Property market outlook, boom conditions

Property market outlook, boom conditions
December 13, 2018 Simon Pressley

The fundamentals contradict the fearmongering! There’s a growing list of influencing factors which collectively equate to the strongest property market outlook that many parts of Australia have seen for more than a decade.

Property markets in parts of regional Australia have already experienced property price growth of boom proportions during 2018 and we expect that to continue for some years yet. Once common sense prevails and APRA allows the return of sensible credit policy (which it will before too long), there’s every chance that some capital city markets will see double-digit growth, too. That may be as soon as 18 months from now!

 

Beware what consensus says

Yes, I fully appreciate that what you’ve just read completely defies the current consensus.

One would be wise to never rely too heavily on the consensus view of property because it’s almost always shaped by just TWO cities (when, in fact there are 175 Australian towns and cities which each have a population of 10,000 or more). The consensus view is also based on the here-and-now and with an apparent lack of understanding of how underlying fundamentals might shape things just over the horizon.

History is littered with masses of people following the consensus when making important property decisions only to subsequently realise that things looked a lot different a year or two later:

  • 2012 – 8 out of 8 capital city property markets declined during 2011 so the consensus in 2012 was very much doom-and-gloom. 18 months later, Sydney and Melbourne were in a full swing property boom. Those who benefitted most defied consensus and purchased in 2012;

 

  • 2014 – Tasmania had been in recession for a few years, the state’s unemployment rate was 2.4 percent above the national average, and the consensus had absolutely nothing positive to say about Hobart’s property market. Those of us who took the time to objectively analyse Hobart’s fundamentals identified significant upside that led to a growth cycle which has, so far, produced 60 percent capital growth and a 25 percent increase in rent;

 

  • 2016 – the consensus view during the middle of Sydney and Melbourne’s boom was that population growth would always be too strong for those cities to ever become over-supplied. 18 months later and falling property prices is the reality;

 

  • 2017 – forever guilty of gross generalisations, the consensus view was that regional Australia had a weak economy and no real prospect for property price growth. Now, as we draw a close on the 2018 calendar year, the fact is that an extra 200,000 jobs have been created in regional Australia over the last 2 years and that property markets are streets ahead of capital cities.

Fundamentals of a potential boom

Step ONE – remove Sydney, Melbourne and Darwin from your mind. It will be several years before new growth cycles commence in these three cities.

Step TWO – remember that large parts of Australia, including several capital cities, have seen very little price growth since way back in 2007. They are well overdue for growth!

Step THREE – block out the noise and think about these underlying fundamentals:

 

  1. Australia has now created an additional 300,000+ extra jobs in two consecutive years. That’s big!

 

  1. Regional Australia created an additional 200,000 jobs over the last 2 years.

 

  1. Our unemployment rate has consistently been falling for some time and is now a very low 5 percent.

 

  1. With pressure continually building on the supply of labour, there are (finally) early signs of wage growth starting to appear. History tells us Australia’s biggest property booms had strong wage growth.

 

  1. The Federal Budget will fall in to surplus during 2019 for first time in a decade. Given the post-GFC global economic challenges, that’s a considerable achievement for the national economy. Doom and gloom?

 

  1. As recently as November, Reserve Bank Governor, Philip Lowe, said “…On many accounts, the Australian economy has performed very well over recent times. Over the past year it has grown by close to 3½ per cent, inflation has been low and stable at around 2 per cent, employment has grown quite strongly, and we are getting closer to full employment. Business conditions are positive and government finances have improved and are in reasonable shape. There is a lot of investment in infrastructure taking place and the number of job vacancies is at a record high. So, overall, it is quite a positive picture.”

 

  1. Housing supply is quite tight in 5 out of 8 capital cities and a very high proportion of non-capital city locations (and is likely to tighten further).

 

  1. Vacancy rates are low and continually tightening. We believe that rents are likely to increase in many locations at rates that will be higher than seen in a decade.
  1. Australia’s population growth will continue to increase at more than 350,000 people per year. Propertyology anticipates that the disbursement of future population growth in future years won’t be as concentrated in Sydney and Melbourne.

 

  1. The world-wide tourism boom has no end in sight and, last year, resulted in international visitors spending $42.5 billion in Australia. Tourism-related businesses right across Australia continue to expand and there’s now a pipeline that totals 213 new tourism projects worth a combined $44 billion.

 

  1. Free Trade Agreements and the TPP that Australia has recently signed with several large countries will progressively result in $10’s billions in extra revenue and tens of thousands of new jobs. Even at this early stage, we’ve already seen major infrastructure project announcements such as airport expansions and the Inland Rail Project to capitalise on the revolution known as the Asian Century. Glass half full!

 

  1. World demand for commodities such as iron ore, coking coal, gold, copper, thermal coal, gas, lithium and others is driving a new wave of increased mining production that includes a $75 billion project pipeline in Western Australia and similarly exciting prospects in Queensland. Get in the game, folks!

