National Property Report – April 2016

NEW SOUTH WALES

The pause we had to have

A sharp fall in dwelling values during the recent quarter has placed Sydney well behind rival Melbourne. Experts say Australia’s biggest city is now facing a long period of sluggish growth after its breathtakingly strong performance during the past three years. Nila Sweeney explains

While it’s far from a struggling market, Sydney is certainly showing the classic signs of a contracting market.

During the January quarter, it again suffered the largest drop in median dwelling values of all other capital cities, according to CoreLogic RP Data. This follows the sharp decline it recorded in the previous quarter.

During the rolling quarter ending January, median values fell by 2.1%, a stark contrast with Melbourne’s negligible -0.1% drop.

While Sydney notched up a whopping 10.5% growth in median dwelling value during the past 12 months, this is also the slowest growth rate since the middle of last year, according to Tim Lawless, head of research with CoreLogic RP Data.

“Sydney’s capital gain of 10.5% is no longer the highest annual rate across the capitals,” says Lawless.

That title now belongs to Melbourne, which grew by 11% during the same period. While still a high rate of annual growth, Sydney’s annual rate of capital gain is now at a 29-month low and has been progressively softening since peaking at 18.4% in July last year, says Lawless.

CoreLogic’s results are mirrored by Domain’s statistics where it showed a dramatic 3.1% slump in house prices during the December quarter. Domain notes that this is the first fall since June 2012 and the sharpest quarterly decline in house prices reported by the city on record.

“The remarkable Sydney boom we’ve seen over the past three years is now clearly over, with the market unlikely to record any notable house prices growth until at least spring,” says Andrew Wilson, senior economist with Domain.

While the median house price still remains above $1 million (at $1,013,258), if current trends continue, Wilson says it will likely fall below this benchmark by mid-year.

“Sydney was certainly tired and emotional towards the end of last year, and prices went backwards. It’s really about the pause it has to have,” he says.

VICTORIA

Melbourne gets a second wind as Sydney falters

As Sydney grapples with weakening market, Melbourne continues to power ahead, albeit at a slower pace

Melbourne’s solid run may not be over yet, if the latest data is any indication. According to CoreLogic RP Data’s January report, median dwelling prices rose by 2.5% in January, significantly outperforming Sydney’s 0.5% rise.

Annually, house values surged 11.6%, again overtaking Sydney to record the highest growth rate in the country during the past 12 months.

“Melbourne’s housing market has been more resilient to slowing growth conditions, which has propelled the annual growth rate to the highest of any capital city,” says Tim Lawless, head of research at CoreLogic RP Data.

“Previously, during the height of the growth phase, there was a large separation between Sydney’s housing market, which was streaking ahead, and Melbourne’s, where the rate of capital gain was substantial but still well below the heights being recorded in Sydney. The latest data reveals Sydney’s housing market is now playing second fiddle to Melbourne’s, at least in annual growth terms.”

In fact, Lawless points out that over the past six months, the performance gap between Sydney and Melbourne has been stark.

Sydney dwelling values have fallen by 0.6% between July last year and the end of January 2016, compared with a 3.0% rise across Melbourne dwelling values. Andrew Wilson, senior economist with Domain, sees a similar trend with their recent data and believes Melbourne will have another solid, albeit slower, growth this year.

“Melbourne just keeps on keeping on. It seems to have brushed aside the higher interest rate environment for investors. It’s a very measured, even and quietly confident market,” says Wilson.

Wilson says the forward indicators, such as auction clearance rate and sales volumes, are looking quite healthy in Melbourne at the moment.

“Melbourne’s median is still just around $700k compared to Sydney’s million-dollar median house price. There’s still a lot of upside in terms of affordability, particularly in the budget and mid-priced range properties. I think this is where the energy is going to be,” he says.

Growth engine this year

As more buyers are priced out of the inner city suburbs, the north, the west and the southeast suburbs are naturally becoming attractive, according to Wilson.

“Since the GFC, these areas hardly had any growth. That’s because their local economy was struggling, but they started picking up last year. The growth momentum started in the mid to lower priced properties. It was always going to be a matter of time before these markets moved, and move they have. I think there’s still plenty of upside in Melbourne under the median under $700k,” says Wilson.

