I am as bullish about the outlook for property markets in Australia now as I have been at any time over the last five years. Affordability, pent up demand from Australians sitting with their hands in their pockets for so long, and renewed focus on infrastructure investment will be the catalyst for a widespread surge in property markets.
I won’t go as far as forecasting a boom however the fundamentals are solid. The 2013 year-end looks like this:
- 60-year low interest rates;
- an increase in home loan activity;
- strong population growth (housing demand);
- tight housing supply due to building approval levels failing to keep pace with demand for 5 years;
- low residential vacancy rates;
- falling stock on market figures across most capitals;
- an increase in buyer activity; and
- a relaxation of credit policy.
History is also on our side. According to longest period of data available from REIA, the average Australian capital city property grew by an average of 7.6% per year since 1997. There were three periods of significant interest rate reductions over this period: 2001, 2009, and right now. As this graph shows, booms followed 2001 and 2009.
Significantly for today’s property outlook, interest rates and unemployment rates are both lower now than they were for the booms of 2001 and 2009 – no wonder we are already starting to see a surge in property values.
Key Influences In 2014
According to surveys by Westpac and Genworth, confidence levels increased after the September 2013 federal election. Improved government efficiencies for project approvals plus continued improvement in confidence generally will lead to an increase in business investment and employment growth towards the back end of 2014.
The jazz word over the next few years will be “infrastructure”, especially transport-related. Funding of such projects is likely to include controversial measures such as government asset sales, industry / retail superannuation funds, private and foreign investment.
Of course, the Asian Century will continue to reshape Australian property markets. The extra 2.5 million Asian people entering middle class between 2010 and 2030 will increase demand for Australia’s agricultural land (watch northern Australia), universities, and new hotels.
The industry which I expect to have the most positive impact on property markets for some years is tourism. Billionaires from all around the world are already looking to build new world class casinos, resorts, hotels and theme parks. ‘Integrated project’ is a term for property investors to get familiar with.
Mining investment is trending down although it will re-emerge before too long. The Chinese economy continues to power along and India will head down a similar industrialisation period before too long. 2014 is likely to yield important project milestones for Indian billionaires, Adani and GVK, in central Queensland’s Galilee (coal) Basin.
Relaxed immigration policy (refer above) has boosted housing demand over the past two years. Australia has returned to the 400,000 annual population growth levels which we saw during the boom years. Housing supply has been steadily falling behind (refer left).
An influx of Asian investors for off-the-plan apartments is already gaining steam in Sydney and Melbourne. Chinese interest in Australian property is as a result of its government trying to curb their over-heated market by capping property investment ownership in their country at two properties and loan-to-value ratios at 60%. Australian FIRB laws prevent foreigners from investing in established property and there’s no shortage of Australian developers trying to lure the Chinese in. I expect this trend to continue, especially in locations where there is already an established Chinese community. Sustainability concerns me.
First home buyer activity should be watched with interest. We know that increases in sale volumes at entry-level price-points drives property prices higher. FHB grants have declined from the 2000-2013 monthly average of 10,952 to an average of 7,676 per month since the turn of the decade. This is because government incentives have been targeted at stimulating the construction industry (new property) as opposed to what FHB’s really want (choice). If initiatives such as FHBs being permitted to draw on superannuation to purchase property or government grants which include established property were introduced we would see greater price growth than otherwise expected.
With the US economy improving, Australian banks have recently increased fixed interest rates. If home loan approvals continue to trend upward the RBA will find it hard not to increase variable rates during 2014, although they will be reluctant to put any pressure on the AUD$.
A review of Australia’s banking sector will take place during 2014. Some of the recommendations which come out of this review will no doubt be important to property investors. We will no doubt be drip-fed information during 2014 before release of a final report in November 2014.
Capital City Outlook (2014-2016)
Sydney’s home price growth since the GFC has been an average of 3.7% per annum, slightly above the national average of 3.05%. While the market was very strong in 2013, high volumes of new apartment sales to Asian buyers was a main driver and I have sustainability concerns as well as questioning resultant changes to the social fabric.
