National Property Report – September 2015

NEW SOUTH WALES

Hot market set to cool, but not yet

As demand continues to heat up, forecasts of an impending price crash are once again dominating the headlines. But experts say this is highly unlikely given the strong market fundamentals

After taking a breather in May, Sydney’s rampant price growth resumed in June. According to

CoreLogic RP Data, Sydney dwelling values rose 2.8% for the month of June and by 3.1% over the quarter. This takes year-on-year growth to 16.2%. The median house price surged to $900,000, and the median unit price to $650,000.

With Sydney prices soaring higher and higher, the one question on everyone’s lips is, will prices keep increasing?

“I believe the answer is yes,” says Linda Phillips, senior economist at Propell Ltd. “For investors, buying into the Sydney residential market is a no-brainer. The median house price has now reached $900,000 and will probably hit the magic $1m by this time next year.”

But while the lure of further growth is strong, investors are facing a new challenge amid tighter lending. “The only problem for investors is that tighter lending requirements mean they have to come up with a 10% deposit, which means finding $100,000 or more when purchase costs are factored in,” says Phillips.

Bloodbath prediction premature

Robust price growth has reignited gloomy predictions of a catastrophic price crash. However, BIS Shrapnel analyst Angie Zigomanis refutes these dire forecasts.

“Doomsday predictions for the residential market are likely to be overblown,” he says. “While affordability is now becoming increasingly strained, Sydney’s dwelling deficiency, combined with healthy sentiment in the market and strong investor demand, is expected to continue to underpin further price rises in this environment.”

Phillips agrees and adds that the headlines about an impending bloodbath in the market, or of price falls in future, have not yet deterred buyers.

“We don’t see prices levelling out any time soon. The rate of growth is likely to pull back from the 16% plus of the last year to around 10% growth in the coming year, but this is still the best growth rate in Australia and one that investors are keen to share in,” says Phillips.

After next year, opinions are divided about future growth. Based on previous periods of price growth, the most likely outcome is that stability will return, with prices levelling out for several years.

But Phillips warns that once interest rate cuts have been washed through the system, and with the broader Australian economy growing as slowly as it is, there will really be no more capacity to push prices up. “We might go through a very long time with flat growth,” she says.

Demand outstrips supply

However, current demand for property in Sydney exceeds supply, and that equation is not going to change any time soon.

“That imbalance is the investor’s friend,” says Phillips.

Demand is not only coming from local investors. Phillips explains that with the A$ exchange rate falling, residential real estate prices have increased commensurately in Aussie dollar terms but have hardly changed in price based on the US dollar.

“Since the boom in prices started in 2011, Sydney house prices have gone up only 7.7% in US dollar terms, while Melbourne has fallen at -8.2% in US dollar terms. So while local buyers fret about the cost of getting into the Sydney market, it still looks attractive to foreign buyers,” she says.

Best performers

Sydney’s North Shore has seen a dramatic surge in prices in the last six months, particularly within 15km of the CBD. Lack of stock, coupled with high buyer demand and historic low interest rates, has seen unprecedented prices achieved at auction.

“Prices have increased dramatically in prime east side Chatswood, which is commonly achieving $3m plus for quality properties, says Jason Lee, residential manager NSW/ACT, Propell. “This has had a flow-on effect to the less sought-after west side.”

Apartments are also in strong demand if well positioned. An apartment development in Beecroft was recently sold out on release, reflecting a location on the transport hub with easy access to the CBD.

The outer suburbs of Sydney continue to show higher percentage growth, reflecting their affordability compared to inner-city suburbs.

“Investors looking to spend $1m or less have to face the fact that they are really only buying at or below the median price,” Phillips says. “In this price bracket, the best selection of properties is out west, from Blacktown to Penrith, Liverpool to Campbelltown. The alternative is to follow occupiers north into Gosford and the Central Coast.”

VICTORIA

Will Melbourne outperform Sydney?

With Sydney running too hot for many investors, can Melbourne deliver better returns?

It may just be a small 0.1% difference in growth, but Melbourne did outperform Sydney in June, prompting suggestions that it could trump Sydney’s stellar performance over the coming year.

According to the June stats from CoreLogic RP Data, median dwelling values in Melbourne jumped 2.9% compared to Sydney’s 2.8%.

