National Property Report – October

Australian Capital Territory

Uncertainty hovers over market

Buyer activity is warming up, even as the prospect of federal cutbacks looms over the market

After a recent period of stalled buyer activity, Canberra’s housing market is showing signs of reinvigoration, according to Australian Property Monitors’ (APM’s) latest Capital City Market report.

Median house prices rose by 1.3% over the May quarter and are up by 2.3% over the year to May. In fact, Canberra recorded its highest ever median house price over the June quarter. And house loans for owner occupiers are up nearly 14% over the first four months of 2013 compared to the same period last year.

Andrew Wilson, APM senior economist, says improvement in the local economy is a significant factor in the increased buyer activity and prices growth, with the latest ABS data reporting a fall in the monthly unemployment rate from 4.7% to 3.9% over May.

However, the shadow cast by the public sector cutbacks that it is generally believed will follow the upcoming federal election continues to loom over the Canberra property market.

Deloitte Access Economics partner Julian Richardson says Canberra has benefited from lower interest rates and the fact that, to date, federal cost cutting has been more talk than action. “That’s good news for now, though chances are whoever wins the election will have to institute cutbacks that may weigh more on the outlook for the ACT.”

Despite some recent policy decisions that will add to federal spending, Richardson says that, whatever the election outcome, potential budget cutbacks do pose a threat to the outlook for the ACT. “Canberra’s private sector employment base should do alright, but the bigger question mark is what happens to the share of the employment base tied to the public sector.”

However, Deloitte’s forecast actually projects the level of jobs in the ACT to grow marginally over the next few years. According to Richardson, in any coming cutbacks there will be more older workers keen to take up redundancies, and the chances are that more of them will choose to stay in Canberra than did during the federal cutbacks of the mid-1990s.

While current indicators – like population growth and mortgage interest rates – are positive, the longer-term outlook will turn on the post-election environment, he continues. “These forecasts therefore show a period of gradual easing in housing demand, but sharp cuts into the federal public service would result in a much weaker outcome.”

Northern Territory

Momentum continues – for now

Housing construction and prices continue to boom in the NT, but what comes next?

Growth in the NT continues to accelerate, ensuring there is no “construction cliff ” in the foreseeable future, the latest Deloitte Access Economics Business Outlook reports. With mining-related construction still strong and housing construction lifting, it predicts construction is not likely to slow notably until 2015–16.

While the NT may have been late to the global resources development party, it is now its life, with population growth above the national average, improved wages, and boosted housing prices, rents and construction, Deloitte partner Julian Richardson says. “After all, add a big project or two atop a small economy, and it is no surprise when some fireworks follow.”

Business investment spending as a share of the NT’s economy has just tripled, and the flow of project work suggests it will stay robust for some time longer, Richardson says. “Yet look either left or right – at Western Australia or Queensland – to be reminded that such surges in growth led by project construction are likely to be temporary.”

Relative to the size of its economy, the value of engineering construction work in the NT is larger than that in Queensland and WA, he continues. “But all the heavy lifting is being done by a single project – the $34bn Ichthys LNG development. The value of that project by itself is almost twice the size of the state’s domestic economy.”

This means the construction sector will be bound to the fortunes of the Ichthys project for some time as it is not due to be completed until 2016, Richardson says. “While the NT looks likely to have several years of good growth ahead, construction work will peak, perhaps in 2015, and cycle back thereafter. Just how far the NT’s project construction cycle then falls back will depend on whether Australia’s resources sector has succeeded in its current phase of cost control.”

New South Wales

Boom times for most expensive capital

Sydney’s property market is going from strength to strength, although a question mark hovers over residential building activity

Australia’s economy may be slowing, but NSW’s property market certainly isn’t, with the latest research highlighting a market on the boil.

The Australian Property Monitors (APM) Quarterly Housing Report shows that Sydney’s median house prices increased by 2.7% to $690,064 over the June quarter, with median unit prices also rising strongly by 2.4% to $491,845. Both figures are all-time highs.

These rises are due to low interest rates, rising investor confidence, and a continued solid economic performance, APM senior economist Andrew Wilson says. “The results are not surprising and are in line with earlier forecasts – of particular note is the correlation over the quarter with the strong auction clearance rates, proven to be an accurate guide to the general level of house and unit prices growth.”

