We’re right into the spring real estate season and our national housing markets have continued to grow throughout the year as the impact of the lowest interest rates in 60 years, improved affordability and rising confidence encourage home buyers and investors at varying levels in most capital city markets.
After a mid-year lull, home prices started rising again and are up 11.2% over the past year. However, individual performances remain patchy and mixed both between capital city markets and market segments, reflecting the underlying impact of local supply and demand factors.
Source: RPData
Sydney was the standout performer
In fact it’s really been a two horse race with Sydney the standout performer over the last year (+16.2%), while Melbourne was the best performing market over the last three winter months (+6.4% for the quarter and 11.7% for the year).
The other capital cities lagged behind as can be seen in this chart:
Source: RPData
And while some are concerned we’re heading for another property bust, the stats suggest otherwise, with Sydney being the only property market where values are significantly above their previous market peak in 2010.
Source: RPData
Why Sydney and Melbourne?
One of the main reasons property values in our two big capital cities continued to grow so strongly was their massive population growth, with around 60% of our immigrants coming to these two cities chasing the jobs there.
At the same time the outflow of residents from Sydney and Melbourne to other states, particularly Queensland and Western Australia, has slowed dramatically since the GFC.
Another factor was that property investors have been targeting these cities chasing capital growth.
Let’s now look at some of our major property markets in a little more detail:
Sydney
Median house price: $740,000; 17.2% increase in last 12 months.
Median unit price: $565,000; 12.1% increase in last 12 months.
Vacancy Rate: 1.8%
The Sydney market continues to perform strongly with house prices now at record levels, up 27.2% over this latest growth cycle.
The Harbour City market is strong because jobs are being created there and its population continues to grow strongly.
“I know some people are asking if it’s too late this property cycle to buy in Sydney, they’re clearly concerned about paying too much” says George Raptis, director of Metropole Property Strategists in Sydney.
But with high auction clearance rates, and days on market (how quickly properties are being sold) remaining low I still see the excellent growth potential in Sydney for the remainder of the year.
There is still strong demand from investors, however, with rentals remaining flat, yields have not kept pace with capital growth.
Homebuyers are selecting more carefully now and their decisions are being driven by lifestyle with many trading backyards for balconies in well-located apartments in Sydney’s gentrifying suburbs.
Currently there are 26,680 apartments under construction in metropolitan Sydney, so investors should avoid the type of location where there is likely to be an oversupply of new apartments or the lure of buying “off the plan”, says Raptis.
Melbourne
Median house price: $570,000; 12.4% increase in last 12 months.
Median unit price: $460,000; 6.2% increase in last 12 months.
Vacancy Rate: 2.6%
The Melbourne market continues to perform strongly with house prices now at record levels, up 19.5% over this latest growth cycle.
“While Melbourne home values have risen at the second fastest pace of all the capital cities over the last 12 months, it’s really a tale of two cities in the one big capital,” says Kosta Mesaritis, of Metropole Property Strategists in Melbourne.
“There is still a significant oversupply of new apartments in the CBD and in many of our inner suburbs at a time when a record number of new apartments are still coming out of the ground or on the drawing board. This will undermine future capital gains and rental growth.”
“Yet there is a shortage of well-located established homes and apartments in Melbourne’s middle ring suburbs with demand outpacing supply, keeping auction clearances high and prices strong.”
“Currently there are some good investment opportunities in buying established apartments in Melbourne’s southern or eastern suburbs and adding value through renovations,” he says.
Brisbane
Median house price: $475,000; 5.3% increase in last 12 months.
Median unit price: $389,250; 5.6% increase in last 12 months.
Vacancy Rate: 2.3%
Having underperformed the combined capital city averages since 2008, Brisbane was tipped by many as the property market to be in this year, and while it is gathering momentum and market turnover has increased, it is still underperforming Melbourne and Sydney.
Shannon Davis, director of Metropole Property Strategists in Brisbane commented:
“There has been a resurgence of home buyers and property investor activity with more properties being sold with multiple offers being made open homes being well attended and more properties being put to auction as vendors gain confidence.
Yet while the overall market has only risen 5.3%, some sectors of the Brisbane market have risen over 10%.
Owner-occupiers are upgrading their homes, and investors and developers are keenly chasing properties with renovation or development potential.
We’ve noticed more interstate investors considering Brisbane where price growth has lagged the southern states. However, with many tenants moving to become homebuyers, vacancy rates are rising a little and rents are remaining flat yet investors are still enjoying healthy yields in around mid 4%” says Davis.
Perth
Median house price: $530,000; 3.2% increase in last 12 months.
Median unit price: $440,000; 7.2% increase in last 12 months.
Vacancy Rate: 2.5%
After a long period of strong capital growth, the Perth housing market has recorded a significant slowdown over the past year and these conditions are likely to continue with transaction numbers falling and confidence decreasing.
