National Property Report – August 2013

NEW SOUTH WALES

More expensive than Manhattan

Ask any Sydney resident and they’ll readily tell you how expensive it is to live in the Harbour City. Now Sydney’s property market is stepping it up another notch as innercity houses fetch higher prices per square metre than similar homes in Manhattan, Paris and London.

It’s the popular central suburbs fringing the CBD that are driving property prices up, with the likes of Paddington, Darlinghurst and Surry Hills achieving sale prices upwards of $13,000 per square metre – more expensive than trendy, desirable hubs in Manhattan, Paris, Hong Kong and London.

These suburbs are highly sought after by a broad cross section of tenants, from CBD workers to young families, to students and art workers.

Andrew Winter, a former real estate agent in London and now host of Foxtel’s Selling Houses Australia, says Sydney’s property market has transformed over the last decade, with property values reflecting the city’s cosmopolitan residents.

“Years ago, there was no comparing London and Sydney prices,” he says.

“But Sydney has become a lifestyle city, with people coming from all over the world to call it home. Even if they don’t just work in Sydney, it has become a base for many international residents.”

Sydney homes set to increase 10% this year

For those hoping that inflated property prices might come down to more affordable levels, don’t hold your breath. Prices of Sydney properties, particularly those between $500,000 and $1.5m, could rise as much as 10% in the next 12 months, thanks to increased buyer activity prompted by low interest rates and increasing buyer confidence.

And when you consider that a three-bedroom terrace in Sydney’s trendy inner east typically rents for at least $1,000 per week – or $52,000 annually – it’s clear that some real value is on offer for savvy investors who have the budget to buy.

For instance, a property purchased for $800,000 (and mortgaged to a 100% loan-to-value ratio) would cost around $42,000 in mortgage interest repayments, at current rates in the low 5% range.

With a $1,000 weekly return, the home would be positively geared, even once other ownership costs such as council rates and property management fees are factored in. This return amplifies for investors who have a decent deposit to throw into the deal.

While supply is traditionally low over the winter months before increasing significantly as we move towards spring, George Raptis, director of Metropole Buyers Agency, believes Sydney’s property market will continue to perform for investors, regardless of the season.

“We currently have record low interest rates, our population is growing, our rents are continuing to rise, and we have experienced a large increase in buyers and investors,” he confirms.

“This has been reported by agents at the coalface every day, who are recording large volumes of potential purchasers attending open for inspections.”

VICTORIA

An inner-city riddle

We’ve long been served a story of how units in inner Melbourne are oversupplied and decreasing in value, but in some suburbs it appears that house prices are falling, not unit prices

Why do buyers hate Parkville? It may be out of many people’s budget, but aside from that, most prospective homebuyers would have a tough time listing its faults. Like its name suggests, Parkville is abundant with inner-city parkland and defines the word ‘green’. It’s a five-minute tram ride from the city, or a 30-minute walk, and offers something for everyone. Families get open space right next to the CBD, while singles and young couples are at the doorstep of Sydney Road’s restaurants and bars.

Despite these strengths, detached houses within Parkville have had Melbourne’s worst-performing property values over the last five years. RP Data figures show that, since 2008, the median price has slid from a base of over $800,000 to its current level of $565,000. This suggests that buyers who purchased a house in the area five years ago are likely to own an asset that’s worth a third less than they paid for it.

One could put this down to an isolated occurrence, but Parkville isn’t alone among inner-city suburbs where house values – not unit values – have decreased significantly over the last five years. West Melbourne, almost in the heart of the city, has seen house values tumble 11% since 2008. And this suburb is in a highly desirable location – most residents can walk to work.

If one compares houses in these city regions to comparable suburbs such as Carlton, Clifton Hill or Fitzroy, it’s evident that affordability isn’t the issue here. Back in 2008, Parkville was at least on a par with these suburbs in pricing. But while Parkville has been falling back, in these suburbs median house prices have been inching up.

Oversupply also falls short in explaining the price drops. Compared to Docklands, where developers have been notoriously oversupplying the market with units since 2010, both Parkville and West Melbourne have seen much smaller construction numbers, dominated by unit construction, not detached houses, and yet Dockland unit values have performed better.

Of course, investors should bear in mind the methodology for calculating median prices. “It’s not an exact science,” says APM’s Andrew Wilson. “Every property is different in time and space, and not every buyer’s or seller’s preferences are the same. This makes working out underlying price movements problematic.”

In the case of Parkville, very expensive homes exist alongside fairly cheap homes, and a falling median price could be more a reflection of the fact that larger numbers of houses are being sold at the bottom end of that spectrum than at the top, skewing the ‘median’ value.

Residex founder John Edwards says investors should use median values more as a guideline. “Sales only tell you what is selling,” he says. “They don’t tell you the fundamental value of the suburb.

QUEENSLAND

Mining today, what tomorrow?

International concern over Queensland’s environmental record and the effect it could have on tourism begs the question: is the state property market destined to become reliant solely on the mining sector?