“With Sydney prices streaking ahead of Melbourne, the question investors are starting to ask is whether Melbourne will outperform Sydney next year,” says Linda Phillips, senior economist at Propell Ltd.

“The question is valid. With a median house price of $615,000 in Melbourne, compared to $900,000 in Sydney, Melbourne is looking increasingly attractive to investors who are otherwise getting priced out of the Sydney market.

“At some point in 2016, we can postulate that the rate of growth in Melbourne may exceed that of Sydney, as Sydney prices stabilise while overseas and domestic investors increasingly support the Melbourne market.”

Foreign investors target premium suburbs

If foreign investors in prestige property shift their attention from Sydney to Melbourne, then Melbourne could show rapid price growth, according to Phillips.

“Since 2010, Melbourne prices have actually fallen 8% in US dollar terms, whereas Sydney prices have risen by a similar amount. This is a considerable gap that could tempt foreigners to shift their attention,” she says. “However, this small niche market can be risky for investors who are seeking quick profits, as it is much more difficult to predict which properties precisely will be of interest.”

Foreign investors have been most active in the prestige property market for houses priced from $2m upwards, although they are not dominating, says Jeremy Marsden, residential manager Vic, Propell Ltd. “They are most active in the eastern suburbs close to the CBD, particularly Toorak, Kew, Balwyn and Glen Waverley. Interest wanes above $5m, where the market is still dominated by domestic purchasers,” he says.

Challenges ahead

Despite this upbeat assessment, Melbourne faces headwinds, says Angie Zigomanis, senior analyst at BIS Shrapnel.

“The Melbourne market has been underpinned by strong net overseas and interstate migration inflows, which were higher than the other states. This allowed population growth to match the elevated level of supply … However, overseas migration has been trending down while new dwelling construction, particularly for apartments, is again at record levels.”

Zigomanis adds that the downturn in manufacturing and construction will also dampen economic conditions. “The potential for continued solid growth in Melbourne’s median house price is limited given the potential for oversupply and weakness in the state economy.”

Zigomanis forecasts Melbourne’s median house price to grow by a total of just 4% over 2015 to 2018. “Given the level of supply due to come through, there is greater downside in the apartment sector, where the median unit price is forecast to fall by 12% in real terms,” he says.

Where to look for opportunities

Phillips suggests investors should target areas within 15km of the CBD if focusing on the southeastern suburbs. In the west and north, they can still find quality investments within 10km of the CBD.

“Houses around $1m within 10km of the CBD are in demand by investors, reflecting that it is hard to buy below $1m that close to the city, but these are also highly sought after by professional couples,” she says. “For houses around the median price, southeastern suburbs are still in demand. Out west, such houses are harder to move, with fewer purchasers in the market. … Areas like Point Cook, Craigieburn and Broadmeadows see good demand for land, and new developments and are popular with new immigrants.”

For those in the $500k to $1m range, there is more choice in the inner west to mid north, such as Preston, Thornbury, Ivanhoe, Coburg and Strathmore.

QUEENSLAND

Can Brisbane bring it on this year?

Brisbane’s recent performance has been disappointing for investors who are expecting big things in this market. But will this be the year when Brisbane finally delivers?

Brisbane’s growth has been painfully slow compared to Sydney’s and Melbourne’s. During the year to June 2015, median dwelling values grew by just 3.4% as Sydney prices surged 16.2% and Melbourne median prices climbed 10.2%. Adelaide even outperformed Brisbane with its 4.5% year-on-year growth.

Despite this, Linda Phillips, senior economist at Propell Ltd, believes Brisbane remains a good bet for investors.

“When you think about the problems that Queensland has experienced in the last couple of years, with a change of government, dramatic cuts to public spending and the end of the mining boom, it’s a surprise that Brisbane house prices did not fall, by and large,” she says.

While Phillips agrees that the 3.5% growth in median dwelling values is modest, she says Brisbane still has lots of potential for investors.

“If that’s what happens to prices in a poor economy, what will happen when the economy finally starts improving? Will we see significantly higher growth in Brisbane? The potential seems to be on the upside,” she says.