According to Damian Collins, director of Momentum Wealth:
“The Perth property market has moved into a holding pattern, with limited growth in the last quarter.
“Overall there is still a slight shortage of listings, with around 10,800 properties for sale compared to a balanced market of 12,000-13,000.
“The demand for properties with longer term development potential is still strong and prices are rising, while most other sectors are seeing a balance between supply and demand.
“It is expected that the spring season will see more properties come to market and we will also likely see more buyers.
“Perth has been a steady performer over the last financial year and growth is expected to progress at a moderate pace in the short term.
“Longer term, Perth is expected to have the fastest growing economy in Australia and the fastest population growth in percentage terms. Both of these statistics mean the outlook for the property market is strong in the years ahead.”
Adelaide
Median house price: $410,000; 6.4% increase in last 12 months.
Median unit price: $335,000; 0.7% increase in last 12 months.
Vacancy Rate: 1.5%
Adelaide’s housing market has essentially remained flat over the last five years; in fact, it’s fallen behind after taking inflation into account.
While it’s experienced its best year in a while, annual house price growth has been 1.8% over the last five years (+4.0% per annum over 10 years) and units prices have remained virtually steady for five years (+3.7% per annum over 10 years.
Demand for property remains subdued with activity driven more by necessity than desire to upgrade or invest.
Darwin
Median house price: $550,000; 4.3% increase in last 12 months.
Median unit price: $450,000; 10.3% increase in last 12 months.
Vacancy Rate: 1.4%
The Darwin property market surged earlier than most other capital cities in this current property cycle. It performed strongly a few years ago driven by solid investor sentiment, but their love affair with the Northern Territory seems to be over (at least in the short term.) I’ve always found investor-driven markets more volatile than our big capital cities and that’s why I avoid them.
Hobart
Median house price: $319,000; 3.0% increase in last 12 months.
Median unit price: $275,000; 1.8% increase in last 12 months.
Vacancy Rate: 1.7%
Hobart remains amongst the weakest performing capital city property markets and without a big economic shift to boost employment and sentiment there is little to suggest things will change.
Canberra
Median house price: $565,000; 1.4% increase in last 12 months.
Median unit price: $420,000; 1.8% increase in last 12 months.
Vacancy Rate: 2.1%
Canberra was the worst performing big city in Australia over the last 12 months. The Canberra housing market has always been affected by the political cycle. The uncertainty surrounding last year’s election, the federal budget and the threat of cuts to the public service all dampened the confidence of home buyers and investors.
Source of Data: RPData, SQM Research
What next?
The spring selling season is here and considering the strong market depth, the high auction clearance rates, the rapid sale of properties coming to market, the ongoing low interest rate environment and the fact that consumer confidence is moving in the right direction, it is likely that dwelling values will rise even further over the rest of the year.
But as before Sydney and Melbourne are likely to lead the pack, with Brisbane coming a close third.
Of course the economy will keep putting stumbling blocks in front of us and it won’t be all smooth sailing – but it never is.
It’s important to remember both the Reserve Bank of Australia and our government are counting on consumer spending and the construction sector to grow our economy.
However, at some time in the future, probably a year or two away, house prices will have risen significantly and our economy will have picked up to the point where the RBA will need to raise interest rates.
Economists predict that rates will rise 2% or so sometime in late 2015 or early 2016. This is likely to stall the current property cycle just as rising interest rate rises have stopped most other property cycles.
The other option to dampen house price growth would be for the introduction of macro prudential controls to protect our financial system.
These could take the form of restricting the amount of high loan-to-value ratio loans that banks can issue, stricter tests on borrowers’ ability to meet repayments in the face of rising interest rates, or a requirement for banks to hold more capital than they do currently to protect against home loan losses, which would raise the cost of loans.
The bottom line is…you can’t just buy any property.
It’s a myth that property values double every 7 to 10 years.
While they say a “rising tide lifts all ships” clearly there are some property markets and certain properties that have had minimal growth over the last few years while others have enjoyed massive growth.
While the overall property market is comfortable, it’s a bit like me putting my left hand in a bucket of cold water and my right hand in the bucket of hot water and saying overall I feel comfortable. Some segments of the property market are hot and others are cold and the fragmentation of these markets is unlikely to change over the next year or so.
This means home buyers and investors will have to undertake careful due diligence and make sure they buy the right type of property…
One that has a level of scarcity, meaning it will be in continuous strong demand by owner occupiers (to keep pushing up its value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages), at the right time in the property cycle and for the right price.
Then hold it as a long-term investment and reap the rewards.
Michael Yardney is a director of Metropole Property Strategists, a company which creates wealth for its clients through independent, unbiased property advice and advocacy.
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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