The APM Rental Price Series Quarterly Report shows Sydney’s unit rental prices also rising again. While Sydney’s house rents remain flat, with no increase recorded over the June quarter, unit rental prices rose 1.1% over the quarter and 2.2% over the year.

This is a trend that has been obvious throughout the year, Wilson says. “Affordability constraints are motivating tenants to gravitate towards cheaper unit accommodation; however, the consequence of this of course is that the difference between house and unit rents is converging.”

Sydney’s home auction clearance rate has also reached levels unseen since the GFC. Wilson says the Sydney market is being “energised”. He estimates that half the sales are by investors, many of whom are seeking capital growth from property in their SMSFs.

“Very positive conditions” mean that residential values in Sydney have risen by 3.7% over the past three months alone, and the city remains the country’s most expensive capital, with a median dwelling price of $570,000, according to RP Data research director Tim Lawless.

The RP Data accumulation index showed Sydney’s total gross returns were 11.2% over the past year, and vendor metrics were continuing to show strength. A typical capital city dwelling is selling in just 45 days compared to 59 days a year ago, vendors are discounting prices less, and clearance rates remain close to 80%.

However, with the housing market again showing solid capital gains, and rents also rising, the issue of housing affordability will soon attract more attention, Lawless continues. “With Sydney values now back at record high levels, there are likely to be a growing number of households who find it challenging to enter the housing market.”

Queensland

Facing up to problems

Queensland is facing some performance challenges, but the state’s government is readying plans to tackle the issues head-on

New challenges are facing the Sunshine State, with its underperformance in the years since the GFC affecting employment measures, the housing sector, and the confidence of both families and small businesses.

However, Deloitte Access Economics partner Julian Richardson says he is cautiously optimistic about the state’s overall growth outlook, though not by a big margin. “A last hurrah of gas development plus the slowing pace of federal and state government cutbacks should ease the squeeze on Queensland’s growth, but it will be a few years before the export dividend from those gas [projects] arrives, and that phase will bring few jobs with it.”

Exports from a number of new gas projects will not cut in until 2015 or 2016, by which time the slightly improved current construction spend will have already wound back, which points to 2014–15 as a weaker year for state growth, he continues.

It is worth keeping in mind that the state’s population growth remains above the national average, which will provide important support for Queensland’s growth performance to offset some of those construction-cliff negatives, Richardson says. “So while the risk of a short-term growth pothole hasn’t been completely eliminated, we expect Queensland to continue carving out a greater share of the national economy over time.”

It is not really a question of if but of when, and how strong, the eventual rebound will be, he says. “Compared to the sort of ratios that have existed between population growth and housing starts in the past, the state should be building about 10,000 more houses per year than it is. That has helped halve vacancy rates across the past two years, and seen house prices begin to rise again, two factors that may help spark the expected recovery.”

Further, Queensland’s claim to be a resource titan remains incontestable, with “mega gas projects and some pretty impressive coal projects doing some heavy lifting in the state’s construction sector”, Richardson emphasises. “Indeed, the combined value of the state’s three largest LNG projects underway – the Australian Pacific LNG project, the Curtis LNG project and Santos’s Gladstone LNG – have a combined value of over $63bn and will provide work until at least 2016.”

South Australia

Positives behind the negatives?

Capital growth figures don’t look promising for Adelaide right now, but experts argue that better times may lie ahead

RP Data housing market results show that Adelaide is the country’s weakest-performing capital city, with dwelling values remaining relatively unchanged over the three months to July, despite interest rate cuts.

RP Data research director Tim Lawless says conditions in the Adelaide property market can best be described as sedate. At a time when a lot of other Australian markets are starting to move, Adelaide prices remains stuck.

Looking at its longer-term performance, the city’s property market hasn’t tracked as badly. Of all properties sold in SA during last year’s December quarter, close to a third were settled for double their initial purchase price. This is when their owners held them for, on average, 13.2 years. The average capital gain was $261,144. In Adelaide, the windfall was even higher at $282,813.