“Brisbane has long been regarded as the next economy to show house price growth. We are still waiting, but this next year could finally be the one where we see it, in which case this is a good time for investors to start positioning themselves in the market.”

According to Brock Shearn, residential manager QLD/NT at Propell, the Brisbane market started improving in mid-2015. “You’re starting to get higher auction clearance rates in the inner-suburban area. Suburbs such as Ashgrove, Bulimba, Tarragindi, Yeronga, Clayfield, Norman Park and the like – particularly for well-presented properties at or above the million-dollar mark – are in high demand. This in turn has produced a ripple effect in surrounding areas.”

Shearn adds that the intense interest was also fuelled by the slight drop in better-quality stock being offered to the market, and the current low interest rates.

“Well-informed investors and second and third home buyers clearly believe the time is right to acquire quality dwellings.”

Rosy forecast

Despite recent subpar growth, Angie Zigomanis, senior research analyst at BIS Shrapnel, is upbeat about Brisbane’s prospects. “The Brisbane market remains patchy, but it’s expected to experience broader price growth in 2015/16 as buyer confidence improves,” he says.

“We’re expecting the median house price to grow by a total of 13% over the three years to 2018, and the median unit price to rise by 6%. Significantly, Brisbane is expected to be the only capital city that will not experience a decline in median house prices in real terms in the next three years,” he says.

Inner-city apartments looking dodgy

The sunnier outlook, however, only applies to houses, Phillips says.

“The apartment market in Brisbane is heading for oversupply due to the many projects underway. Buyers are attracted to the apartment market due to the relatively low entry price point. The inner-city location and the fact that rental levels are stronger close to the city and around the universities are also attractive to buyers. However, the high numbers of apartments being added continuously will likely weaken rental levels over the next couple of years. Capital growth is unlikely in the short term,” she warns.

Phillips says there has also been an increase in off-the-plan purchases – no doubt driven by competitive pricing and available discounts, given the sheer number of newly constructed apartment complexes near the CBD. This, along with growing interest in land or dwellings with development potential, due to recent Brisbane City Council rezoning, has led to an increase in general market transactions.

WESTERN AUSTRALIA

Perth turns into a buyer’s market

As the market continues to weaken, buying opportunities open up further for investors looking to buy low

There’s no other way to put it. The Perth market is in a downturn and it’s looking like this will continue over the next two years.

According to Angie Zigomanis, senior research analyst at BIS Shrapnel, the Perth market, along with Darwin’s, is forecast to deteriorate progressively as the resources sector declines further. “Buyers’ demand is now tapering off, with demand across first home buyers, subsequent home buyers and investors all beginning to weaken,” he says.

The waning demand is exacerbated by dwindling overseas migration and growing interstate migration outflow.

“Perth’s median house price is forecast to continue to fall over 2015 to 2016 and start to stabilise in 2017 when mining investment is expected to bottom out,” Zigomanis says.

BIS Shrapnel expects the median to drop by 3% over the next three years.

Buying and selling in the current market

Prices in most typical suburbs have eased by around $20,000 in the last year or so, and Linda Phillips, senior economist at Propell Ltd, expects house prices to fall another $10,000 next year. She expects apartment prices may fall as much as $30,000 over the same period.

“For anyone buying into the Perth market, the name of the game is to try and pay next year’s price today. Perth is a buyer’s market, with prices softening as the state recession continues.

Prices may remain weak for a couple of years before staging a recovery from about 2017/18 onwards, Phillips says.

While there is a lot of stock on the market, the level of turnover remains good, and quality and well-priced properties are still selling.

But the price point has to be spot on, says Callen Deverell, residential manager WA, Propell Ltd. “If a property is well priced, then it will sell quickly enough. But many vendors are still looking at last year’s prices and adding some, and if their property is priced $25,000 or more too high, then purchasers will not even bother turning up to inspect it.”

According to figures supplied by Real Estate Institute of Western Australia (REIWA), there are 14,250 properties listed for sale, up from 11,000 a year ago. A figure of 10,000 is usually taken to represent a balanced market, so it is definitely a buyers’ market.

“With so many properties on the market, investors need to do their research in a suburb. It is a matter of identifying, say, a dozen properties which appear to be most competitively priced, then doing their homework, inspecting all of them and negotiating hard. In this market, it is still possible to make a good purchase,” advises Phillips.