Several major projects will be good for Sydney’s economy. This includes Barangaroo ($6B), Crown Casino ($1.2B), Darling Harbour ($2.5B), WestConnex Motorway ($10B), and North West Rail Link ($8.5B). A second Sydney airport and further sale of state assets to fund additional infrastructure projects will dominate tabloids. I expect Sydney to continue to perform slightly above the national average. Housing supply will continue to be tight, although there is more in the construction pipeline.
Metropolitan Sydney is the most expensive property market in the country and a reason for investors to look elsewhere. The more affordable Western Sydney has high unemployment, crime, and an inefficient transport network. More Australians leave NSW than those who arrive as illustrated in the interstate migration chart below.
The Victorian economy has a high reliance on manufacturing and State Government’s primary strategy appears to be to stimulate the construction industry (as illustrated in this chart) – this persistent over-supply is to the detriment of property investors.
Large volumes of new apartment sales to the Asian buyers is likely to shield what will otherwise be a property market with low yields and below-par performance in general.
Propertyology purchased very few properties in my home town over the last couple of years – there were better opportunities elsewhere (mostly in regional locations).
A high level of engagement with Asia and a ‘How Can We Help You Do Business?’ attitude from the Newman government is resulting in improved conditions.
Queensland is the only state where the unemployment rate declined in 2013. Major projects in Brisbane include $1.1B Moreton Bay Rail Link, $1.4B airport expansion, and $3B RNA development. The CBD will benefit from several projects including the $5B Underground rail project, a new state government office block, hotels, and possible new entertainment / casino precinct.
Brisbane will also attract world-wide exposure from hosting the G20 Summit (2014) and Commonwealth Games (2018). Don’t be surprised if additional demand for accommodation is comes from an in increase in people migrating from other Australian locations for Brisbane’s lifestyle, affordable housing, and employment opportunities. Housing supply is quite tight and pressure is already starting to build. Of all of the capital cities in Australia, Brisbane will perform best.
Adelaide is officially Australia’s most liveable city and home to 76% of South Australians. Key industries are defence force manufacturing, motor vehicle manufacturing (which is on life support), and agriculture (not a major employer).
Development projects in Adelaide’s inner-city include a new hospital, redevelopment of the Adelaide Oval, and entertainment precinct. While housing is very affordable there is considerable new supply of new apartments. Adelaide’s property market is like its economy – uninspiring. Unless major job creation projects such as Olympic Dam are announced Adelaide’s property market will continue to perform below the national average.
Over the last couple of years Perth’s property market mirrored the State’s iron ore activity. Growth in wages, employment, and record population created more demand for housing than could be supplied.
As mining projects wind down skilled labour has become more readily available for WA’s construction industry. Combine this with recent building approval and land supply data and it would appear that housing supply is set to increase significantly. Perth has the most active first home buyer market in the country, meaning reduced demand for rental accommodation and a rise in vacancy rates.
While there have been job losses in WA’s mining industry Perth’s economy is still buoyant due to an unprecedented level of major projects. This includes hospitals, highways, casino expansion, entertainment and sport precincts, railway and airport upgrades, and inner-city revitalisation. There is a lot to like about Perth although housing has become very expensive. Perth’s property market will be firm, although not spectacular.
The Nation’s capital has a very high reliance on government employees (politicians, military training bases, federal police academy). The incoming federal government has flagged the possibility of up to 12,000 job cuts and it stands to reason that a significant portion of these will be in Canberra. On the supply side, the construction pipeline is growing. Canberra’s property market will perform below par for the foreseeable future.
Darwin has been Australia’s best performing capital city over the five years with an average change in median values of 7.24%. Demand for additional accommodation has come from major projects such as the Icthys LNG plant, a marine supply base, and correctional facility.
To address its very expensive housing the NT government has an accelerated land release strategy and housing supply is likely to work against the property investor grain. While its geography will lend itself to Asian-related projects a big segment of Darwin’s population is transient and I have concerns for the sustainability of Darwin’s property market.
Hobart’s recent economy is summed up by its incredibly high unemployment rate of 8.1% and some of its youth are therefore heading to the mainland. Most commentators have been very critical of Hobart’s property market.
There are opportunities for economic growth through tourism, agriculture, and science and housing is very affordable. I have an open mind on Hobart.