In contrast, Wilson explains that the upper range market in the Eastern suburbs, which were the engine room during the GFC, are now suffering from affordability barriers that has constrained activity.

“I believe higher prices will restrain activity in these markets. I think they will be the underperformers this year. That’s because buyers have been priced out from these markets. The very strong growth is happening in the northeast and down to the southeast where buyers largely ignored in the past. They’re now becoming very fashionable due to their affordable price tags.”

Specifically, Wilson points to Carnegie all the way down to Carrum Down and Springvale.

“These areas are attracting buyers because they’re significantly more affordable compared to the inner suburbs. You can almost see the heat energy working its way outward through the southeast corridor through the train line. Carnegie is now a million-dollar suburb because it’s been rediscovered and because of its affordability advantage compared to its neighbouring suburbs.

This is what’s going to keep driving the market.”

Wilson also expects to see solid performance of suburbs such as West Heidelberg, Macleod, Rosanna, Greensborough, Glenroy, Broadmeadows, Sunshine and Albion.

QUEENSLAND

Growth momentum remains elusive

Brisbane’s patchy performance continues to underwhelm and disappoint investors

Broadly speaking, Brisbane hasn’t lived up to expectations of better market performance. During the month of January, Brisbane home values fell by -0.7% and only managed a miniscule 0.8% growth over the three months to January, according to CoreLogic RP Data.

Interestingly, median unit values grew faster, up by 4.5% compared to houses, which only saw a 2.6% increase in median values during the year.

However, Tim Lawless, head of research at CoreLogic RP Data, points out that given the abundance of new units being approved across the city, “it is unlikely that the strong performance across Brisbane’s unit market will be maintained.”

Rental market under pressure

Brisbane’s sluggish price growth overall is not the only thing disappointing investors. Vacancy rates have started to rise, while rents remained stagnant during the three months to January. Over the past 12 months, median rents for houses fell by 0.7% and units recorded a 1.2% drop in weekly rent.

Lawless blames the additional accommodation produced by the current building boom, along with recent record high levels of investor activity, as the main drag for the rental market across the larger cities in the country.

“There’s substantial new dwelling supply coming to the market at a time when the rate of population growth is slowing,” notes Lawless.

In addition, Lawless says wages are increasing at their slowest pace on record, which indicates that many renters simply don’t have the means to pay more for their accommodation.

As such, he expects that rental market conditions are likely to remain weak, potentially softening further over the coming months.

“In fact, there is a possibility that rental rates may start to fall on an annual basis. While this is great news for renters, investors are facing the prospect of weaker capital gains coupled with falling rents, which would push down their yields. The large pipeline of residential construction activity and recent high levels of investment demand means that renters are likely to continue to have plenty of choice when looking to renew their lease,” he says.

Unmet expectations

Andrew Wilson, senior economist with Domain, says Brisbane is still on watch after a disappointing performance over the past two years.

“We had big expectations last year and the market did nothing for nine months. We have high expectations again for Brisbane this year, but we’re still on watch,” says Wilson.

While forward indicators are showing encouraging signs, the fact remains that prices only grew by 4% last year.

Big infrastructure projects are disappearing rapidly

A big part of Brisbane’s weakness is the rapidly dwindling resource-related infrastructures that fuelled Queensland’s economy during the past five years.

Deloitte Access Economics says in its report that engineering construction in Queensland is currently in a freefall as the LNG megaprojects that supported the sector are now almost complete. These include the following:

• The $21.5 billion Curtis Island project
• The $19 billion Gladstone LNG
• The $25 billion Australia Pacific LNG

Of the six big mining projects underway in Queensland, Deloitte Access Economics says only the $1.25 billion Eagle Downs coal project will remain by the end of 2016.

“Things are likely to get worse from here, and other sectors cannot fill the void, particularly in Queensland’s case,” it says. “The State Government is not in a position to fund very much in the way of infrastructure without unlikely Federal funding. Engineering construction activity in Queensland has fallen off the cliff, but the bottom is some way off yet.”