State of the rental market

According to REIWA, vacancy rates across Perth jumped 4.9% in May to their highest level in six years, amid a growing supply of rental properties. At the same time median rents fell by $25 per week compared to a year ago.

REIWA president David Airey says WA’s slowing population growth has created the oversupply, along with a significant number of newly constructed dwellings coming to completion.

“The competition among property owners is having an effect on price. Perth’s median rent peaked at $475 per week in the middle of 2013 but has since fallen by $50, or around 10% across the board. The long-term equilibrium for Perth’s vacancy rate is 3%, so the current situation means there are more than 50% more properties on the market than is usual,” says Airey.

Rents at the top end of the market have suffered the most since the end of the mining boom, as fewer people earn high enough wages to justify renting premium property. According to Phillips, the worst rental markets are on the northern and southern fringes of the city, where considerable development of basic four-bedroom, two-bathroom properties has led to an oversupply and high vacancies.

In contrast, rents in the CBD and the better inner-city suburbs remain high, with properties keenly sought.

“This is a good example of the old real estate adage, ‘location, location, location’,” says Phillips. “The highest demand for rental property is close to the city, and demand recedes as distance from the CBD increases. For an investor, buying at the right price is only half the equation. It is no good getting a good deal if you cannot rent out a property, or experience lengthy periods when it is empty.”

Rental demand is also strong near employment nodes such as Cockburn Central and Canning Vale in the south, and Scarborough and Joondalup in the north, and suburbs surrounding these nodes offer the best opportunities.

SOUTH AUSTRALIA

Weak economy weighs on the market recovery

While there have been signs of recovery appearing in the market, the shadow of a slowing economy and increasing supply continues to create doubt about long-term prospects

Adelaide is certainly looking attractive at the moment. With the median dwelling price sitting at just $405,000, it offers the cheapest entry point into the property market of any mainland city. Predictably, investors are starting to take notice and make a move into this market.

“With houses at half the price of Sydney’s and 25% cheaper than Melbourne’s, the city is proving attractive to price-sensitive groups such as first home buyers and retirees. Where else can you get a good capital city lifestyle at this price?” asks Linda Phillips, senior economist at Propell Ltd.

Even with the closure of the car industry and increasing unemployment making the headlines, the market has remained resilient.

During the June quarter, the median dwelling price rose 1.8%, taking annual growth to 4.5% and even outperforming Brisbane’s 3.4% growth, according to CoreLogic RP Data.

“It’s true the 7.2% unemployment rate is still the highest level of any city, but there are signs that this is now peaking,” says Phillips. “The car industry has been unwinding for some time, and this uncertain variable is becoming better understood, with the impact limited, it seems, to the older and state housing suburbs in the north around Elizabeth.”

With things not looking as bad as feared elsewhere across the metropolitan area, buyers have been returning to the market.

“Adelaide has never seen the scale of growth of other markets, but on the plus side it has always been a steady market, and over time the average growth has managed to match other cities’. It also has the bonus of offering higher rental yields, reflecting the lower prices,” says Allan Romaniuk, residential manager SA/TAS, Propell Ltd.

“The sweet spot for investors in this city is to locate a suburb that has above-average growth prospects, combined with a higher-than-average rental yield. This helps to limit the downside risk on any investment.”

Concerns remain

Despite promising growth in the property market, BIS Shrapnel senior research analyst Angie Zigomanis remains cautious about future prospects amid rising supply and weaker demand.

“The dwelling excess in the South Australian market after the post-GFC surge in construction began to be absorbed over 2012 and 2013, resulting in improvement in prices. However, the excess increased in 2014 as purchasers and builders responded to large and temporary increases in incentives to first home buyers of new dwellings,” he says.

“This rise in construction is coinciding with slowing underlying demand as net overseas migration inflows ease. With the state continuing to face headwinds in a number of industry sectors, there will be little to place upward pressure on prices apart from the low interest rate. As a result, the residential market in Adelaide should remain challenging as rental growth also suffers from oversupply.”

Areas to watch

According to Phillips, the northern suburbs are starting to be affected by the winding-down of the car industry, particularly older suburbs with state housing stock that is now physically obsolete.

