There is a lot of talk about a gloomy real estate outlook, but what are our property markets really up to?
That’s one of the most common questions I’m asked these days. And my answer is: “It depends.”
Of course it depends on which market you’re talking about – some are performing much better than others.
It depends if you’re a buyer, a seller or a long-term investor.
Yes our property markets are in a decline with Corelogic reporting that national dwelling values fell for the 16th consecutive month in February 2019, but the rate of decline is easing.
Their National Home Value Index was down a further -0.7 per cent in February taking the total decline nationally to 6.8 per cent since the market peaked in October 2017.
The current downturn is related to various factors including:
- Decreased investor activity with local investors having difficulty obtaining finance due to the bank’s “credit squeeze, at a time of higher supply of new and off the plan properties
- Fewer overseas investors due to difficulty getting money out of their home countries at a time when we pulled the welcome mat out from under them with increases taxes and fees
- Decreasing consumer confidence causing home buyers to go on strike
- Uncertainty about the outcome of the upcoming Federal election.
The upper end of our markets are suffering most
As usually happens when the market turns, the higher end of the property market suffers more.
This is really an area of discretionary spending – maybe you don’t need to upgrade your $5 million home to that $7 million mansion at the moment.
In due course the cheaper, more affordable areas will also suffer as wages growth is likely to be low in these suburbs.
Here is what is happening in each major city around Australia.
The Sydney housing market is likely to remain weak for the first half of this year in part due to the downturn in investor activities at a time of oversupply of new apartments on the market but things are likely to pick up in the second half of the year after the Federal election.
Obviously some segments of the Sydney property market are likely to fall considerably more than that average this year (we’re looking at you off the plan properties), while some segments of the market are holding their own.
Investors are abandoning the off the plan apartment sectors and many of those who purchased off the plan a few years ago are now having trouble settling with valuations coming in on completion at well below contract price at a time when banks are more reluctant to lend on these properties.
But in the background strong economic growth and jobs creation is leading to population growth and ongoing demand for property in Sydney.
At the same time international interest from tourists and migrants continues.
Sydney is currently offering investors an opportunity to buy established apartments in the eastern suburbs, lower north shore and inner west in a “buyer’s market” with little further downside and the prospect of the market moving forward again in late 2019.
Overall property values here will be underpinned by a robust economy, jobs growth Australia’s strongest population growth and the influx of 35 per cent of all overseas migrants.
Remember, Melbourne rates as one of the 10 fastest growing large cities in the developed world, with its population likely to increase by around 10 per cent in the next 4 years.
Currently the oversupply of new apartments is slowly being soaked up, but rents and values have yet to rise.
However we are not expecting the Brisbane market to have a substantial correction like Melbourne and Sydney are experiencing considering the underlying strong demand from home buyers and investors from the southern States at a time when yields are attractive and housing affordability is relatively healthy.
Brisbane’s economy is being underpinned by major projects like Queen’s Wharf, HS Wharf, TradeCoast, Cross River Rail, the second airport runway and the Adani Coal Mine, but jobs growth from these won’t really kick off for a few more years.
In the meantime, a healthy level of affordability at a time of increased interstate migration from Sydney and Melbourne and the return of local and interstate investors seeking strong rental yields plus capital growth should help make 2019 a good year for Brisbane property.
Adelaide property is likely to chug along nicely again this year, much like it has the last few years due to affordable housing prices, a healthy balance between demand and supply and mildly positive economic conditions.
New jobs are being created by many new projects like the $2.4 billion Royal Adelaide Hospital and the Port Adelaide defence contract for manufacture and maintenance of military boats leading to improving migration rates.
While Adelaide remains the most affordable capital city for houses at present and while things look good in the short term, over the next few decades the bulk of Australia’s long-term jobs growth, economic growth and population growth will occur in our 4 big capital cities meaning there are better locations for long term wealth creation that Adelaide.
The median house value in Perth is now the lowest of any capital city but housing affordability being the best it has been in a long time, local confidence is low with poor economic conditions, relatively high unemployment and subdued migration levels.
To get people back into the State more jobs will need to be created.
It’s much too early for a countercyclical investment in the west – I can’t see prices rising significantly for a number of years.
Hobart has been the best performing property market in the last three years, but it’s likely this will change in 2019, and we’ll see Hobart market lose its momentum.
Over the last few years too many investors chased the Hobart “hot spot” at a time when there was a lack of employment drivers, insufficient population growth and not enough infrastructure spending.
Remember home buyers create a property market (they make up 70 per cent of buyers) and investors create property booms – which is what’s happened in Hobart.
And Hobart is too small a market to be a long term “investment grade” proposition.
The Darwin property market peaked in August 2010 is still suffering from the effects of the end of our mining boom today with a very soft employment market, lack of migration and infrastructure spending.
Currently values are 27 per cent below the historic averages and it is unlikely we’ll see these types of house prices again in the next decade.
The small size of the Darwin market makes it more susceptible to local events and Darwin typically has a higher and more variable vacancy rate, a product of a large transient working population.
Darwin does not have significant growth drivers on the horizon and would be best avoided by investors.
While economic growth in the territory is projected to slow down in the 2019 financial year, it is likely remain above the national average.
Population growth is expected to remain strong, which will support underlying demand for dwellings.
With public sector employment accounting for more than 40 per cent of jobs in the Australian Capital Territory, if history repeats itself the uncertain political climate leading up to the federal election later this year will reduce local consumer confidence and dampen housing demand a little.
But, as always, this will correct itself after the election and Canberra’s property market is likely to continue to perform well in the medium term.
THE BOTTOM LINE
We’re clearly in for another interesting year in property, one with moderate price growth in some locations and virtually no growth in others and falling prices in yet others.
Australia’s property markets are very fragmented, driven by local factors including jobs growth, population growth, consumer confidence and supply and demand.
This makes it an opportune time for both home buyers and investors to buy property at a time when they’ll face less competition.
Remember that our property markets are behaving as they always do and some of the best profits are made by investors at this stage of the cycle.
That’s because these downturns are only temporary, while the long term increase in value of well located capital city properties is permanent.
However correct asset selection will be more important now than ever, so only buy in areas where there are multiple long term growth drivers such as employment growth, population growth or major infrastructure changes.
Similarly suburbs undergoing gentrification are likely to outperform.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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