17 December 2018

2018 Market Wrap and Predictions for 2019

It has been an action-packed year across the economic, political and social landscapes. Changes in Prime Ministers to international sporting events have all made the year fly by.

With the recent and inevitable slowdown of the Sydney and Melbourne markets, the media has been plagued with sensational headlines, filled with emotive language that property is heading for crash. Unfortunately, in the attempt to make the news more interesting, they tend to focus on the low-probability, tail-end scenarios of reports published, which actually conclude a different message if read in the entirety.

Goldman Sachs economist shared this view stating “while there is a kernel of truth to many of the popular narratives, a close inspection of the data suggests most are overly negative”.

To put things in perspective, more capital markets actually achieved positive growth at the end of November. It was only the negative growth in Sydney and Melbourne that has been pulling the combined capitals results into the negative.

[supsystic-tables id=5]

Index results as at November 30, 2018 – Corelogic

For house prices to crash they have to first be on the market, and then sell at significantly lower levels. That is, prices don’t magically drop without transactions happening first. Basic supply and demand economics suggest for prices to drop there needs to be significantly more stock on the market than potential buyers. The three main contributors to increased supply are:
1- High interest rates. Not just a couple of percentage points higher, but high enough to cause significant mortgage stress and forced sales.
2- High unemployment. To the extent where people need to sell their property because they don’t have a job to pay the mortgage.
3- High construction levels. Not just in isolated pockets but across the board which leads to excess supply and high vacancy rates.
None of these scenarios look likely to happen anytime soon, therefore it is unlikely that there will be any major property crash. Although prices are down in Sydney this year, the market is still up 60% from 2012, hardly a crash landing thus far. Just a soft landing for a few markets that have recently experienced significant growth from strengthened economies, high population growth and limited supply. A natural correction as demand weakens due to tighter lending standards and decreased overseas investor interest. Supply has taken weight over demand.
Residential real estate in Australia is now worth over $7 trillion (that’s a lot of zeros) and accounts for over 50% of household wealth. Whatever happens next year with the election, negative gearing, or capital gains tax, the property market will remain a favoured place for Australians to create and store wealth. Just like it has done for the past 100 years. In a recent article Goldman Sachs outline “Labor’s proposed negative gearing and capital gains tax reforms will only have a small effect on individual investments and residential property will remain attractive”.
As much as the media like to focus on the ‘Australian Property Market’ (note: no ‘s’ on Market), in reality there are many markets and sub-markets doing different things, at different times. The trick is where to look for opportunity (and it’s not the front page of the paper!).
Herron Todd White publish a monthly Property Clock where they position major markets around the country where they feel they sit in their cycle at the close of 2018.

Image sourced: Herron Todd White – Month in Review December 2018

Here is Sound Property’s analysis on a few markets for the year ahead based on our State Profile Reports:

Sydney – Further price declines likely

Overall demand has dropped 22.4% this year according to realestate.com.au. A tighter lending market combined with affordability issues will ensure further price declines into 2019. Oversupply of apartments will emerge in higher density pockets, with dwelling commencements up 54% and sales volumes down. Valuations will continue to soften on off-the-plan purchases bought at the peak of the market.


Canberra – Should continue growth cycle based on strong economic data

Currently, Canberra is one of the most well-rounded markets in the country with strong data in many segments. It has the strongest increase in gross State product, up 5.8% for the year, the second highest population growth, the lowest unemployment rate and the strongest affordability of any major city. Increasing levels of supply will affect apartments in inner suburbs with a softening of yields and prices expected.


Melbourne – Further price declines likely

The similar affordability and credit conditions being felt in Sydney will see prices soften further in 2019 in Melbourne. However, Victoria is still experiencing the highest population growth in the country and strong economic activity will prevent any hard landing or prolonged correction period.


Brisbane – Housing market set for moderate increases

As Brisbane is nearly 50% more affordable based on relative incomes than Sydney and Melbourne it has the ability to defy the credit crunch being experienced in these other cities. Combined with strong interstate migration and large infrastructure spending, Brisbane remains one of our favoured markets for the next 3-5 years.


Sunshine Coast – Strong economic drivers should continue growth cycle

Astar performer in 2018 with 10%+ rises in suburbs such as Maroochydore and Mountain Creek. One of the most dynamic growth centres in the country at the moment with a diverse range of infrastructure projects underway. Vacancy rates are still low hovering around 1% and population growth is double the state average.


Adelaide – No economic
x-factor will contribute to sluggish growth

Very slow population growth, lowest in the country behind Darwin at only 0.62% p.a. Without this fuelling demand, it is hard to see any pressure on supply and any significant growth.


Perth – Market approaching bottom of cycle, however still a way to go

WA has produced the second lowest economic year on year performance (+0.8%) in the country. The -57% population growth trend means the city is lacking the demand required to absorb excess stock and push prices upwards.


Hobart – Prices set to stabilise
as market runs out of steam

Hobart has just become more expensive than Adelaide, Perth and Darwin. It has been attracting investors on double-digit growth, high rental yields and cheap prices. Without the diversity or growth in employment that a mainland capital offers it begs the question how long before the reality of market catches up with all the speculation, and a prolonged period of correction ensues. Hobart has been the strongest property market over the last few years however remember — it is a very small market which can be easily moved in either direction.


Darwin – Weakest economic
drivers in the nation will ensure restricted growth

Underlying demand is set to stay subdued as the weak labour market and low population growth keep sentiment and price growth low. Darwin currently has the lowest population growth (0.12%), only just in positive territory, and the lowest economic growth, retracting at -8.2% year on year.

The team at Sound Property look forward to providing clients with a complete property investment advisory service offering guidance, education, communication and ongoing support in 2019.

Let us do the research for your suburb of interest! We will provide you with Vacancy Rates as well as another 14 Key Investment Drivers for growth and rental yield.

Request a Suburb Profile Report now. 

This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your circumstances. Please consult a licensed tax or financial advisor before making any decision to invest. Past performance is not a reliable indicator of future performance.