“Such houses are difficult to lease but offer the opportunity for redevelopment, especially if several neighbouring houses can be purchased to create higher-density development,” she says.

To the north, Phillips points out that there is considerable new stock on the market which has been supported by rent guarantees.

“At present there seems to be an oversupply of stock in those areas near RAAF Base Edinburgh, so the trade-off for the rental guarantee seems to be lower prospects of capital growth,” she says.

In contrast, the southern suburbs and those to the west of the city have held their value better than the northern suburbs, and it is here that most of the capital growth is occurring.

Suburbs such as West Beach, Fulham, Henley Beach and Grange are close to the oceanfront while being conveniently situated for the city and airport. There are redevelopment opportunities here that are of interest to investors. Similar opportunities lie to the south of the city in suburbs such as Clarence Park, Clarence Gardens and Edwardstown.

TASMANIA

Lingering oversupply dents growth prospects

Despite the promising recovery in prices, overbuilding and slow migration continue to weigh on the market

The Hobart market has been fairly stable over the past few years, with prices oscillating but overall remaining steady.

Apart from the more affluent suburbs, which have recorded moderate growth, prices haven’t really moved.

“This in itself is a good achievement for an island state that suffered severe economic difficulties,” says Linda Phillips, senior economist at Propell Ltd.

“For the first time in a while, the economic news is starting to improve, led by a windfall on GST for the state. With median prices that first home buyers can only dream about, the state looks increasingly attractive by comparison to high-priced mainland cities,” she says.

The affordable offering has certainly caught the eyes of a growing number of mainland buyers and investors who are starting to move into the market.

The lower end of the market is also seeing support from first home buyers who still enjoy Tasmania’s first home buyer’s grant.

While the market is yet to reflect these drivers and deliver a significant increase in prices, there is a feeling that it has bottomed out and there is an upside to the market. The improved prospects, along with high gross rental yields, help offset the risk of investing in this state.

“Around Hobart it is the higher-quality and better suburbs that are performing the best, including Sandy Bay and Battery Point. North, West and South Hobart are all performing well,” says Allan Romaniuk, residential manager SA/TAS at Propell.

“The best investment opportunities are still found in the more desirable suburbs of Hobart. Other markets such as Launceston are too small and specialised to invest in, unless an investor has fully acquainted himself or herself with the market and has an intimate knowledge of it. Outside of

Hobart, the smaller level of transactions means that even a standard property can take a year to sell, so it is a very different market.”

Outside of Hobart, there are two areas of interest to investors, though these are small pockets that require careful research. Inland from Hobart is Lenah Valley, a transport area close to the city, according to Romaniuk.

“The first is the area to the east of Hobart, across the bay, including Geilston Bay, Bellerive, Howrah, Lindisfarne and Rose Bay.

“These attractive suburbs are well positioned for capital growth, although their distance from employment nodes makes them slightly more difficult to rent.

“The second is the area surrounding Kingston, well to the south of Hobart, including Huntingfield and Blackmans Bay. Investors will be more comfortable with these carefully selected modern growth locations than with older areas within the existing city.”

While prices have yet to respond to newfound interest, this is showing up in listing statistics, with the number of total listings in Hobart down 7% compared to last year, a leading indicator of the potential for price growth ahead. This means that, for investors, there is the potential to buy into the market before any significant growth arrives.

NORTHERN TERRITORY

Buyers beware

Things aren’t looking good in the Top End. With dwelling prices continuing to fall, the pain is expected to persist over the next two years

If people in Darwin wonder what life will be like after the Inpex gas pipeline is constructed, they can take a look at WA and Queensland, where the downturn in resource project construction has already had its impact,” says Linda Phillips, senior economist at Propell Ltd.

“Inpex is halfway through a five-year construction phase and is one of the major employers in Darwin, with 8,000 workers. This fuelled a massive increase in house and apartment prices, as the small market sought to cater for a massive influx of workers. But the continuing addition of new developments and land for housing is now having an impact, with prices easing.”

Darwin prices increased dramatically during the mining boom, as a shortage of stock and a large inflow of workers increased demand. However, those years have passed and prices are declining as supply now exceeds demand.

