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How Much Price Growth Is Left For Hobart?

How Much Price Growth Is Left For Hobart?
June 24, 2019 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

You could imagine how many times we’ve been asked “…how much longer has Hobart’s growth cycle got to run?”

After identifying Hobart’s potential before anyone else and putting our money where our mouth is from early-2014, Propertyology stopped investing there in mid-2016, just as the herd arrived.

Propertyology’s investor clients have seen their property asset increase in value (so far) by 50 per cent or more, plus market conditions are such that rents (investor income) have increased by circa 25 per cent. There is no question that Hobart has been Australia’s best-performed property market over the last five years.

One certainly couldn’t complain if the run did end now.

We can’t give a definitive answer as to when the growth cycle for Hobart real estate will come to an end – if only there was such a thing as a crystal ball so. My assessment of conditions makes me believe that Hobart real estate prices still have petrol in the tank.

But beware of a select few Hobart disbelievers who continue to produce negative spin and factually incorrect statements. I prefer to focus on trying to interpret the collective sum of key metrics.

Property Market Performance

The headline capital growth rate (Greater-Hobart) confirms a 33.4 per cent increase in median house prices over the 5-years ending February 2019.
More than any other capital city, the variation in market performance from one part of Hobart to the next is extreme. Of the seven city councils which make up Greater-Hobart, investors who purchased in Brighton (the outer northern suburbs) would be filthily disappointed with their measly 6 per cent growth over the last five years whereas investors in the municipalities of Clarence (41.4 per cent), Kingborough (44.7 per cent), Hobart City (50.5 per cent) and Glenorchy (52.1 per cent) would be elated.
The cream on top of that great capital growth is the 25 per cent rental growth, creating a cash flow positive situation for those who got into the market at the beginning of the current cycle.

Growth Cycle

Growth cycles occur when a larger than normal critical mass of buyers transact in property.

One needs to bear in mind that buying property is a transaction that most people don’t perform very often (an individual property generally changes hands every 7 to 10 years). So, contrary to the hotspot and property boom rhetoric that property marketeers carry on with, an individual city or town generally only sees a growth cycle once every 8 to 15 years.

Market forces within each individual location will always vary but, generally speaking, once a growth cycle ends that market is likely to run relatively flat for several years. For example, at the end of Sydney’s second last boom the 2004 median house price ($490,000) only increased by a cumulative 14 per cent over the following seven years (to $557,000).

The below chart shows that long periods of relative flatness is common after a boom.

When growth cycles do occur, they generally last only 2 to 3 years before either the construction industry rebalances the market with extra supply, local economic conditions diminish, or large masses of the local buying public can no longer afford the price to enter that market.

In some rare occasions, a growth cycle may run four years, as we saw recently in Sydney and Melbourne.

Hobart has now seen three (3) very strong years so it’s safe to assume that it’s currently in the back half of its cycle. But are we a couple of months or a couple of years away from the end?

Current Market Signs

There’s no doubt at all that the rate of price growth slowed considerably in Hobart throughout the course of the 2018. But the same can be said for most of Australia.

On face value, the latest CoreLogic headline rate (Greater-Hobart) for median house prices might suggest that Hobart’s growth cycle is already over. But closer analysis of the data confirms that four of Hobart’s seven municipalities are currently running at the (annualised) pace of between 8 and 14 per cent.

Macro factors such as the tightest credit policy conditions in Australian history, federal election campaigning that threatened increased property taxes, and a general negative media tone (refer Sydney-Melbourne downturn) suppressed the potential of every property market in Australia over recent times.

Early this year, I went on record saying that I felt APRA’s unreasonably tight grip on credit supply had the effect of taking between 5 and 7 per cent off the otherwise potential growth of every location in Australia.

Fortunately, those major growth suppressants largely dissolved in late May with a re-elected LNP government (meaning no new property taxes), APRA agreeing to loosen the credit belt a little bit, and the RBA cutting interest rates for the first time in 34 months.

In an already active buyer market, I believe that May’s trifecta of good news for Australian property markets will provide Hobart with a second wind. Allow me to explain why.

Vacancy Rates

One of the many laughable comments made by Hobart disbelievers is that [paraphrasing] “… the main thing which has driven price growth in Hobart over recent years is a heap of investors buying cheap property…” The evidence certainly doesn’t support those claims, but it’s only one of many factually incorrect statements made by so-called experts.

