National Property report – September 2012

NEW SOUTH WALES

Sydney property could be in for a bumpy ride as the competing forces of affordability concerns and housing shortfalls take their toll

As investors mull over the preliminary results of the ABS Census 2011, released in June this year, some familiar alarm bells are ringing across the Sydney property market. Among the more ominous is that a theme of poor affordability just doesn’t seem to be quitting.

Census data shows the gap between what Sydneysiders are earning and what they’re spending remains dangerously close. Thanks to a 20% increase in mortgage repayments over the last five years, Sydneysiders continue to shoulder the biggest mortgages in the country, with median monthly household mortgage repayments at $2,167. This is compared to a national average of $1,800.

The Harbour City’s figure for median weekly rent has also risen since the last census was taken and is now at $351, almost 25% higher than the national average. This is significant for a city where the same census reveals that 31.6% of households are renters – an edge above the national average of 29.6%.

As mortgages and rents have gone up, so too has median household income, which is now at $87,516 a year, 24% up on 2006 census figures for Sydney. A recent Council of Australian Governments report confirms that affordability remains a struggle for Sydneysiders. The report indicates that just 24% of properties for sale in Sydney are affordable to households in the lowest 60% of incomes.

Residex chief executive John Edwards warns that this situation should not be taken likely. In his view, affordability concerns speak volumes about where a property market is heading. “A market can start acting in some interesting ways whenever price increases haven’t been matched by growth in income,” he says.

Edwards says that prices can only rise in an area provided they are at a level considered affordable to buyers. When property is considered unaffordable, growth in values typically starts to flatten or in severe cases, can even fall.

APM’s senior economist Andrew Wilson believes that this effect is already prevalent in Sydney. “We’ve seen a lot of stagnation in many Sydney markets, especially the more prestige ones, and there’s no sign of a recovery soon. That said, there are certain areas of the city that are showing growth, such as in the north-west and south-west,” he says.

QUEENSLAND

Queensland’s property market may be back on the bounce, but with the threat of additional holding costs, there’s still plenty for investors to be unhappy about

When Campbell Newman became the new Queensland premier in a landslide victory earlier this year, it was clear that expectations were running high – especially among property circles.

Here was a man who was expected to roll up his sleeves and get to work on the state’s many problems with housing. He may not have had all the answers, but many thought a change from what the Bligh government had been doing would bring with it a refreshed approach. ‘New’ might not be better necessarily, but ‘new’ was at least different.

More recently, the feeling has gone a little sour. Since June, the Real Estate Institute of Queensland (REIQ) has been lamenting what it calls deliberate efforts by the state government to target property investors for income.

The institute says that the government’s revenue-raising measures are a disadvantage to prospective property buyers, who they say are being made to bail out the state’s fiscal woes. It’s a position the institute has been taking up strongly.

They point out the following potential revenue-raising measures outlined in the state government’s financial audit as having a negative effect on investors:

• Imposing a $100 levy on all property owners
• Reducing or removing the concession on land tax
• Applying a premium transfer duty rate
• Increasing the landholder acquisition duty rate

The response

Acting REIQ chief executive Antonia Mercorella says that if these measures were to be put in place it would cause a chain reaction among investors who are already sick and tired of rescuing the government.

“Property owners – and investors specifically – seem to be forever targeted by all levels of government when they are short of cash, whether it is through higher council rates, one-off levies or higher rates of stamp duty,” she says.

She adds that additional legislative and compliance obligations on property investors over recent years, coupled with weaker returns on investment, have resulted in many opting to sell their rental properties. Mercorella says this phenomenon is evident in ABS data, which shows the number of investors active in the Queensland property market has halved in the last five years.

Were additional costs to be laid on Queensland investors, Mercorella says the state’s thinning investor numbers are likely to decline even further. “We are [already] starting to see the impact of this reduced investor activity… if land tax thresholds are reduced or removed, the added costs would put an end to the glimmers of renewed investor activity we have seen in recent months,” she says.

VICTORIA

Melbourne is currently a victim of its own past success, but optimism is on the rise in the market

Victoria is currently on the wrong side of a two-speed economy and when resources are involved, all the fame and culture in the world seem to pale into insignificance. However, many forget that Melbourne is still a desirable city in which to live and a slow period of a couple of years or so doesn’t take away from its fundamental strength.

