The leading indicators including clearance rates, housing affordability, home loan approvals and market sentiment, have pointed to a high chance that the national property market has made further progress towards recovery.
The recent auction results show the market continues to build further momentum in Sydney and Melbourne, whilst remaining stable in other regional cities in recent months. In fact, the clearance rates in Sydney and Melbourne have returned to the pre-peak level of 2016-2017.
This is supported by the major drivers: clarity of policies after the election, three consecutive interest rate cuts by the RBA, APRA serviceability adjustments and income tax cuts by the government.
Sydney, Melbourne and Canberra are the best performing cities in the quarter ending September 2019, with increases of 3.5%, 3.4% and 1.4% respectively.
Compared to the recent market peak, the medians still remain 11.9% below the July 2017 peak in Sydney and 7.9% below November 2017 peak in Melbourne.
Adelaide, Perth and Darwin markets are in declining territory for the last quarter, with declines of -0.6%, -1.9% and -1.1%, respectively.
The current combined median price (as at 30th September 2019) for dwellings in Sydney, is $805,000, Melbourne $634,000 and in Canberra, $604,000. While in other capital cities, the prices range from $450,000 to $550,000.
Looking back over the last 5 years, the top-performing cities were Hobart (38.2%), Melbourne (26.1%), Canberra (23.2%), Sydney (19.7%), Adelaide (9.9%), and Brisbane (7%). However, the Perth and Darwin market declined by -20.6% and -30.1%, respectively.
How far will the markets grow in the next cycle? For the long-term assumption, price growth is subject to both domestic and global long-term factors as follows:
Employment and Wages
Wage growth has been minimal in recent years. In the five year period to 2018, the average annualised wage growth was 2.2%, which is significantly lower than in the previous five years to 2013 at 3.3%.
Moving forward, it is likely that wage growth will continue to be low in the years to come due to high labour force growth and the increase of part-time and casual positions. This will directly limit the home loan size that banks are willing to supply.
Household Debt
Household debt is another factor to consider. Compared to the start of the cycle seven years ago, the level of indebtedness of Australian households has reached an all-time high of 200% of household income.
This means that households have to spend a large portion of their income for debt servicing, which will likely have negative spill-over effects on other sectors of the economy such as weakening the retail industry and tighter spending on education and healthcare. In addition, it becomes harder than before for households to afford larger and better homes, which will also limit price growth.
Overseas Immigrants
On the other hand, a large percentage of demand for property comes from newly arrived immigrants, who need to either buy or rent a place to live right away.
In fact, of the 400,000 people added to the country in 2018, 250,000 or 63% of total growth were immigrants.
Previous trends show that the majority of immigrants will settle in Sydney and Melbourne, which will generate strong demand for properties in these two cities.
In fact, like-for-like properties in Sydney and Melbourne are probably still cheaper than in large Asian cities such as Shanghai, Beijing, Singapore and New Delhi. Therefore, we will see quality properties with large parcels of land in good locations always going to be sought after.
Price Forecast for the Next Cycle
In it’s simplest form, we forecast future price growth based on the long-term price trend which is 5-7% growth per year, when annualised. It’s always important to take a long-term view of the market when investing as opposed to a short-term outlook.
It is predicted that the growth of the next cycle will not be as strong as previous, mainly bounded by the affordability issue.
However, houses on large blocks of land, packed full of character, located in good locations (limited supply) will always be sought after. Being diligent in your research and understanding the key fundamentals that promote house price growth is paramount when investing. Combine that with diligent asset selection, smart value add scenarios such as cosmetic or structural renovation, land sub-divisions and granny flat addition will always help accelerate and manufacture equity for your portfolio.
Get in touch with Michael to find out how we can help you on your property journey.
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