2019 really has been one of contradictions for Australian real estate. The year began with a Banking Royal Commission, it seemed that banks were not allowed to approve loans for anyone, Australia’s biggest property markets (Sydney and Melbourne) appeared to be in free-fall, and there were dire predictions about property markets generally because of a (then) anticipated change of federal government.
Lest we forget, 6-months can be a long time in real estate. In the words of Warren Buffet, “…things are never as good nor as bad as they seem.”
In the second half of 2019, banks started lending money again, the RBA cut interest rates three times, and the median dwelling value in all bar one capital city (Darwin) is now trending north. Who would have thought?
As with every single year, numerous non-capital city locations well and truly outperformed the capital city average, even though the majority of Australians continue to remain oblivious to the real world of real estate.
Related article: Double-digit growth right now
But the thing is, the 2019 mid-year momentum change in Australian property markets was triggered by the stimulus of three interest rate cuts – the first RBA movement for three years.
One must also not underestimate the very real likelihood that Sydney and Melbourne’s strong rebound were partly attributed to the drop in the AUD$ (from 0-72 in January 2019 to 0-68 in December).
While a quick burst of sugar on occasions doesn’t hurt anyone, we all know that sugar is not a sustainable energy source.
Those contemplating participating in 2020 property markets would be wise to focus on the fundamentals of a balanced diet. Within a year or so, these current stimulatory policies will be gone, and Australia’s best performed property markets will be the ones that always had the strongest fundamentals.
There is nothing orderly about Australian property markets right now. Wild swings from a deep downturn to sudden strong growth is the definition of an unstable market. The external interferences of major policy changes over the last few years have been significant, and one suspects there’ll be a couple more.
Given the significant policy disruptions, I consider it to be a completely futile exercise to attempt to forecast actual rates of property price growth for 2020. But anyone who buys property based on the potential of a one-year result is in the wrong game anyway.
Generally speaking, the outlook for Australian real estate is as clear now as it has been for many years. Propertyology forecasts growth in median dwelling prices over the next five years to be superior to the last five years and more widespread, as opposed to being concentrated on a select few locations.
Boardroom discussions within the business sector and each level of government mostly revolve around capitalising on growth opportunities. And the foundation to launch growth strategies is strong in many respects.
But big-picture thinking and patience have never been a strong suit of the general public. They have always focused on the here and now and have an apparent inability to analyse the decisions of today and how they might affect the future.
So, let me remind everyone that auction clearance rates and changes in median dwelling values are outcomes (currently driven by a sugar-fix), they are not fundamentals!
There is a fork in the road right in front of us. While both roads might appear to be smooth, there’s actually a narrowing of lanes just around the bend of one road. The other road appears to offer a much smoother run to the destination.
For help in deciding which road to take, one would be wise to pull out the map and reflect back on 2009 and 2010. Therein lies a recent template for the impact of stimulus on property markets and the importance of objectively reviewing market fundamentals before making real estate decisions.
The current stimulus measures (RBA rate cuts, fast-tracked infrastructure spending, and tax cuts) is in response to Australia’s self-inflicted political and economic train wreck of 2015 through to mid-2019. The stimulus measures of 2009-10 were in response to a global train wreck referred to as the 2008 GFC.
The strong (largely across-the-board) rebound in Australian real estate prices from the 2009-10 stimulus is likely to be repeated in 2020. But the smart decision-makers of today will be looking beyond 2020 and trying to figure out which Australian property markets have the best potential post-stimulus.
You see, once the GFC sugar-fix wore off, 8 out of 8 capital city property markets declined in value in 2011 and 5 out of 8 declined again in 2012. The markets which subsequently went on to become the best performers were ones which hadn’t seen much price growth during the pre-GFC years, their housing supply had been tightening throughout all of those lean years, and (then) price growth occurred through improved local economic conditions.
Related article: How to use the Property Wheel
Back then, the markets which had those key fundamentals included the likes of Sydney, Melbourne, Hobart, Orange, Byron, Geelong and Newcastle. This time around, it will be completely different property markets.
Property Market Fundamentals – Capital Cities
The best chance of correctly predicting which Australian locations will perform best beyond the 2020 sugar-fix first requires an ability to completely disregard one’s personal confirmation bias.
What one might want to happen will have absolutely no bearing on what will happen.