Townsville residents will remember with sadness the day they lost Tim’s Surf and Turf. The iconic restaurant used to serve 1kg steaks on the city’s waterfront but was shut down in 2007 to make way for a 20-storey international hotel. City officials told families who had been going there for years that this was an exciting sign of progress for tourism. They’re not saying that anymore.

Tourism and Events Queensland has reported in its regional snapshot of the city that total visits to Townsville over 2012 were down 2% from 2011 – a year when Queensland frequently made the news for natural disasters. Within that fall, there were 11% less international tourists than what the city usually gets in an average year.

And Townsville is just one example. Across Queensland a number of tourist markets are struggling. In the Gold and Sunshine Coasts, as well as in Cairns, tourists’ total dollar contributions to the economy are below long-term averages, a startling reality for an industry that generates around 6% of Queensland’s Gross State Product and accounts for 12.9% of all registered businesses in the state.

“Queensland continues to recover but it isn’t well spread. Tourism dependent areas continue to languish”

Tourism also has the benefit of being a sustainable industry. Unlike mining, tourism does not deal in non-renewable resources and can continue to generate money for the economy, provided the environment remains intact; yet that too is changing.

In June, a group of more than 150 scientists from 33 institutions around the world signed a statement detailing how the mining and gas boom along the Queensland state coast was hastening degradation to the Great Barrier Reef, one of the state’s biggest tourism generators.

This followed a Unesco report in March that found 43 development proposals in the vicinity of the huge reef were under assessment and that the federal and state governments had failed to improve water quality in the area. At the time, ecologist Hugh Possingham told ABC that more than half of the reef ’s coral had been degraded over the last 27 years.

“This is just going to accelerate that, so we should really be doing the reverse,” he said.

Unesco pointed out that ports on the Barrier Reef coast currently export 156 million tons of coal each year, with plans to expand that within the next decade. By 2020 an estimated 7,000 ships will traverse the reef every year, up from 5,000 in 2010.

WESTERN AUSTRALIA

WA forges into ideal price growth conditions

New research shows that Perth buyer activity is up at a time when the number of property listings is well below average

WA property is doing fine, if you’re asking. Capital growth is at levels much higher than in most other states, and the returns are good too, especially in Perth’s inner-city suburbs.

There’s also another healthy indicator that most investors and residents won’t even realise: new ABS statistics reveal that nearly three in four Western Australians plan to move into a different property soon, mostly within their state.

The figures amount to an estimated 491,000 adults living in WA who plan to make the move over the next three years. That’s the kind of market activity that states on the eastern seaboard can only dream of.

ABS’s director of WA State and Territory Statistical Services David Waymouth says the fact that so many Western Australians want to move house shows how much lifestyle aspirations creep into people’s decisions.

“Most Western Australians would like to live in a separate house, with 73% of those planning to move within WA in the next three years preferring a separate home to a townhouse, flat, unit, or apartment,” Waymouth says.

“Home ownership is also important,” he adds. “Sixty-five percent of Western Australians who plan to move within WA over the next three years [show] a preference to own their home rather than rent.”

The results were pulled from the ABS’s WA Housing Motivations and Intentions Survey, which collected information about current and future housing intentions among adults living in WA.

The survey also looked at ‘future movers’: adults indicating a plan to move in the next three years. Just under half of all future movers had lived in their current home for less than two years, while a further 24% had lived in their current home for between two and five years.

Waymouth says the survey also looked at what may influence people when choosing a future house.

“When choosing their future home, just under half of future movers within WA said appearance and layout were factors influencing their decision,” he reports. Other influences on people’s choice of house included:

• 44% wanted to move to a better-quality residence
• 42% said familiarity with an area was a strong influence
• 38% said being close to family or friends was important
• 38% reported that having access to facilities and services such as shops or schools mattered

The results also showed that people’s priorities when moving home reflect their different stages of life. People in senior households were more likely to choose a home that was smaller (34%) or on a smaller block (27%). People in senior households were more likely than those in non-senior households to indicate being close to family or friends was important (56% compared with 36%).

SOUTH AUSTRALIA

Slow and steady long-term performance

Adelaide’s property market is showing signs of life, but investors who hold for the long term are reaping the most rewards

According to the RP Data-Rismark Home Value Index, Adelaide was one of the only capital cities (alongside resources powerhouse Darwin) to record gains in home prices for the May quarter.

The city recorded a 2% increase in property values, but it’s nothing to get too excited about just yet: Harcourts Brock Williams director Michael Brock believes this result has been largely achieved through strong sales at the top end of the market, rather than the property market rebounding as a whole.

Brock says many of these sellers have owned their homes for a long time – at least 10 years – and, as a result, their property values have “doubled, trebled, or [increased] even more so” by the time they’ve sold.

“There is still some fallout at the lower end of the market, where people haven’t quite got through the tough economic times,” he confirms.

Elsewhere in the state, Real Estate Institute of South Australia vice president Ted Piteo says renewed consumer confidence is leading to stronger sales, particularly in regional areas backed by mining projects.

“The resources areas and the growth they have had has been impressive and a lot more executives and workers have moved into those areas to work in the mining sector,” he says.