 

  1. Australia’s international student market continues to expand rapidly, last year generating $34 billion for the Australian economy (up 17 per cent).

 

  1. The roll out of the Federal Government’s 10-year $290 billion defence force manufacturing contracts is now under way. Jobs, jobs, jobs!

 

  1. Most economists aren’t anticipating any increase in the RBA cash rate until (at least) mid 2020. There’s some chance of interest rate cuts in 2019.

 

  1. The global economy is in much better shape now than what is was five and ten years ago.

 

  1. The innovative and competitive loan products offered by many non-bank lenders provide property investors with viable alternatives to the bigger profile banks which proved to be (unreasonably) conservative during 2018.

 

That’s a long list of big-picture, positive stuff which, collectively, paints a very bright future. Believe the doom and gloom reporting if you wish. But I’m telling you that there will be locations that experience a property boom over the next few years!

The flick of a pen

Property price fluctuations are determined by buyer behaviour. Housing affordability, a strong (or improving) local economy, and local consumer confidence are the main drivers of demand for property.

During 2018, on the back of discoveries from the Banking Royal Commission (BRC), there were an abundance of would-be property buyers who had their dreams quashed by the inability to get finance approved (first home buyers, renovators, upgraders, downsizers, small business owners, and investors).

It’s Propertyology’s view that, in 2018, APRA’s credit tightening created a drag on property prices, nationally, of between 5 percent and 7 percent. In other words, if not for APRA, Sydney’s 9 percent decline in 2018 would have been only 1-2 percent, Melbourne’s 5 percent decline would have been growth of 1- 2 percent, Hobart’s 10 percent growth would have been in the high teens, and so on.

But, let’s be crystal clear about this. Australian banks DO NOT have a shortage of funds, the vast majority of loans approved over the last decade were of acceptable standard, home loan arrears and foreclosures remain at very low levels, and our economy is solid (refer above). The credit squeeze is self-inflicted!

We didn’t have a problem with credit policy per se; the problem exposed by the BRC was one of compliance.

The availability of credit is an essential component for progress with infrastructure needs, business expansions, home ownership, financial independence, and the broader economy. Sanity will eventually prevail, and the supply of credit will return to sensible standards. The future health of the Australian economy depends on it. A flick of the APRA pen is all that it takes!

Until then, logic suggests that approval of credit is more likely for more affordable properties.

 

Conclusion

Calendar year property market forecasts are a bit like New Year’s resolutions – we shouldn’t need a date on a calendar to remind us about making important decisions. This is particularly relevant to property investment decisions.

Those who can afford to invest but fail to act will rue the lost opportunity the closer they get to retirement!

All good financial decisions are made by looking beyond the next 12 months, by appreciating that market conditions will always be very different from city to city, by analysing the fundamentals of each market (as opposed to reacting to the ‘noise’), and by investing in a market in anticipation of growth cycles commencing in the near term.

As for 2019, Hobart is (again) a no-brainer as the capital city expected to perform the strongest. Property prices will decline in Sydney and Melbourne however, the rate of decline will be influenced most by how soon APRA uses that aforementioned pen.

2019 Forecast Change in Median Dwelling Values
  Scenario #1 

No change by APRA

Scenario #2 

Return to sensible credit policy during Q1

Scenario #3 

Return to sensible credit policy during Q2

Adelaide -1% to 2% 2% to 5% 0% to 3%
Brisbane 0% to 3% 3% to 6% 1% to 4%
Canberra 0% to 3% 2% to 5% 1% to 4%
Darwin -7% to -10% -6% to -9% -6% to -9%
Hobart 4% to 7% 7% to 10% 5% to 8%
Melbourne -5% to -8% 0% to -3% -4% to -7%
Perth 1% to 4% 4% to 7% 2% to 5%
Sydney -7% to -10% -3% to -6% -6% to -9%

 

I couldn’t rule out somewhere close to double-digit annual price growth in Brisbane and Adelaide over the next 2 to 3 years. And, conditions in Canberra still look solid (although steer clear of apartments).

Don’t be fooled by the 2018 price fall of 2 per cent in Perth. A large portion of its former over-supply has been absorbed, vacancy rates have reduced from 6.9 percent to 3.3 percent over the last two years, and expectations for new job creation is now high. In 2 or 3 years from now, Perth may well be Australia’s best-performed capital city.

The best opportunities for the foreseeable future are in locations outside of capital cities where housing is more affordable, annual cash flows are stronger, housing supply is tight, and economic conditions are good.

As we’ve already seen during the last couple of years, double-digit price growth will occur again in 2019 and beyond in many regional locations. But remember, don’t expect the consensus to come up with the right answers as to exactly where to invest.

 

Propertyology is a Brisbane-based buyers agency and (national) property market research firm. Our multiple-award-winning business is currently helping everyday people to invest six locations across four different states. Like to know more? Contact us here.

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