The Residential Property Prospects Report 2012-2015, released in June by BIS Shrapnel, has forecast a slow performance for the Melbourne property market in the near term due to an excess of construction in the wake of the GFC, which may be slightly offset by lower interest rates and an increase in affordability.

“Without any supply pressures, median house prices in Melbourne are forecast to show little change and decline in real terms over the next three years,” says Angie Zigomanis, BIS Shrapnel senior manager and study author.

Zigomanis believes that the Melbourne market is in an especially tough place because it recorded the highest post- GFC rise in prices of any capital, growing 27% in 2009–10. This price surge coincided with record new dwelling construction commencement in 2010–11, which exceeded annual underlying demand.

ANZ head of property research and Melbourne resident Paul Braddick says the state is a victim of its own success.

“In the last five or six years, we’ve done very well on the back of growth in business investment, whether it’s non-residential building or roads and infrastructure, but the state government budget has tightened,” says Braddick.

“You’re not getting additional growth coming from public sector investment, so over the next 12–18 months, we’ll see a lot of the private projects completed, and then it’s not clear what will be there to fill in that void.”

Braddick says that recent over-investment in housing was sparked by stimuli that no longer exist.

“Melbourne house prices did extraordinarily well in 2010, on the back of the first homeowner boost and the Foreign Investment Review Board rule changes, which were temporary,” Braddick says. “Both of those were removed, so if both things were significant contributors to that gain, once you take them away, you’re going to see some downside in prices…We think there is probably a little more downside to prices in Melbourne, while I think that prices in Perth and Sydney look pretty close to the bottom now.”

WESTERN AUSTRALIA

Property forecasters seem to agree that Perth will see strong prices growth by year-end, but what’s less clear is how long the increases will last

Imagine this. If the end of next year were to see a party in which all Perth’s property investors attended, it’s pretty clear who would make the A-list and who would be left standing at the door staring down a toothless bouncer from New Zealand.

Those drinking champagne and sipping the high-life will largely be investors who already own property in Perth or are going to purchase in the next two years or so. The ones left crying, wondering why they didn’t get in, could be the investors that choose to purchase any time after that.

The point of this analogy is that things appear to be looking up for the Western Australian capital. After having experienced consistent declines since the global financial crisis, many pundits are now saying Perth property prices could be going up by the end of the year – and in a big way.

In fact, some economists believe that Perth property prices could soar so much that affordability issues will eventually create a ceiling that will make it difficult for many investors to enter the market. They’ll be left outside, shivering in the cold, unable to get into the party.

BIS Shrapnel senior manager Angie Zigomanis says the evidence of an impending surge in prices is already there. “Population growth is already accelerating as Perth benefits from rising overseas and interstate migration and, combined with recent weak new dwelling construction, this has resulted in vacancy rates tightening from 3.5% at June 2011, to 1.9% in March 2012,” he says.

BIS Shrapnel is forecasting Perth house prices to rise 22% over the three years to June 2015, representing a rise of just over 7% per annum. However, the Real Estate Institute of Western Australia (REIWA) cautions that large-scale increases could profoundly affect affordability, especially in the rental market, and that this could limit the extent of growth much further down the line.

“A concern is the affordability pressure on people in the rental system,” says REIWA deputy president Ian Cornell.

“The proportion of income required to meet the median rent in Perth grew by 0.7% in the March quarter and now stands at almost 21%.”

Cornell adds that REIWA’s Housing Affordability Report for the March quarter speaks volumes about Perth’s nagging affordability issues, indicating housing affordability in WA fell by 1.2%.

SOUTH AUSTRALIA

Despite optimism, prices remain sluggish as demand struggles to soak up supply

The recent Residential Property Prospects 2012–2015 report by BIS Shrapnel forecasts just a 9% gain in prices for Adelaide in the next three years to 2015, which represents a 1% decline in real terms, once inflation is taken into account.

“Construction in South Australia has been exceeding underlying demand,” says report author Angie Zigomanis. “With state economic conditions also underperforming compared to national growth, the result has been downward pressure on prices.”

However, Zigomanis says there are also some bright spots for the state.

