, particularly in high density construction in inner Brisbane. While the detached housing market is only up modestly, he believes there’s a significant risk of oversupply developing over the next 12–18 months.

While Brisbane may present an attractive value proposition, Mellor urges investors to consider the long-term prospects of their investments.

“Brisbane’s fundamentals are not that good. There’s not a stock deficiency. There was a stock shortage 18 months ago, but that’s already gone. Now that market is going quickly into oversupply by early 2017, and I suspect it might happen sooner in the inner-city apartments.”

Interestingly, Mellor is more positive about the prospects of the Gold Coast, long seen as a perennial underperformer due to the supply glut of the past five years.

“Gold Coast is in much better shape now,” he says. “Gold Coast has been getting 5% growth per annum over the last two years, so it’s seen good, steady growth, which is better than Brisbane.

The oversupply situation has been reversed. In fact the market has been weak in terms of supply for some time now. Construction fell sharply, so now there’s undersupply.”

WESTERN AUSTRALIA

Perth’s strong December bounce just a blip?

A solid rise in property values during December was welcome news for investors in Perth, but it might be too early to call it a recovery

Good news has finally arrived for Perth property owners. The latest CoreLogic RP Data Hedonic Index shows that Perth dwelling values surged by 2.3% in December, leading the country for a change.

This is a relief for investors who are stuck with loss-making property. But it might be too early to pop the champagne.

The report shows that while values rose solidly in December, they were still down by 0.1% over the quarter. Over 2015, values fell by 3.7% – the biggest drop of all capital cities. This means investors only got a negligible 0.2% total gross return on their investments over the year.

“The largest losses have occurred in Perth, where the average dwelling is now worth approximately $19,970 less than it was 12 months ago,” says Tim Lawless, head of research, CoreLogic RP Data.

The other bad news is that, in addition to the still-weak prices, rental yields are also falling. Even worse, rental rates are falling faster than the drop in property values – a double whammy for investors.

Anecdotal evidence shows some properties are vacant for around six weeks before they are tenanted. Even then, landlords have to reduce their asking price, some by at least $50/week, to get tenants in.

Too early to call it a recovery?

Robert Mellor, managing director at BIS Shrapnel, says he doesn’t see the recovery some people are touting.

“People talked about the WA market turning around. Sure there are signs that things are a bit better, but prices are still down by about 4% during the year. I can’t see that market turning around or recovering before 2018,” he says.

“The worst is still to come because the construction level is so high. These are detached housing driven by first home owners. They don’t have excess supply for apartments, but they also don’t have pent-up demand from homebuyers or investors. Everyone who wants to get into the market has done so. As such, I expect prices to decline by at least 3% in 2016, and the market is unlikely to bottom out until 2018. This means it’s way too early to get in.”

Mellor points out that while the NSW government has the capacity to stimulate the economy by selling off state assets, the WA government is unable to do this.

“WA suffers from not getting the mining royalty, so they’re not in a similar position to do something.”

Overseas migration into WA has also fallen drastically to just 1.5% growth, he says. This is a far cry from the 3.6% growth it recorded during the 2011/12 peak.

“With population growth now slowing dramatically, we need to see drastic reduction in construction to bring supply and demand into balance,” he says.

Domain senior economist Andrew Wilson agrees it’s too early to call the latest improvement a sure sign of recovery, but believes the rate of decline is slowing.

“Perth is starting to show positive signs now. I think the worst is over. Prices have been falling for two years. Once there’s a sense that the market has found its bottom, I think confidence will return and will lead to Perth recovering again.

“The upgraders are moving to higher-priced properties. Even if they’re selling at a discount, they’re buying more expensive properties. This helps to stem the downward trend in prices. We’re talking incremental movements. Not burst. They are early signs and very fragile. I expect Perth to finish the year in positive territory and prices to start to stabilise by mid-year.”

But Wilson warns investors that it’s still too early to get into the market, despite attractive buying opportunities.

“Even if there are early signs of the market bottoming out, it’s still red zone for investors,” he says. “Vacancy rates are still the highest in the country. I think investors would be worried to find a tenant in the Perth market. It would be a leap of faith to enter the Perth market at the moment. It’s still too early. It needs momentum and it’s not there yet.”