The downturn in exports has affected activity at the port, although this is being offset by increases in the live export trade in cattle and buffalo to the Asian market. Darwin also has the potential for an increase in tourism, driven by the lower A$, and could benefit from the government’s initiative to expand activity and population growth in north Australia.

But these things will take time. In the medium term, there is the potential for a gap in demand in the housing market, as the resource industry cuts jobs long before other sources of employment grow.

“Investors looking to buy now face having to select property well, rather than markets, and it may be circumspect to wait a couple of years before seeking exposure to this market,” says Phillips.

“They need to be prepared for prices that are not far behind Sydney prices, and to head for the better prestige and coastal suburbs, which seem to be holding levels of value from last year, with continuing good demand reported by agents.”

According to Brock Shearn, residential manager QLD/NT, Propell Ltd, the prestige and coastal suburbs of Darwin such as Larrakeyah, Fannie Bay, Parap and Nightcliff will always attract good demand from owner-occupiers and investors.

“Suburbs surrounding those areas such as Rapid Creek and Millner still offer some value for money, with the potential for reasonable capital growth. The better suburbs around Sandy Bay are likely to see values holding in the next year, while the southern suburbs such as Palmerston will see prices easing.”

At their peak, median prices in Darwin rivalled those of Sydney, a situation that was unsustainable in the long run. As a result, prices have been easing in the house market, and are weaker for apartments.

This is exacerbated by the growing number of new apartment developments throughout the Darwin CBD. About 800 units have come onto the market this year. The increasing supply of land in Muirhead and the Palmerston region is also adversely affecting vacancy rates and rental values.

Many apartments have been let on long-term contracts related to the gas industry, which is helping to underpin returns, but there has been a general contraction in rental growth within the past six months.

AUSTRALIAN CAPITAL TERRITORY

The forgotten Territory

Often dismissed as an overpriced and oversupplied market with limited growth, Canberra could be the surprise outperformer in the next few years, according to an analyst

Canberra prices have been weak for the last couple of years, especially in the last half of 2014, so naturally it doesn’t feature highly on investors’ lists.

However, Linda Phillips, senior economist at Propell Ltd, is upbeat about the national capital’s prospects.

“We’re now seeing an inflection point, and prices have started increasing during 2015,” she says. “Canberra may be the surprise market for growth over the next few years.”

This comes as the tight restrictions on recruitment introduced by the federal government after the last election have been lifted.

“The Public Service Commission has passed responsibility over hiring of government staff back to individual departments and agencies, which marks an end to the severe cuts in the public service, down by 11,000 staff in the last year alone,” says Phillips.

“This means that Canberra may start to experience higher growth, sharing the wave that has swept Sydney and Melbourne. The starting point for Canberra house prices is already high, with a median price of $590,000, so we are unlikely to see double-digit growth, but it is quite possible that growth could exceed much of the rest of Australia.”

There are good reasons for investors to look at Canberra, especially if prices are going to rise, even modestly. The drivers of economic activity for the Territory are different to other markets, being influenced by political cycles and the stability of public sector employment, so it tends not to be correlated with the other eastern seaboard markets, which makes it attractive to investors. It is driven by the public service cycle and tends to be sheltered from downturns, which makes it a safer investment.

“With the threats to employment evaporating this year, it looks like an appropriate time for investors to consider the market,” says Phillips. “We are expecting growth in house prices to average 4% in the next year for Canberra, though newer properties, or those with redevelopment potential, may do better than average.”

The trough in demand that followed the last federal election is now evaporating as demand returns to the market.

House prices are increasing, though at a modest pace. The auction clearance rate has been above 80%, similar to Sydney’s. Houses are typically selling within a month of listing, and the number of total listings on the market has dropped by 14% compared to a year ago.

However, the apartment market remains weak due to the current oversupply. “There are completed apartments still on the market looking for buyers, so it is not an off-the-plan market at present. As such, prices are not expected to show any increase in the next year,” says Phillips.

Despite the overall slow growth levels last year, some markets have shown considerable growth in prices.

Casey, on the very northern fringe of the city, not only had the highest number of sales but the median price increased by 21% to $520,000. Franklin, also to the north, was another strong market, with prices up 9%, while nearby Bonner saw prices fall 2.3%, reflecting patchy market conditions.

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