Read Time: 10 minutes
Daylight savings has ended and I’ve made a promise to eat no more Easter eggs. It can only mean one thing, we are now in April and it’s time to review the first quarter of the Australian property market.
You’re undoubtedly keeping up to date with the news headlines. The Turnbull Governments abolishment of the 457 visa, 17 straight wins for Winx the super-mare and the Australian property bubble that is or isn’t going to burst.
Search ‘Property Bubble’ in any Australian newspaper and you’ll be inundated with articles. The Sydney Morning Herald has close to 90, the Australian Financial Review more than 80 - in the last three months alone - that's almost an article a day in each paper. The economy is largely driven by business and consumer confidence, which the media have the ability to influence.
Let’s take a look at what the data is telling us and how each capital city and territory is tracking.
Sydney, as we thought it would, is still a very hot market and isn’t appearing to cool down.
Capital Growth: 2016 saw an increase of 15.5%, a further 5% has been added in the first quarter (January 1.0%, February 2.6% and March 1.4%) for all dwellings
Gross Rental Yield (Houses): At the end of the first quarter is at a low of 2.7%, having stayed steady throughout January and February at 2.8%
Combined Rental Vacancy Rates: Have remained fairly unchanged for the quarter at 1.9%
Median Dwelling Price (all dwellings): $805,000 as at March 31, 2017
State Government: Liberal Party
Unemployment Rate: 5.2% as of February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White, Sydney is approaching the peak of the market for houses and is at the peak of the market for units.
It’s important to understand that Australian property works in cycles. In the last 30 years, Sydney has been through two full property cycles. In the five-year lead up to the peak of 1989 home values increased by 122% and in the 18 months proceeding dropped by 11.1%. In the five-year lead up to the 2003 peak, values rose by 98% and declined by 8.8% in the 21 months following the peak. In the current cycle, values have risen close to 80% in the last five years. If the patterns repeat themselves you can probably work out what should happen next.
Take a walk around the CBD, Parramatta and surrounding areas and you’ll see they are construction zones, with major infrastructure projects including the CBD and South East Light Rail Extension, Badgerys Creek Airport, Parramatta Urban Growth Project, WestConnex, North West Rail Link and the Barangaroo Project including Crown Casino to name a few. Commercial office occupancy is also at all-time highs of 96% in the Sydney CBD.
Melbourne, is still a very strong market, as is most of Victoria.
Capital Growth: 2016 saw an increase of 13.7%, a further 4.2% has been added in the first quarter (January 0.8%, February 1.5% and March 1.9%) for all dwellings
Gross Rental Yield (Houses): Is sitting at a low of 2.7% which has been unchanged all quarter
Combined Rental Vacancy Rate: Ended the quarter at 1.7%
Median Dwelling Price (all dwellings): $605,000 as at March 31, 2017
State Government: Australian Labor Party
Unemployment Rate: 6.1% as at February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White, Melbourne as in a rising market for houses and is at the peak of the market for units.
The Melbourne CBD is experiencing a huge amount of apartment development. According to the RLB Crane Index, there are currently 146 cranes in the metro area, up from 131 in September 2016. We are seeing a shift away from cranes in the city centre and immediate surrounds to the city's west and north, due to the continuing worry of apartment oversupply in the Melbourne CBD.
The Andrew’s government are revising the Plan Melbourne Blueprint, disregarding the limit of two dwellings per block, allowing developers to build more townhouses, villas and smaller boutique developments on existing parcels of land in Melbourne's middle ring suburbs, such as Glen Waverley, Hampton and Doncaster. Also creating a windfall for suburban families selling their blocks to developers at hugely inflated prices. To note apartment capital growth for the January to March quarter has increased by 2.9%, up from -1.8% where it finished the October to December 2016 quarter.
Where to from here for the Sydney and Melbourne property market? At the cold face, open homes across both capital cities are standing room only and auction clearance rates hover around 80% week on week - Real Estate agents have never been happier! There is an abundance of infrastructure projects, the media is creating unparalleled hype and FOMO (fear of missing out), parents are drawing down on the equity in their home to help the kids get on the property ladder or alternatively are purchasing investment properties and or holiday homes with their capital gains. All these factors are continuing to push up prices.
What factors could cause the Sydney and Melbourne markets to stall or correct? Runaway prices and housing affordability are now a political issue with topics such as new land releases, negative gearing, stamp duty and capital gains tax being debated at both state and federal levels. A change in policy, interest rate rises and economic conditions could all play a part.