“The lower interest rate is certainly helping, and we’ve seen a lot more activity than there was this time last year; we are pretty positive about the next quarter.”

TASMANIA

Confidence increasing, activity decreasing

With investors bowing out of the market and first home buyer activity set to be contained by state funding changes, the prognosis for Tasmania’s property market into 2014 is not looking positive

With mortgage interest rates at historically low levels, Real Estate Institute of Tasmania president Adrian Kelly believes there is more confidence in Tassie’s property market now than there was 12 months ago.

But Kelly admits that the local real estate market hardly represents an appealing destination at present for would-be property investors.

“I don’t think prices will rise at all,” he says frankly of Tassie’s short-term property forecast. “But it is interesting to watch the larger cities where their auction clearance rates are high, and their markets are clearly improving.

“I think that will flow through to Tasmania, but it won’t happen for a while yet. We need to sort out issues around employment and job security first, because once those things are better then we’ll start to see an improvement in the property market.”

When Kelly talks about “issues around employment”, he’s referring to the state’s unemployment rate: at 7%, it’s the highest in the country and well above the national unemployment rate, which hovers around 5.5%.

But it is the state government’s decision to can the First Home Owner Grant (FHOG) in 2014, in favour of shifting funding towards first home builders, that has Kelly most concerned.

“The First Home Builder Boost is a positive step but will only help 5% of first home buyers, as the remaining 95% prefer to buy an existing property,” he says, adding that only 40 people have chosen to take up the building grant between January and May 2013.

AUSTRALIAN CAPITAL TERRITORY

Threat to Canberra workforce

There’s no denying that a federal election can impact confidence in the property market, and in the nation’s capital the consequences of September’s vote could prove to be dire

When John Howard was elected back in 1996, he swiftly forced Canberra into a recession with massive job cuts throughout the public service. At the time, he pledged that only 2,500 jobs would go; the final figure was much higher, with some placing it closer to the 20,000 mark.

While Tony Abbott has promised that if he wins in September he has no plans to execute a similar “bloodbath of the public service”, shadow treasurer Joe Hockey isn’t so reassuring.

“We’ve said the public service here in Canberra has to be reduced by 12,000 over the first two years as a starting point,” Hockey reveals.

This accounts for around 18% of Canberra’s public service workforce, and if this scenario plays out it will strip around 6% from the total number of jobs in the ACT capital overall.

It’s no wonder property buyers – both investors and owner-occupiers – are sitting on their hands for the time being.

“There’s no question that the market is not booming,” confirms Real Estate Institute of the ACT spokesman Craig Bright. “The closer you get to an election, the market tends to drop away… And it certainly doesn’t help when they call a nine-month election [lead-up].”

While Bright believes that Canberra’s soft property market will bounce back after September’s federal election, investors are clearly not as confident.

The most recent Property Industry Confidence Survey (a survey conducted by the Property Council of Australia and ANZ each quarter) recorded local industry sentiment at 96 on the index, with a score of 100 considered neutral. It was the lowest score of any state or territory in the country, except for Tasmania, placing it alongside Tassie as one of the least positive property markets in Australia.

“The combination of an uncertain political outlook and a continued unwinding of the 2011 dwelling construction boom is likely to have weighed on ACT property industry confidence,” says Paul Braddick, ANZ head of property research, adding that ACT economic growth is expected to be “lower in the next 12 months”.

NORTHERN TERRITORY

Life after the gas boom

Darwin’s property market is flying as prices continue to rise at a rapid rate. But what happens when construction of the city’s major gas project ends in 2016?

Darwin house prices grew by 11% over the year to May – that’s the good news if you’re an investor who already owns property in the city. The bad news for anyone wanting to get into the market is that this run of price increases isn’t likely to last.

With construction of processing facilities for the $34bn Inpex Ichthys LNG project almost entirely responsible for recent price pressures on Darwin’s housing market, the big issue for investors is going to be what happens in 2016 when building of the facility is completed.

According to Deloitte Access Economics’ latest Business Outlook report, the sheer scale of the project means a major shift in the Darwin economy is going to be inevitable when project construction comes to an end.

“Data suggests that this project accounts for over 90% of the spend on major engineering construction underway in the NT. That’s a very big egg in a fairly small basket,” the report says.

It adds that there are already tentative signs that the gas industry is going to face steep challenges, compounded by a weakening employment market. The construction phase of any major project tends to have the highest labour obligation, and this natural decline in jobs that will occur as the project shifts into its operational phase will be exacerbated by weaker demand for Australian gas.

“Gas projects are dominating the investment landscape in Australia at present… However, a transition is approaching with the bulk of those investment projects being currently underway, with far less in the pipeline to potentially replace them,” Business Outlook claims.

The gas investment pipeline is being set back, the report says, because coal seam gas producers face mounting extraction costs, community opposition and regulations. These have combined to erode the profitability of Australia’s gas exports.

“[Gas] projects are generally underpinned by gas contract prices which have been agreed in recent years. But prices have been changing of late … And with US gas production steaming along thanks to the leaps-and-bounds improvement in shale gas technology, there may be some destabilising price movements to come.”

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