As we enter a new year, current media is touting the pause in the Sydney property cycle, leading some people to believe a bearish approach should now be taken towards property as an asset class overall. Can we predict the entire national market’s change from a weekly adjustment in auction clearance rates in one city? Or that prices have come down a fraction of a percent in one week across the whole country, and therefore a national ‘bubble’ has burst?
Unfortunately, the media will often assess the property market as one singular market. Share market style indices and narrow windows of time are often used to construe generalised and emotive predictions. In reality, there are thousands of markets around the country, each offering different dynamics of growth, yield and risk.
Sound Property always urges investors to reflect on their unique situation, and investment goals, first and foremost before following any predictions.
The current lending environment
The Australian Prudential Regulation Authority (APRA), which oversees banks, credit unions, and building societies, is focused on curbing the increased lending to investors and safeguard the Australian banking system and property market. A welcomed initiative for us at Sound Property, as the activity has been aimed at risker high loan-to-value (LVR) mortgages and interest only loans. The current low interest rate environment has been attractive for many non-seasoned investors to gear up on property by taking out high LVRs (some as high as 95% before the crackdown) and interest only.
Whilst Sound Property doesn’t think these new restrictions will cause widespread issues in the property market, it is important to assess where these investors have been buying and mark as areas to avoid. These investors’ typical strategy is to grow a portfolio based on quantity, not quality. Their targeted investment properties are often investor dominated high rises, new greenfield house and land developments or ‘cheap’ property in lower socio-economic areas.
For Sound Property, blue-chip property in established, owner occupied areas will tend to withstand any volatility that occurs when the full effects of the APRA legislation are felt, and some investors are forced to sell.
The Property Markets
Australia consists of thousands of property markets, doing different things, at different times. There are various national economic factors such as consumer confidence, interest rates, exchange rates and wage growth that influence the markets at large. However, there are many other drivers such as supply levels and affordability that can make a specific market move in its own cycle. To maximise medium to long term gains, Sound Property prefers to invest counter-cyclically. For this reason, a market that has had a prolonged amount of capital growth is considered more of a risk than a market that has been subdued, however showing signs of positive economic and social regeneration. Here is our take on the main capital markets around the country (*data sources referenced below):
Canberra’s Property Market
- 3 Year Capital Growth: U 9.9%↑ H 27.2%↑
- Long Term Population Growth: 1.12%
- Unemployment: 5.14%
- Vacancy Rates: 1.3%
- Rental Yields: U 5.6% H 4%
- HTW Property Clock: Rising Market
CommSec Jan 2018 Market Comments:
The biggest improvement has been the job market, with annual employment growth now the strongest in almost a decade. The ACT is top ranked on housing finance.
Canberra’s Property Highlights/Lowlights:
Super low vacancy rates, shortage of stock on market and relative affordability should ensure Canberra obtains some of the top growth rates for the next few years. Avoid oversupplied inner city units in favour of townhouses and houses on the middle ring suburbs.
Brisbane’s Property Market
- 3 Year Capital Growth: U 1.9% ↑ H 12.6% ↑
- Long Term Population Growth: 2.37%
- Unemployment: 6.11%
- Vacancy Rates: 3.8%
- Rental Yields: U 5% H 3.8%
- HTW Property Clock: Rising market
CommSec Jan 2018 Market Comments:
The outlook is promising with annual employment growth the fastest in the nation and just off the fastest for the state in over a decade. Economic growth is up 19.1% compared to the decade average.
Brisbane’s Property Highlights/Lowlights:
Still a slight oversupply present in CBD unit market causing higher vacancy rates and softening of prices. Inner city fringe townhouse and house market with an owner occupier focus are attracting interstate migration for those wanting more affordability than the southern states. Combined with the improving local economy this will continue to drive prices for consistent growth for the next 3-5 years.
Adelaide’s Property Market
- 3 Year Capital Growth: U 5.5%↑ H 6.4%↑
- Long Term Population Growth: 1.14%
- Unemployment: 6.72%
- Vacancy Rates: 1.5%
- Rental Yields: U 5.1% H 3.9%
- HTW Property Clock: Rising market
CommSec Jan 2018 Market Comments:
South Australia has eased from fourth to fifth on the performance rankings. South Australia is ranked fourth on four of the eight indicators.
Adelaide’s Property Highlights/Lowlights:
If you want a market to dip your toe in early in its opportunity phase, Adelaide could be the market. Low population growth will prevent any major bull run.