Life’s best decisions can’t be made without blocking out the noise and focusing on the important facts. Specific rates of price growth in 2020 aren’t the point – what will be will be – look past the sugar-fix and interpret what the fundamentals say.
|Housing Supply||Demand||Property Market Cycle|
|Vacancy Rate **||Building Approval Pipeline||Economy ^^
[GDP growth, wage growth, retail trade growth]
|Leading indicators ##
[job ads, credit growth]
|Population Growth ~ ~|
|Adelaide||0.8%||Above average||GDP 0.4%
|Job ads -3.0%
|0.8%||Last growth cycle ended pre-GFC|
|Several years of soft economic performance has resulted in below par property investment activity and low rental supply. Adelaide rents are currently under pressure, but the overall demand for housing isn’t. Opportunities for economic development exist within tourism, agribusiness, science and defence however, there’s very little in the way of concrete decisions to immediately get inspired by.|
|Job ads -8.1%
|2.1%||Last growth cycle ended pre-GFC|
|Housing supply has tightened in recent years and Brisbane is Australia’s biggest capital city beneficiary of internal migration. While the cost of housing is relatively affordable, Brisbane’s property market has produced very little since way back in 2007 and current buyer activity continues to be soft. Over more than a decade, the state’s unemployment rate has been above the national average, the deep economic hole includes the highest state government debt in Australia and the most bloated public sector workforce. There’s an obvious lack of confidence for private sector investment to ramp things up. 2020 will be dominated by commentary of the (October) state election.|
|Canberra||1.0%||Above average||GDP 2.7%
|Job ads 9.0%
|2.2%||Existing growth cycle started 2015|
|Along with its economy, Canberra’s property market has already been a solid performer for a few years. Professional services, international students and tourism have been good contributors to a local economy that has performed better than what most expected. Housing demand is likely to remain strong, although one should exercise caution with apartments. There is an election in October 2020.|
|Darwin||3.1%||Below average||GDP -13.2%
|Job ads -20%
|-0.2%||Current downturn started 2015|
|Australia’s Top End capital city has so much potential yet so little support. The local economy is so concerningly weak that the city is now losing population. Other than rental yields being strong, there’s (sadly) currently nothing positive to say about Darwin’s property market outlook. There is an election in August 2020.|
|Job ads 3.5%
|1.5%||Existing growth cycle started 2015|
|Hobart (still) has a dire shortage of rental supply. Tasmania ended 2019 as (officially) Australia’s fastest growing economy and its outlook is for more of the same. Internal migration continues to accelerate. Hobart still has the best overall property market fundamentals of all Australian capital cities by a sizeable margin. Growth in both property prices and rents will continue.|
|Melbourne||2.0%||Above average||GDP 1.9%
|Job ads -8.2%
|2.5%||Last growth cycle ended Dec 2017|
|Firm||Rising||Firm||Easing||Strong||Currently sentiment driven|
|Melbourne’s economy remains strong and, while there aren’t any alarm bells, there are a few recent metrics suggesting that its economy is easing. Future job losses in the construction sector are most likely. The rate of internal migration is already tapering, and I anticipate that trend will continue. The high volume (and quality) of apartment supply is a concern.|
|Job ads -1.7%
|1.0%||Current downturn started 2015|
|Property prices in Australia’s fourth largest city are the same today as 10-years ago. The property price growth which I thought Perth might start to see during 2019 did not materialise and is perhaps an indication that, although its economy is (slowly) improving, buyer confidence remains low. Internal migration is still in decline although the rate of decline is easing. Perth rents are starting to come under some pressure. 2020 will (finally) be the year that Perth property owners can enjoy some mild value appreciation.|
|Sydney||3.1%||Above average||GDP 1.3%
|Job ads -13%
|1.8%||Last growth cycle ended July 2017|
|Firm||Falling||Easing||Easing||Strong||Currently sentiment driven|
|2019 saw Sydney residential vacancy rates break an all-time record high (there were 22,300 unrented dwellings in Nov-2019). Sydney’s economy is likely to remain healthy in 2020, but the future trajectory is more likely to be downward than upward, particularly for the construction sector. As economic conditions improve elsewhere in Australia, I anticipate a further increase from the 27,434 residents that migrated away from Sydney last year.|
|** Vacancy rates as at Nov 2019 (SQM Research), ^^ State economy as at June 2019 (ABS), ## Leading indicators include credit growth QE Sept 2019 and Job advertisements YE Oct 2019, ~~ Population growth rate for 2018 FY|
At the time of writing this report, the most current ABS economic data was for the quarter ending September 2019. Those results confirmed strength in the ACT and Tasmania, conditions were softening in Victoria and New South Wales, and economic conditions elsewhere were weak.