But there’s hope

Notwithstanding the freefalling infrastructure spending, the economic forecaster remains upbeat about Queensland’s prospects.

“Our consistent comment on Queensland for quite some time is that this State’s economy is better than you think. We stick by that view,” says Deloitte Access Economics.

It cited a number of reasons, including the fact that Queensland has already taken a number of lumps. Whereas the construction spend in huge projects in Western Australia has barely begun to fall from its boom-time peak, the matching construction spend in Queensland has already virtually halved since its glory days, according to Deloitte Access Economics. In other words, a lot of Western Australia’s pain is still to be fully felt, whereas a lot of Queensland’s pain is already behind it.

And whereas some other States have a period of pain awaiting them as their recent housing price surge starts to hurt their economies more than it helps them, Queensland faces few such risks.

WESTERN AUSTRALIA

Positive news hard to come by

Things could get a lot tougher for the Perth market before it gets better

It turns out that the sudden rise in median values in Perth during December was just a flash in the pan – as suspected.

During January, median dwelling values resumed their downward trajectory, falling by 1%, according to CoreLogic RP Data. While Perth managed to eke out a 1.7% growth during the three month period, values were still down by 4.1% during the year.

“Over the past year, both houses and units across the city saw values fall, however house values fell by a much more substantial -4.4%, compared to a -0.4% fall across units,” says Tim Lawless, head of research at CoreLogic RP Data.

Domain’s latest results also showed Perth house prices falling significantly during the past 12 months.

“The Perth median house price is now the lowest recorded by the city since the March quarter 2013, with prices falling by 4.5% over 2015 – the sharpest annual decline since 2008,” says Andrew Wilson, senior economist with Domain.

Wilson notes that unit prices fell by 5% over 2015 – the sharpest annual decline since 2011.

However, he now sees some glimmer of light, albeit faintly, at the end of the tunnel.

“Although Perth’s median house price continues to fall as a result of the declining mining sector, it’s not all bad news,” he says. “There are early signs suggesting the rate of decline is moderating, as affordability improves and confidence recovers.”

However, the rental market looks set for more pain ahead with rents dropping substantially at a time when vacancy rates are surging.

According to the December stats from the Real Estate Institute of Western Australia (REIWA), median rents dropped by $40 per week during the December quarter, compared to the same period a year ago.

Rental listings also surged between September and December period, rising by 15%. Vacancy rates are now sitting at a high 6%. While one can argue that 96% of properties are still rented out, a 6% vacancy rates indicates an oversupplied and poor performing rental market.

While this is good news for tenants, investors will have to deal with a string of temporary, but difficult, circumstances, according to Hayden Groves, REIWA president.

“Migration trends have changed rapidly in WA over the past six months and housing supply has increased. This has caused demand for rental housing to lessen, putting downward pressure on prices,” he says.

The horrid phase is now beginning

The bad news, according to Deloitte Access Economics, is that the horrid phase for Western Australia is now beginning.

“Western Australia has gone from leading the nation to figuring rather more prominently at the other end of the scale,” it says in its report. “Unemployment in the State is rising fast, and is now above the national rate for the first time since 2003 as job growth throttles back to a near standstill. WA’s population is now growing more slowly than Australia’s. And as the population data is only available with a six-month lag, chances are that shortfall has continued to widen in the meantime.”

The engineering construction activity that has fuelled Western Australia during the mining boom is almost exhausted with a staggering $105 billion worth of gas projects to be completed by 2017.

With no significant projects to fill the hole, things could get awful for the state before it gets better.

“Western Australia’s moment of truth has been approaching for some time, but that doesn’t make it any less painful,” says the Deloitte Access Economics report.

“As is the case for Queensland, there is just no way public spending can ramp up on the scale required to avoid, or even partially, offset the drop off of engineering projects to any meaningful extent.”

However, the good news is that the horrid phase is both temporary and rather less horrid than past downturns, according to the economic forecaster.

“These forecasts point to a State that handles the transition from a resource construction boom to a resource export boom without huge dislocation. That may not sound like a great outcome, but it is.