“With Adelaide being the most affordable of the mainland state capitals, the reductions in interest rates should also assist affordability and stabilise the price falls. While expanding mining projects will have a positive impact on the state economy, they will take some time to ramp up and ultimately be reflected in the residential market.”

AUSTRALIAN CAPITAL TERRITORY

Medians have taken a minor fall in the most recent quarter, presenting some inner-city opportunities for upgraders and yield-seeking investors

The recently released Real Estate Market Facts Report, commissioned by the Real Estate Institute of Australia (REIA), has shown Canberra house prices in the most recent quarter are down 1.5% on the same period last year. Meanwhile, prices for apartments and other dwellings are down 5.9%.

Craig Bright, director of the Real Estate Institute of the ACT (REIACT), believes the negative period presents investors and upgraders with some unique opportunities in the local market. Especially considering that the REIA report showed that, compared to other states and territories, the ACT recorded the second-highest average annual return for three-bedroom houses and the highest annual yield for two-bedroom apartments.

“The small [recent] drop in median prices makes it a good time for investors to consider buying a house or apartment in Canberra, as rental returns are very strong here,” Bright says. “Some of the greatest returns in Australia are being achieved by people who own rental properties in the ACT.”

Bright also believes that upgraders should seize the chance to get closer to the CBD.

“The biggest fall in median house prices over the quarter was in inner central, which includes North and South Canberra,” he says. “Sales in the ACT are still strong, with over a thousand properties selling over the period…There are still lots of buyers and house prices are relatively stable.”

Sought-after suburbs within 1km of the CBD, such as Reid, Turner, O’Connor and Braddon, have all experienced substantial drops in median price over the past year, according to RP Data.

NORTHERN TERRITORY

Robust capital growth appears to be on the cards for Darwin, but among city markets there will be clear winners and losers

When it comes to property prices, Darwin premier suburb Bayview knows a thing or two about disappointment. You wouldn’t know it by looking at the suburb’s large, stately houses, surrounded by beautiful Mangrove trees and winding creeks, but the area is Darwin’s worst performing market of late.

The reasons behind the area’s recent demise reveal much about what is happening in Darwin as a whole. RP Data figures indicate median price falls in Bayview of 41% in the 12 months to May, and when looking across the city to its south-eastern regions, a pattern emerges. In contrast to established suburbs such as Bayview, newer areas including Palmerston are doing quite well. In fact, the 16 suburbs that make up Palmerston account for 42% of all property sales across the city.

Palmerston suburbs such as Bellamack and Farrar are leading the pack in recent price performance. The former saw prices growth of 17% in the 12 months to May, while Farrar currently enjoys the highest average annual growth rate in Darwin at 35%.

“A lot of Palmerston is very popular with buyers,” says president of the Real Estate Institute of Northern Territory Quentin Killian. “In amongst more upmarket suburbs, there are a few key markets that are transforming from lower socio-economic areas to places that appeal to a greater mix of incomes and that’s probably a reason for certain areas showing a lot of growth.”

Backtrack to Bayview and other suburbs on the inner-city fringe and the climate becomes one of poor performance. Joining Bayview among Darwin’s worst performers is Nightcliff, Fannie Bay and Stuart Park, which are all areas within 3km of the CBD. All have just scraped double-digit falls over the 12 months to May, and when this is considered against some of the high performing areas of Palmerston it is clear that prices growth remains erratic across the Northern Territory capital.

TASMANIA

June data has provided some positive sentiment for the Tasmanian market amid some bad news and budget blues

Hobart has led a rebound in home price increases across six of Australia’s eight capitals, according to RP Data-Rismark’s June Hedonic Daily Home Value Index. The surprising 2.7% increase in value for Hobart properties topped next best cities Perth and Canberra, which both recorded 2% flat.

Apart from Adelaide and Darwin, each capital recorded an increase of 1% or more, in what is traditionally a weak month for home values.

RP Data research director Tim Lawless attributed the positive result to two factors.

“The catalyst for the improvement in market conditions is likely to have been the 55 basis point reduction in the average discounted home loan rate over May and June, as well as the subtle improvement in consumer sentiment readings that have been reported,” he says.

The index comes in the middle of a period of sustained negativity for Tasmanian property investors, with an unemployment rate of 7.3% adding to poor consumer confidence and putting the state economy in a far more volatile position than its mainland counterparts.

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