Now, while you’ve all had a chance to dissect the abovementioned fundamentals and draw your own conclusions as to which property markets have the best outlook, let me remind you that you’ve merely reviewed some important metrics for just eight (8) locations. In the overall scheme of things, you’ve assessed the school exam results of a small handful of children from a school of hundreds.
Across all of Australia’s states and territories, there are an additional 178 towns and cities which each have a population of 10,000 people or more. History is proof that the best performers often aren’t among the capital cities. So, one who invests in Australian real estate without analysing the fundamentals of all options is accepting the very high odds that they want do anywhere near as well as they could.
This time three years ago, most wannabee property investors looking to enter the market followed the sheep and invested in either Sydney, Melbourne or Brisbane. For the record, the median house price over the last three years increased by 2.4 per cent, 12.8 per cent and 8.3 per cent, respectively.
Just imagine if those same investors removed the blinkers and gave themselves a proper chance of performing well. The official best-performed market was Glenorchy (40 per cent), while some other absolute stand outs include Bass Coast (37 per cent), Macedon Ranges (35 per cent), Snowy Monaro (34 per cent), Baw Baw (30 per cent) and Geelong (29 per cent).
Orange (23 per cent), Launceston (22 per cent) and Burnie (21 per cent) also did very well over the last three years and I think still have plenty of strong miles left in their legs.
Byron, Coffs Harbour and Griffith (all 19 per cent), Wangaratta and Mildura (16 per cent), Ballarat, Bathurst, Latrobe, Campaspe, Newcastle, Maitland, Sunshine Coast, Lismore and many more non-capital city locations all performed significantly better over the last three years than the same old three-ponies of Sydney, Melbourne and Brisbane.
In spite of all the noise, below is a healthy set of credentials:
- At a federal level, 2020 looks like being Australia’s most politically stable year since the Howard-era (ended 2007). Such stability is important for consumer sentiment,
- An unemployment rate under 5.5 per cent is very healthy,
- Infrastructure spending is ramping up,
- Australia has its first current account surplus in 40 years, its lowest welfare dependency in 30 years, the biggest tax cuts in 20 years, and a federal budget surplus for the first time in 11 years,
- Australia’s export sector (agriculture, tourism, international students, mining) has an exciting future,
- Household budgets are recent beneficiaries of tax cuts and significant reductions to mortgage costs,
- Australia remains a global leader in the population growth ranks,
- Housing supply in large parts of Australia (although not all) is much tighter than many realise,
- Very low (and falling) residential vacancy rates in large parts of Australia – particularly regional Australia – is already placing significant pressure on rents, thereby creating high yields and strong cash flows for property investors,
- The national first home buyer scheme kicks off in the new year (raising demand through increased buyer activity), and
- The cost of borrowing money is dirt cheap.
Some Potential Concerns
While conditions overall are solid, perfection never exists. Never!
There is some talk of Australia’s unbroken record of 29-years of economic growth coming to an end. While I do agree that there is an outside chance that Australia could produce two consecutive quarters when the national economy does not grow (the technical definition of ‘recession’), I feel (significantly) less concerned about Australia’s economic future now than one or two years ago.
In any case, if there’s one thing that studying Australian real estate history has taught me, it’s that economic conditions at an individual town / city level (as opposed to broad-brush national conditions) will always have the biggest influence on local property markets. We saw proof of that during Australia’s 1991 recession and the Global Financial Crisis.