If such a high portion of property transactions were carried out by investors there would be a big increase in the amount of rental stock, rising vacancy rates, and softening rents. While that’s exactly what has unfolded in Sydney over recent years, the opposite has occurred in Hobart.

An all-time record low vacancy rate is one of a few reasons why I believe there’s still petrol in Hobart’s property market tank. Logic suggests that some Hobart tenants will extricate themselves from paying those rising rents and become homeowners, thereby placing upward pressure to asset values.

Housing Demand

In a nutshell, the initial cause of Hobart’s property boom was the remarkable improvement in the State’s economy that began in 2014. The extra jobs led to an increase in local buyer confidence and improved buyer financial capacity.

When those same economic conditions are combined with affordable housing and a lifestyle which is growing in popularity, a significant swing in internal migration occurs, as illustrated in this chart.

The Tasmanian government is campaigning to encourage more people to leave the mainland, especially really expensive and congested cities like Sydney and Melbourne. A continuation of solid internal migration is another reason why I believe there’s more price growth to come for Hobart real estate.

Whilst a typical house in Hobart has increased in value by circa 50 per cent over the last five (5) years, the cost of housing in Hobart is still affordable in relative terms. According to Core Logic data, as at December 2018 there are 39 other Australian cities and towns with a higher median house price than Hobart.

Related article: Australia’s most expensive cities

Some questions have been recently asked about Hobart’s economy, presumably as a result of Tasmania’s unemployment rate beginning an upward trajectory in the back half of 2018.

Those who understand what has been driving Tasmania’s economy and the many good things in the pipeline will have very little concern about the outlook for Hobart’s economy.

For the year ending March 2019, Tasmania was ranked first for growth in State Demand, second for wage growth and third for growth in retail trade. Importantly, Hobart is also streets ahead of every other capital city for growth in job advertisements, a leading indicator for near-term economic growth and a helpful metric for property price growth.

Some of the biggest projects that are in Hobart’s pipeline include a recently committed City Deal (a major federal and state government project), further expansion of the airport (look out when Hobart commences direct international flights), a few new luxury hotels, some serious investment in new infrastructure by University of Tasmania, and an exciting vision for Macquarie Point.

Housing Supply

For as long as humans have needed a roof over their head, the response from the construction industry to any strong property market has always been to make as much hay as possible while the sun is shining. Hobart will be no different to any other city on the planet.

Building approval volumes have increased in Hobart over the last two years, meaning there’ll be more new properties completed over the next two years than normal. But Hobart’s population growth has increased at a higher rate than the supply pipeline. And I remind you of that all-time record low vacancy rate.

I fully expect building approval volumes to continue to accelerate in Hobart – frankly, it’s essential!

But the columns within Hobart’s building approval chart are nothing like the enormous towers within a comparative building approval chart for several mainland capital cities (over-supply is a significant contributing factor of Sydney’s property market downturn).

One of the reasons that housing supply hasn’t managed to catch up with demand is the community’s (understandable) determination to protect what makes Hobart such a beautifully special place by resisting high rise apartment construction – 5 or 6 storeys is ‘high’ for Hobart.

An inability to develop upwards means that most new supply must be in the form of sprawl in the outer suburbs. But that has some geographical hurdles that came by the name of ‘Mount Wellington’ and the ‘Derwent River’.

The municipality of Brighton is the most logical target for property developers and that’s a key reason why Propertyology’s buyer’s agents completely avoided investing there.

Whilst Propertyology stopped investing in Hobart three (3) years ago to focus on several other locations across Australia (refer here), that doesn’t mean that other investors won’t still see potential in Hobart.

Hobart is the only capital city in Australia where one can buy a solid 3-bedroom house within 6-kilometres of the CBD for $450,000 or less.

In addition to thousands of investors now having the confidence to jump off the (post-election) fence, the federal government’s 5 per cent deposit initiative for first home buyers will also increase buyer activity. Interest rate cuts plus APRA’s credit policy changes will improve buyer’s capacity and breath oxygen into the property market of Hobart, and every location in Australia.

And rental yields in this popular university city are still the best in the country!

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