Where will it end? I can’t answer that, but, what I do know is, The Australian Prudential Regulation Authority (APRA) are tasked with controlling investment related credit demand and we have seen a tightening of lending from most major banks, particularly for investors. Australia's big banks are also handing down their own mortgage rate raises. Record low rental yields show home prices are out of balance with rents and the heightened affordability issues that are stopping some buyers from entering the market are all typical signs of the cycle nearing the peak.
Canberra is continuing to prosper post-Christmas, after ending 2016 on a strong note.
Capital Growth: 2016 saw an increase of 9.3%, a further 5.1% has been added in the first quarter (January 0.4%, February 3.2% and March 1.4%) for all dwellings
Gross Rental Yield (Houses): Is a healthy 4.0% and has remained steady all quarter
Combined Rental Vacancy Rate: 0.9% and dropping
Median Dwelling Price (all dwellings): $586,500 as at March 31, 2017
State Government: Australian Labor Party
Unemployment Rate: 3.8% as at February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White Canberra is in a rising market for houses and a declining market for units.
On the ground there are lines out the door at open homes, filled with families, professional couples and investors alike. Renovated family homes are moving quickly and auction clearance rates continue to hover around 70%. To note, apartments over the January to March quarter have only risen by 0.2%, which we can confidently say is due to the oversupply of apartments.
As predicted, Canberra has had a great start to the calendar year. Infrastructure projects include the light rail construction, which is now in full swing and the opening of the international airport terminal, with Singapore airlines flying four times a week to Asia and New Zealand. The Canberra market is benefiting from a limited number of stock and low-interest rates. All the key economic indicators point to continued growth in the Canberra housing market.
Hobart, Australia’s best-performing capital city for the January to March quarter.
Capital Growth: 2016 ended with capital growth of 11.2%, a further 5.6% has been added in the first quarter (January 1.4%, February 1.0% and March 3.1%) for all dwellings
Gross Rental Yield (Houses): 5.0% the nation's highest (along with Darwin)
Combined Rental Vacancy Rate: 0.6%, the nation's lowest and continuing to drop
Median Dwelling Price (all dwellings): $355,000 as at March 31, 2017
State Government: Liberal Party
Unemployment Rate: 5.8% as at February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White Hobart is in a rising market for houses and units.
We had no doubt Hobart would start the year strong, with the state government's investment in infrastructure and a booming tourism sector. Hobart is now the best performing CBD hotel market behind Sydney and Melbourne. Work is also underway at Hobart airport to extend the existing runway to allow for larger planes to land, this will open up direct flights to Asia and allow for more domestic flights. We never like to invest in a market that is reliant on tourism alone, however, we certainly feel that Hobart is meeting the majority of our key indicators across multiple sectors. The only problem, it’s near impossible to find a property as the market is so hot.
On the ground, buyers are far outweighing the available stock. The current demand vs. supply comparison will continue to push up home values and the ripple effect will see further out suburbs enjoying the same growth.
Why are we seeing this growth in Canberra and Hobart?
Interstate migration and population growth due to housing affordability issues in Sydney and Melbourne
Remote working allowing people from Sydney and Melbourne to migrate and retain their employment and larger capital city salaries
Increasing tourism industries
Confidence and stability in state and federal government in both states
Sydney and Melbourne homeowners drawing on their equity to purchase investment properties and holiday homes in both areas.
Adelaide, does everyone remember the tortoise and the hear fable? The property market is fairly slow, however, growth is steady.
Capital Growth: 2016 ended with capital growth of 4.2%, a further 1.6% has been added in the first quarter, putting Adelaide in front of Brisbane, Perth and Darwin for the January to March period (January 0.5%, February 0.6% and March 0.4%) all dwellings
Gross Rental Yield (Houses): Ended the March quarter at 4.0%
Combined Rental Vacancy Rate: Sitting at a healthy 2%
Median Dwelling Price (all dwellings): $439,000 as at March 31, 2017
State Government: Australian Labor Party
Unemployment Rate: 6.6% as at February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White, Adelaide is in a rising market for houses and at the bottom of the market for units (to note units gained 5.1% capital growth in the January - March period, with January recording 0.3%, February 0.8% and March 4.0%).
The Adelaide market has remained steady as the supply and demand issues we are seeing in other states doesn’t exist, as the market is closely aligned with roughly the same numbers of buyers and sellers.