Related article: Property prices grew during last recession
Here’s a few top-end-of-town things which will have some influence on property markets in all locations:
- Wage growth in Australia has been weak for several years. While gross household incomes generally haven’t increased much, take-home salaries have increased through recent cuts to interest rates and personal tax rates;
- Consumer spending is soft. This is partly related to wage growth and more so a general lack of confidence. I anticipate that the recent commencement of stimulus initiatives will produce the desired outcome in time;
- National building approval volumes were in sharp decline during 2019 and I anticipate this trend will continue in 2020. While that’s not good for construction-related jobs and government revenues (property taxes), the knock-on reduction in housing supply will in increase pressure on property prices for years to come;
- Most Australian states have experienced significant drought (and bushfires) recently. Understandably, this is having an effect on confidence and economic conditions within effected communities. While no one can make it rain, we know that it will happen. Droughts have occurred many times during Australia’s history and recoveries can be swift and strong;
- Global tensions (refer China and US) have already adversely affected trade volumes, including in Australia. At the time of writing this report, there were some signs of a reconciliation,
- Politicking from some powerful union groups pose some threat to disruption within Australian businesses, lost productivity, and potential resistance from the private sector to expand their workforces if environments get too hostile.
On several occasions over the last four years, Propertyology has been on record saying that self-imposed credit tightening policies would significantly reduce the volume of money running through Australia’s economic ecosystem and result in harm to the broader economy.
While we are now consistently seeing a range of economic metrics supporting our earlier forecast, the fact that APRA has finally relaxed credit policy (in June 2019) gives us confidence that the economic recovery will occur before too long. Macro policy settings have changed direction, from containment to expansion.
Things To Watch
Drilling down to factors which I think will have a positive influence on certain individual property markets, here’s some things to sharpen the microscope on:
- Existing Australian residents are shifting away from the big and expensive cities and towards better quality lifestyles, affordable housing, and improved economic conditions. One such example is Hobart, but there are dozens more. The internal migration shift is real and it will not be a passing fad,
- Expect to hear more about initiatives to reduce big city pressures and accelerate regional economic development. The federal government’s recent immigration policy change is one such example,
- The incredible opportunities for investors in various parts of regional Australia is not only real but super exciting. Here’s an example of a recent purchase added to my own property portfolio,
- Tripartite agreements between federal, state and local government in the form of strategically-chosen City Deals is one of many clues for leading economic indicators,
- This really big Land Down Under is home to lots of goodies that other parts of the world want more and more of. Exports has always been Australia’s strongest suit. We are still in the very early stages of the Asian Century middle class expansion and Australian businesses are really starting to ramp up (job-creation) plans that take advantage of several Free Trade Agreements that were signed a few years ago,
- New dams and irrigation projects are not only important for drought and flood proofing Australian communities, the improved water security is a key ingredient to realising Free Trade potential. It is a money trail worth following,
- Renewable energy isn’t a passing fad either. Logic suggests that there’ll be more projects developed each and every year, creating improved economic conditions within targeted communities,
- Several states are reviewing residential tenancy legislation changes. Any potential changes aren’t likely to directly impact property values, but they do have significant potential to affect relationships between tenants and landlords along with have an influence on rental supply and the cost of rents, and finally
- One would be wise not to forget that Australia is one large sandpit containing a wide range of valuable natural resources beneath the surface. The industry cycle is again in upswing.
Here’s a sample of Propertyology’s work for an everyday Aussie investor:
A Few DON’Ts
- Don’t put all of your investment eggs in to one location basket,
- Don’t invest in anything off-the-plan,
- Don’t invest in and around new greenfield estates,
- If you want to have some chance of achieving better than average rates of capital growth, avoid all high-rise apartments,
- Don’t confuse generalist commentary about national conditions (good or bad) with the actual conditions in individual cities and towns, and
- Don’t allow personal confirmation biases to get in the way of objectively analysing fundaments in every market in Australia.
Related article: Australian real estate’s equivalent of Bubonic Plague
Some Important DOs
- Spend some time early in the new year to set financial goals for the year ahead. You’ll be thankful in years to come that you did,
- There’s never been a situation in our lifetime that borrower interest rates (investment expense) were so much lower than rental yields (investment income) like we have right now. And it seems increasingly likely that the RBA might cut again in February-March. This means that, even with a very small deposit, the annual cost to hold an investment property is near zero. Whether using cash or equity in existing property, do something proactive for your future and get in the game,
- Remove the blinkers. The consensus always lack imagination and are more often wrong than right. For example, this time 6-years ago Western Australia was the strongest state economy while Tasmania was the weakest (it was then in recession), but only those who dug beneath the surface discovered the changing fortunes.
Which takes me right back to the fork in the road that I referred to earlier. Don’t be fooled by what you can see along that short stretch of road ahead of you; looks can be deceiving.
There are opportunities aplenty in this big Land Down Under. History has taught us that those who follow the herd rarely end up in the best paddock.
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