In fact, business investment as a share of WA’s economy has already returned to its longer-term average. The difference is that it has further to fall before a period of recovery finally commences in this State.” Even more worrying is the fact that these are rising, according to CoreLogic RP

Data’s Pain and Gain report.

During the September quarter, 11.4% of homes sold across Perth achieved less than what the vendors bought them for. This is the highest level of loss-making resales since July 2012, the report says. The proportion of lossmaking sales has also increased by 5% compared to a year ago.

The report shows that 89.1% of investor stock was sold at a loss during the last quarter of 2015. The areas that suffered the highest resale losses were in the Perth council area, with more than a third (37.1%) of sales making a loss. Mandurah followed at 23.6% and the Nedlands at 20%.

SOUTH AUSTRALIA

Soft numbers continue to weigh on confidence

While the two biggest data providers, Domain and CoreLogic RP Data, reported contrasting readings of the South Australian market recently, the reality remains that the Adelaide market faces a challenging year ahead

CoreLogic RP Data’s reading of the Adelaide market during January shows a sluggish market – no change over the month to January and a drop of 0.3% in median values during the three-month period. Over the past year, detached housing values rose by just 1.5% and unit values dropped by 3.9%.

In contrast, Domain showed a solid result over the December quarter, a healthy 6.7% median house price growth over 2015 – its best annual result since 2007. It also showed Adelaide unit prices rising strongly 5.2% over the year – the highest annual growth rate since 2008.

The discrepancy can be attributed to the different times the readings were taken and also the fact that each of the data providers uses different methodology to calculate their median numbers.

Andrew Wilson, senior economist with Domain, explains their data clearly shows Adelaide is on a positive path.

“It’s certainly a positive story for Adelaide home owners, with the city recording five consecutive quarters of house price growth for the first time since the boom period of 2010,” he says. “With growth continuing at its current pace, it is highly likely that the median house price will break through $500,000 by mid-year.”

“The auction clearance rates were good and we’ve seen growth in the mid to higher price range in the north of the city. There’s a feel of an even market, especially with the northern suburbs now getting a bit more investor activity.

Wilson adds that Adelaide’s tight rental market, and low vacancy rates, would help attract more investors to the state.

“Rents are rising. It’s a bit of a sleeper market, but I think it’s going to have a positive year this year,” he says.

TASMANIA

In catch-up mode but racing ahead

Often ignored and underrated, Hobart is fast becoming Australia’s most lucrative property market

It’s easy to dismiss the Hobart market as a potential investment destination. After all, it’s a very small market and the economy has been anything but underwhelming.

Yet, the slew of data coming out from the Apple Isle has been consistently positive. Case in point, CoreLogic RP Data’s January stats show that on a monthly basis, Hobart was the best performer in January, with home values rising by 4.7% over the month.

Over the three-month period ending January 2016, dwelling values rose by 3%. While the annual growth is moderate compared to Sydney and Melbourne at just 2.3%, growth is starting to gather momentum.

“For investors, Hobart is one of the most lucrative rental markets,” says Tim Lawless, head of research at CoreLogic RP Data.

Gross rental yields are now sitting at 5.1% for houses and 5.3% for units. CoreLogic RP Data puts Hobart units as having the highest yields of any other capital city unit market.

Domain also recorded a healthy showing for the Hobart market during the December quarter.

“The Hobart housing market delivered a strong result in the December quarter, especially given Hobart house prices have increased by just 5.8% over the past five years. This indicates further potential for growth as the local economy improves and positive consumer sentiment builds,” says Andrew Wilson, senior economist, Domain.

The future looks brighter

While Tasmania’s robust performance may come as a surprise for many investors, economic forecasters, such as Deloitte Access Economics, have long been positive about the state’s prospects.

“Tasmania is doing better for many of the same reasons that NSW and Victoria are too. On the one hand there are some bullets that it doesn’t have to dodge. For example, if you didn’t have a boom in mining construction projects in the first place, then you can’t lose that prop to current economic activity,” it says.

The strength in interest rates and exchange rates that used to hold back Tasmania’s economy has now turned green.