The Adelaide economy has struggled in the past and as reported in the CommSec state of the state report was ranked 7th place nationally in January 2017. Like most states, the Adelaide marketplace is affected by the state's economic drivers. Over the next two years, there are further infrastructure projects planned for Adelaide and South Australia in general, some of these include road and major rail work upgrades, the NBN rollout, construction of solar farms and significant public spending on defence projects. These projects would create population growth, employment opportunities and demand for housing which in turn will continue to sustain the market. I also believe rentvesters that have been priced out of the Sydney and Melbourne markets will look to Adelaide as a viable investment option with fairly priced property returning strong yields.
Brisbane has had a quiet start to the year.
Capital Growth: 2016 recorded capital growth of 3.6%. The first quarter has remained flat, recording a 0% change (January 0.1%, February -0.4% and March 0.2%) all dwellings
Gross Rental Yield (Houses): Has remained strong at 4.1%
Combined Rental Vacancy Rates: Ended the quarter at 3.3%
Median Dwelling Price (all dwellings): $480,000 as at March 31, 2017
State Government: Australian Labor Party
Unemployment Rate: 6.7% as at February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White, Brisbane is at the start of a recovery market for houses and a declining market for units.
Brisbane has had a slow first quarter for capital growth and vacancy rates, although the YOY growth for all dwellings sits at 3.7%. Looking at additional data there are regions of Brisbane performing well. Turnkey family homes and older properties offering renovation potential are moving fast and compared to Sydney and Melbourne offers fantastic value for money. We still have concerns about the looming oversupply in the investor apartment market and recommend staying clear.
With the improvement in the resource sector and infrastructure projects for the Commonwealth Games, we are confident the Brisbane market will find its feet. A watch out for investors is finding a tenant can take longer so this needs to be factored into your cash flow analysis.
Perth, the market has continued to fall in the first quarter, which isn’t great news for those with existing properties.
Capital Growth: Ending 2016 with a decline in capital growth of -4.3%, a further decline of -1.3% has been taken off home values in the first quarter (January 0.2%, February -2.4% and March 1.0%) all dwellings
Gross Rental Yield (Houses): At the end of the first quarter is sitting at a moderate 3.6%, which has remained steady throughout the period
Combined Rental Vacancy Rates: Sit at the national high at 4.8%
Median Dwelling Price (all dwellings): $475,000 as at 31 March 2017
State Government: Australian Labor party
Unemployment Rate: 6.0% as at February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White, Perth is approaching the bottom of the market for houses and is in a declining market for units.
Although the figures read like a doomsday novel, there is some good news, there are areas of Perth performing well. As the market is correcting itself, sensibly priced homes with good improvements, in good locations are selling for a fair market price. As the market nears the bottom for the savvy investor there are deals to be had, the balls in your court.
As we have seen in other markets a change in long-term government can be an upside for the property market, we get to wait and see what effect the newly installed Labor government might have. I’m really excited to monitor the Perth market over the next few quarters.
Darwin, another one to watch as it nears the bottom of the market.
Capital Growth: Saw 2016 finish up with an increase of 0.9%. The first quarter has seen a decline of -3.1% (January -1.7%, February -4.3% and March 3.1%) all dwellings
Gross Rental Yield (Houses): Is sitting at 5.0% and has remained steady for the quarter (the nation's best along with Hobart)
Combined Rental Vacancy Rate: is 3.8% at the end of March
Median Dwelling Price (all dwellings): $490,000 as at March 31, 2017
State Government: Australian Labor party
Unemployment Rate: 3.5% as at February 2017 (national average of 5.9%)
Property Cycle: As reported by Herron Todd White Darwin is at the bottom of the market for houses and units.
I’m also excited to watch the Darwin market over the next quarter and beyond, for a number of reasons: There are some large planned infrastructure projects, like the Perth market, grossly overvalued homes and apartments due to the resource boom have now started to correct themselves and there will be promising opportunities for the savvy investor to purchase a good deal in the right location. Sydney and Melbourne rentvesters looking to lay claim on their slice of Australia will be good for home prices. The state government has also reintroduced the First Home Owners Grant (FHOG) late last year and the feeling is the sub $650,000 market will be stimulated by this grant.
Milk Chocolate was founded seven years ago by Richie Ragel and Michael Cleary, to purchase residential and commercial property in Australia on behalf of our clients, looking for a home or investment property. To see how we can help you get in touch here.
Thanks, Michael
Source: NSW Government / QLD Government / NT Government / WA Government / TAS Government / SA Government / VIC Government / ACT Government / Australian Government, Department of Employment / CoreLogic / SQM Research / RLB Crane Index / Heron Todd White / Cordell State Market Watch / Australian Financial Review / Australian Bureau of Statistics
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