SOUTH AUSTRALIA

Adelaide’s consistent performance set to lure investors

Behind Adelaide’s moderate growth is a solid market set to reward investors

After the heady boom in Sydney and Melbourne during the past couple of years, anything less would be considered boring, even disappointing.

But now that the biggest markets are in a decline, experts say the boring markets like Adelaide could be your key to getting the best return in the current cycle.

While the latest CoreLogic RP Data stats show a subtle drop in dwelling values during the past 12 months, Adelaide has a number of positives working in its favour.

According to Andrew Wilson, senior economist at Domain, Adelaide’s moderate yet steady market is very much underrated by investors.

“Adelaide actually has had a remarkable year,” says Wilson. “It’s a very solid market, particularly the upper end, which keeps producing moderate but reliable returns for investors. It’s a steady market and I think this year is going to be another notable year for Adelaide. While you don’t get the peaks and troughs, the market just keeps on keeping on. It provides certainty for investors.”

Besides being the most affordable mainland capital city in Australia, Adelaide also has a shortage of  rental property, which means healthier rental returns.

“You can still buy properties there for under $200k in the northern suburbs of Adelaide. For this, you’re getting over 7% yields. Adelaide’s vacancy rate is among the lowest in the country.”

Upper-end properties in demand

Upgraders also appear to be taking advantage of the low interest rate to trade up, as shown by the strong performance of prime suburbs like Joslin, Unley Park and Glen Osmond. Despite price tags of over a million dollars, buyers are snapping up properties in these areas and pushing the median price up by around 30%.

However, Robert Mellor, managing director at BIS Shrapnel, warns investors to be cautious and selective if they plan to invest in Adelaide.

“The economy is stagnant. The population only grew by 0.8%, and this is not going to change in the next two years. It’s an affordable market, but it doesn’t have anything to attract people in. It’s not a place where jobs are being created.”

Biggest gainers and losers

Over the September quarter, the proportion of loss-making resales was just under 9.5%, according to CoreLogic RP Data’s Pain and Gain report. This is slightly higher than the 9.45% recorded at the end of the first quarter 2015.

The suburb of Prospect recorded no loss-making resales over the quarter. Campbelltown and Unley recorded less than 3% of all resales at a loss.

The council areas with the highest level of loss-making resales over the quarter were Playford, where one in four sales were at a loss, and Light and Walkerville, which both recorded 14.3% loss-making sales.

TASMANIA

High-yield prospects, but oversupply worries drag confidence down

Tasmania’s strong yields may not be enough to attract investors who fear oversupply and patchy economic performance

Broadly speaking, Tasmania, and specifically Hobart, had a terrible year in 2015. Median dwelling values fell by 0.7%, according to the latest CoreLogic RP Data report. In fact, values are now 4% lower than they were five years ago.

Robert Mellor, managing director at BIS Shrapnel, blames the ongoing economic weakness of the state economy for the poor performance.

“Tasmania has enormous potential on the tourism side, but Australians like the beach more than mountains and lakes. While it’s picking up a lot more international tourists than it has done in the past, they need something else to stimulate the economy,” says Mellor.

Population growth has been quite stagnant at just 0.2%, and Mellor says this is not likely to change any time soon. He also blames the government’s effort to stimulate the economy by giving money to first home buyers.

“The government’s way of stimulating the economy has been giving too much money to first home buyers. They were giving away $30k [to FHBs] to build their first home. Sure, it stimulated construction, but they don’t need any more construction. The FHB stimulus didn’t do anything to lift the market,” he says.

“They basically added too much supply, so they’re now experiencing an oversupply of housing. We estimate that the underlying demand is probably no more than 2,000 dwellings a year. Last year, they built 2,900; that’s nearly 50% more. They were already building well over underlying demand for two years before the government stimulated construction via first home buyers. Now supply has gone through the roof.”

Seeing positives behind the negatives

Despite the seemingly poor performance, Andrew Wilson, senior economist at Domain, thinks Hobart in fact had a remarkable year in 2015.

“Being one of the smallest markets in the country, Hobart has had a tremendous year,” says Wilson. “This market responded to the improvement in the local economic conditions. Unemployment has fallen sharply in Hobart, and unemployment is now tracking upwards. The market has been a bit up and down during the past two years, but is now stabilising.

“Just like Adelaide, Hobart has a very tight rental market. Hobart has the lowest vacancy rate in the country at just under 1%, and has the highest yield. But some reasons it doesn’t attract a lot of mainland investors may be because of the uncertainty of capital growth and the perceived fragility of the local economy. It had a very good year.”