Australian Property Monitors (APM) senior economist Andrew Wilson says the real challenge for the Adelaide housing market remains the economy. The May unemployment rate for the city was 6.1%.

Deloitte Access Economics partner Julian Richardson agrees and says that one of SA’s problems is that the state responds more to the exchange rate than interest rates. The news on the former – despite impressive falls in recent months – has been less good than it has been on the latter.

Lower interest rates may be a great benefit for the market, but so far they’ve had little impact on retail sales or the pace of housing construction in SA. Richardson believes both sectors remain in the doldrums.

“The lift in Adelaide’s residential vacancy rate over the past two years has been significant, with the rise in vacancies indicating that the housing market is no longer undersupplied, partly reflecting weak population and job growth. In turn, that has helped drive a modest [level of] approvals for new residential construction.”

The net result of this situation, along with the rising unemployment rate, is that overall growth is forecast to be pretty modest, Richardson says.

“Alongside the state’s manufacturing woes, the fading strength of housing construction has been a particular problem. But there is enough good news in the pipeline from lower interest and exchange rates to help ensure that SA’s economy is expected to pick up from its current lows.”

Tasmania

Demographic weakness

The declining population outlook is having a significant impact on the economic woes of the Apple Isle

Tasmania’s outlook is the weakest of all the states, according to the latest Deloitte Access Economics Business Outlook. This economic weakness is partly dollardriven, partly a reflection of global woes and state fiscal fortunes, and partly due to a lack of demographic demand.

It is no surprise that Tasmania’s businesses aren’t happy and aren’t investing, Deloitte partner Julian Richardson says. “An unwillingness to expand production capacity helps to explain the current weakness in the economy. It also points to further weakness down the track – businesses just don’t expect the future Tasmanian economy to be strong enough to justify much by way of outlays on new capacity.”

Unfortunately, while lower interest rates are positive, there are some important negatives to note: the state’s population growth is “slower than a wet week”, job growth is stagnant, unemployment is sitting above 7%, and the measures of job vacancies are continuing to sound the retreat, he continues.

Exchange rates aren’t the state’s key challenge for the longer term; rather, demographic destiny is, Richardson says. “The workforce is ageing fast, and less than half of all adult men in Tasmania are employed full-time, with that share having dropped notably since the GFC … The Apple Isle will be continuing to shed some its share of national population and output in coming years.”

This ever-weakening population outlook means that, even with new construction moving at a slow pace, state vacancy rates are well above the national average and house prices are edging lower, he adds. “Further, despite its infrastructure program, the state government is keeping a close eye on its recurrent spending, meaning that the public sector isn’t doing much to offset the hole in private sector activity.”

Although there are some major projects in the pipeline, “there’s not really anything to get excited about over the next couple of years”, ANZ head of property research Paul Braddick says. “As a result, the broader prospects for the state are that we’re likely to see the employment market continue to struggle. That’s not good news for the housing market because there will be fewer potential renters and first home buyers.”

Currently, Tasmanian projects are led by the $395m wind farm being constructed in Little Musselroe Bay and a $2bn wind farm proposed for King Island. Plans for a $900m iron ore pellet and concentrate plant have been shelved, but planning is underway for a $200m tin and tungsten mine at Mount Lindsay. A $78m open-cut nickel and cobalt mine at Barnes Hill has also been proposed.

The $565m redevelopment of the Royal Hobart hospital is the most significant public sector project on the cards, although plans for a $100m redevelopment of the Hobart Showground are pending approvals.

Victoria

Market rising faster than expected

The Melbourne property market has been posting some significantly improved results, but how is foreign investment impacting on it?

After a period of somewhat underwhelming activity, the Melbourne market has turned a corner. In the latest Australian Property Monitors (APM) Quarterly Housing Report, Melbourne recorded the strongest result of all the capitals over the June quarter, with houses up 5.0% and units up 3.7%.

Further, the city’s auction clearance rate recently jumped to a three-year high, according to APM senior economist Andrew Wilson. Not only are more homes being listed for auction, but potential buyers are keen to make purchases, he says.

The city’s inner suburbs and outer east emerged as the best-performing areas, boasting clearance rates of 87.5% and 75% respectively. Each of these figures is significantly higher than the 69% average seen over the past few months, suggesting that the Melbourne market could indeed be emerging from the slump it has been in over the last two years.