Hobart’s Property Market
- 3 Year Capital Growth: U 18.3%↑ H 20.6%↑
- Long Term Population Growth: 0.96%
- Unemployment: 5.63%
- Vacancy Rates: 0.3%
- Rental Yields: U 5.9% H 4.2%
- HTW Property Clock: Rising market
CommSec Jan 2018 Market Comments:
Tasmania now is top-ranked on population growth and is third- placed on equipment investment and unemployment. Population growth is the strongest in 6 ½ years.
Hobart’s Property Highlights/Lowlights:
One of the higher growth markets for 2018 due to super low vacancy rates, population growth and affordability. However, Hobart may be nearing its peak as it can have short cycles as it is lacking in diverse economic drivers that sustain growth. Long term population growth is weak at 0.96%.
Melbourne’s Property Market
- 3 Year Capital Growth: U 23.0%↑ H 50.4%↑
- Long Term Population Growth: 2.56%
- Unemployment: 6.21%
- Vacancy Rates: 2.1%
- Rental Yields: U 3.9% H 2.8%
- HTW Property Clock: Approaching peak of market
CommSec Jan 2018 Market Comments:
Victoria is second on the economic performance rankings in five of the eight indicators: retail trade, housing finance, population growth, construction work done and equipment investment. The lowest ranking is fifth on the unemployment rate.
Melbourne’s Property Highlights/Lowlights:
Strong population growth continues to drive property prices in Melbourne. However rental yields are dismal around 3% and may prove a burden on cashflow for the investor.
Sydney’s Property Market
- 3 Year Capital Growth: U 27.7% ↑ H 31.5% ↑
- Long Term Population Growth: 1.82%
- Unemployment: 4.7%
- Vacancy Rates: 2.6%
- Rental Yields: U 3.7% H 2.9%
- HTW Property Clock: Starting to decline
CommSec Jan 2018 Market Comments:
NSW has secured top rankings on five of the eight economic indicators: retail trade, dwelling starts, equipment investment, construction work and unemployment. NSW is second on economic growth and in third spot on population growth and housing.
Sydney’s Property Highlights/Lowlights:
Still the strongest economy in Australia however housing affordability is now very strained, and the market has begun to cool. Low rental yields and a subdued market offer little return for investors.
Darwin’s Property Market
- 3 Year Capital Growth: U -16.6% ↓ H -11.8% ↓
- Long Term Population Growth: 2.86%
- Unemployment: 3.41%
- Vacancy Rates: 3.5%
- Rental Yields: U 5.5% H 4.7%
- HTW Property Clock: Bottom of Market
CommSec Jan 2018 Market Comments:
The Territory is top ranked on economic growth but now lags all other economies on six of the eight indicators. Employment is now lower than a year ago in trend terms. The good news is that exports are growing strongly, up 35 per cent on a year ago.
Darwin’s Property Highlights/Lowlights:
Improving unemployment and economy are positive. However, still bottom of the current market cycle and maybe too premature to see any significant growth this year.
Perth’s Property Market
- 3 Year Capital Growth: U -12.7%↓ H -9.2%↓
- Long Term Population Growth: 2.82%
- Unemployment: 6.38%
- Vacancy Rates: 4.6%
- Rental Yields: U 4.2% H 3.2%
- HTW Property Clock: Bottom of Market
CommSec Jan 2018 Market Comments:
The economic performance of Western Australia continues to reflect the ending of the mining construction boom. But employment growth was just off the strongest levels seen in five years. And annual population growth has lifted for the past four quarters.
Perth’s Property Highlights/Lowlights:
Excess stock on market needs to be absorbed and unemployment reduced to contract vacancy rates. Still bottom of the current market cycle and maybe too premature to see any significant growth this year.
Conclusion:
Image courtesy of Herron Todd White
With the New Year’s celebrations well and truly behind us, property market predictions and commentary for 2018 have started to dominate the headlines. Investors are left to contemplate these ‘one-size fits all’ predictions and often generic statistics. However, there are different markets doing different things at different times. Sound Property encourages clients to engage accountants, financial planners and mortgage brokers in the process, in order to obtain a holistic view of the investment.
Contact Sound Property to discuss your investor profile and which property markets and strategies will help you achieve your investment goals in 2018.
(*Statistics taken from: ABS Census 2016, SQM Research, Economy ID, Herron Todd White, CommSec ‘State of the States’)
This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.