Top-performing Hobart suburbs over 2015

While there were uncertainties about the local economy, some suburbs defied the downturn and recorded impressive results last year.

Buyers targeted suburbs in the mid- to upper-end areas, pushing prices up between 15% and 35% over 2015. Among the best-selling suburbs included Opossum Bay, Huonville and Mount Stuart.

NORTHERN TERRITORY

More pain ahead for Darwin investors

Darwin’s woes set to deepen as the market fundamentals soften further

It’s not the kind of news you want to read as an investor, especially at the start of another year. But unfortunately, there’s no way to sugarcoat the current sad state of the Darwin market.

During the past 12 months, dwelling values in Darwin dropped by 3.6%, the second biggest loss of all capital cities, behind Perth, according to the latest CoreLogic RP Data stats. This translates to an estimated $18,154 value loss in dollar terms.

Just like Perth, the prognosis for Darwin’s market over the next 12 months is not looking positive, with experts forecasting a further drop in values and rental yield.

“Darwin being a smaller market has suffered a lot more,” says Andrew Wilson, Domain senior economist. “While Perth is showing signs of bottoming out, I can’t see that in Darwin at the moment. There’s a lot of fragility there at the moment.”

While Wilson believes the market will turn around sooner rather than later, he doesn’t see it happening this year.

“The unemployment rate is still very low in Darwin, but there’s been a significant impact of the end of the FIFO in Darwin, particularly at the management level as a source of rental and property purchases. I think there’s still some downside to Darwin. It still has affordability issues, despite prices coming back a bit. It’s still an expensive proposition.”

The most vulnerable segment is the unit sector because of oversupply, according to Wilson.

“Vacancy rate for units is the highest of all units or houses of any capital city, pushing up around 6%  at the moment. There’s no sign of relief because there’s no demand from both renters and buyers. It’s question of when demand will soak up these properties.

“At the moment, Darwin is in a painful adjustment phase because of the end of the FIFO. It’s a volatile market. There’s still some adjustment to go for both prices and rents this year. I think at this stage Darwin is the only capital city that will record negative growth this year.”

AUSTRALIAN CAPITAL TERRITORY

Canberra quietly recovers

While investors have been fixated on what’s been happening in Sydney and Melbourne, Canberra has quietly but surely built growth momentum

Some experts say it’s the new government and a better and well-received budget that have fuelled Canberra’s steady recovery. Others point to an improving economy.

Whatever it is, the proof is in the numbers. The latest CoreLogic RP Data stats show Canberra finishing the year 4% higher. While the December figure showed a 1.1% drop in median dwelling values and a slight fall over the quarter, the overall trend is looking positive for Canberra.

In dollar terms, property owners in Canberra saw the value of their homes increase by an estimated $21,900, according to Tim Lawless, head of research at CoreLogic RP Data.

During the past five years, median dwelling values have grown by 5.6%.

Andrew Wilson, senior economist at Domain, believes the upbeat sentiment is likely to continue over 2016.

“Canberra has had its best year in a long while,” he says. “The budget was well received, and that truly stopped the roller-coaster ride in prices. It now has a better economic climate.”

After suffering in the doldrums for a number of years, Canberra is now well into catch-up mode, according to Wilson.

“Prices have fallen over the past four years in Canberra. The perception that prices haven’t moved, combined with the low interest rate, has started the ball rolling. I believe there will be enough momentum for this market to grow this year and next year. Canberra at one point had a median very close to Sydney’s median in 2011, and it’s now well below.”

However, Wilson points out that Canberra is always going to depend on the budget and the public service, which are still uncertain.

“We still don’t have the good news we want from the local economy. Canberra still has hard decisions to make in terms of cost-cutting and so on. These will always have an impact on the market housing. What happens with the budget that comes in May will determine what’s next for the property market, and this will be critical.”

Robert Mellor, managing director at BIS Shrapnel, is also still concerned about the supply situation in the high-density housing sector.

“The market is oversupplied in terms of apartments,” he says. “As such, we expect the apartment market will fall by 1–2% this year due to oversupply. Its true Canberra is an improving market but only for houses, not apartments. There’s no oversupply of detached housing, so we’re more bullish and expect to see around 4% growth in this sector.”

• SHARE