Buyer activity has increased significantly over the first half of 2013, with the rise in house prices propelled by the lowest interest rates in decades, rising confidence and continued generally solid economic performances, Wilson says. “The results in Melbourne are not surprising and are in line with forecasts made earlier in the year – of particular note is the correlation over the quarter with the strong auction clearance rates, proven to be an accurate guide to the general level of house and unit prices growth.

“The patchiness that characterised market activity over 2012 is diminishing, and we are seeing the fastest prices growth since the government-stimulated house price boom of 2009/2010, with most capital city markets and market segments at or near record levels and rising,” he adds.

RP Data research director Tim Lawless agrees that the Melbourne market is currently being buoyed by positive conditions, with residential values 2.4% higher over the past three months alone.

“A typical capital city dwelling is selling in just 45 days compared with 59 days at the same time a year ago,” he says. “Vendors are discounting their prices less, and clearance rates remain slightly lower than 80% in Melbourne.”

Deloitte Access Economics partner Julian Richardson says that Victoria is generally doing it tougher than NSW, with the A$ leaving some carnage in its wake. “However, the state’s population momentum remains good, risks around housing construction are no worse, and even the A$ has lost some altitude, leaving Victoria’s overall growth outlook adequate.”

Western Australia

Healthy market booming

WA’s tight rental market is encouraging first home buyers to snap up properties in the $400,000 to $600,000 price range

Unit rental prices in Perth continue to trend upwards, recording strong results across the board in the June quarter, Australian Property Monitors’ (APM’s) latest Rental Price Series Quarterly Report shows.

Perth was the only capital to record growth in house rents over the quarter, up by 1.0%, and unit rents rose sharply by 6.3%. The city’s current median asking price of $425 weekly for house rentals is closing in on Canberra’s median of $500, and this is set to soon become the most expensive major capital city for tenants.

APM senior economist Andrew Wilson says the trend in evidence this year has continued as rental prices for both houses and units have skyrocketed in Perth. “Affordability constraints in the market are motivating tenants to gravitate towards cheaper unit accommodation… The consequence of this is that the difference between house and unit rents is converging.”

Real Estate Institute of Western Australia (REIWA) president David Airey disagrees with reports claiming that the Perth rental market is tight and rents are going up. “Our data currently shows that there are now 4,200 rental properties on the market, which is a significant jump in recent times. We have gone from a tight vacancy rate of just 1.9% in December to 3.2% now, and that puts us above the long-term average,” he says.

REIWA data for the three months to May put the Perth median rental at $475 per week, up by $5 on the March quarter and generated solely by a modest increase for units and apartments alone – house rents didn’t move, Airey says.

The market should see a softening in rents for the second half of this year because of a slowing economy and strong first home buyer activity, he continues. “Our mining-based economy and its associated jobs is not as strong as it was last year. Separate to that, the significant number of first home buyers means that many tenants are leaving the rental system for a mortgage, thereby freeing up more stock back into the rental system.”

Real estate agents have noted a significant drop in the level of enquiries for rental accommodation and that long queues of prospective tenants at rental home-opens have vanished, Airey says.

Over the last eight to nine months rental vacancies in Perth have dropped to extremely low levels, and this has been coupled with strong rental growth last year and a stream of interest rate cuts, Momentum Wealth’s Damian Collins says.

“Tenants are thinking, ‘I can get a loan and buy a home, and it’ll cost me the same as renting’, so a lot of people are moving out of the rental market and into home ownership.”

This has led to increased buying activity in the $400,000 to $600,000 price range, and there is now a shortage of residential stock in this price range, he says. “A balanced market is considered to be 12,000 to 13,000 properties, but we’ve been at 8,000 listings. The sale market has been strong and there is a shortage of stock, so we’re expecting the market will perform well. It’s moved already, but we’re predicting 6–7% growth in 2014.”

A new RP Data report, which details almost 800 suburbs where rental returns are forecast to double in value over the next decade, backs this prediction up. Of the 800 suburbs, each selected based on their past performance, 181 are in WA.

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