“Low interest rates are helping housing construction and, more importantly, they’ve lent a degree of momentum to the commercial construction pipeline in Tasmania. More importantly still, a fall in the $A has unleashed a torrent of tourists to Tasmania – both those arriving from overseas, and Australians who find that foreign travel is now rather more expensive than it used to be, and opt for the delights of the Apple Isle. Similarly, student numbers from the rest of the world studying in Tasmania are also on the rise,” says Deloitte Access Economics in its report.

It cites these recent positive developments as triggers in Tasmania’s turnaround:

• Vacancy rates dropped by half since second half of 2012. This has the potential to keep the home fires burning around housing construction activity
• Retail spending has recently reenergised to reclaim a faster-than- Australia title on the turnover front
• Car sales have rebounded to match their all-time highs
• Population growth has held up (albeit at really low rates) across a time when Australia’s has continued to fall away
• Unemployment rate fell from more than 8% in the middle of 2013 to now just over 6%, in line with the national unemployment rate.

While the economic forecaster warns that this combination of factors is not enough to turn around the long-term trends for Tasmania, “it is enough to give this State some solid short-term momentum.”

NORTHERN TERRITORY

Lots of negatives and a bit of positives

Just like Perth, Darwin prices declined further as it deals with falling demand and oversupply

Investors who are looking for a bit of good news about the Darwin market aren’t unlikely to find it anytime soon.

The latest set of numbers from CoreLogic RP Data suggests that Darwin home values slipped -0.1% in January 2016, bringing home values down -1.4% over the past three months. During the year, values dropped by 2.5%. Along with Perth, Darwin is one of the only two capital city markets to see dwelling values fall.

Darwin investors also have to deal with a weaker rental market after rental rates dropped significantly over the past 12 months. House rents are now 13.7% lower, while unit rental rates have fallen by 12.1%.

“Given the decline across Darwin’s rental market, yields are currently lower than they were one year ago, however despite this, Darwin houses continue to record the strongest gross rental yield of any capital city at 5.3%, and unit yields are currently recorded at 5.1%,” says Tim Lawless, head of research, CoreLogic RP Data.

Deteriorating economy

Deloitte Access Economics points out that, outside of the construction sector, most other economic indicators in the Territory are already showing clear signs of deterioration. These include:

• Population growth slowing from a peak of about 3.0% in early 2013. Current population growth is now only barely positive
• Retail turnover growth being below the national average for the past 12 months
• Car sales dropping away in recent months
• Housing finance deteriorating
• House prices dropping
• Rental vacancy rising.

Even more worrying than the indicators above is the downturn in business investment, according to Deloitte Access Economics.

“The latest official statistics do indeed suggest that business investment as a share of the Territory’s economy may have already peaked and is now starting the process of coming back down to Earth. The downside is that with business investment still accounting for around half of the Territory’s economy, the expected slide in business investment still has far further to fall. That will continue to weigh on economic growth as the Territory undergoes a challenging period of transitioning to new sources of growth,” it says.

On the upside, Deloitte Access Economics says the lower $A should provide a longer-term positive for the Top End. While job growth eased, Darwin’s job market remains in reasonable shape.

AUSTRALIAN CAPITAL TERRITORY

Catching up fast

The Canberra market may be small, but it’s got growth momentum working in its favour

Canberra often suffers from bad publicity, not just from its resident politicians, but also its property market. As such, it doesn’t generally feature in many investors’ hot list for investment destination.

Yet, the national capital city has quietly recovered and is now rapidly catching up with the bigger states.

According to the January stats from CoreLogic RP Data, dwelling values across Canberra rose by 2.8% over the first month of 2016, significantly stronger than Sydney’s 0.5% gain and even higher than Melbourne’s 2.5% rise.

During the past 12 months ending January, Canberra was the third strongest capital city market after Melbourne and Sydney, with home values up 6% compared to January 2015.

“These strong conditions are in whole driven by houses, where monthly movements show a 2.9% increase and the annual rate of capital growth is 6.7%,” says Tim Lawless, head of research at CoreLogic RP Data.

Similarly, Domain also recorded a solid performance by Canberra over the December quarter when median house prices grew by 4.3% – its highest quarterly growth rate since December 2009.

“It’s a great result for the capital’s housing market, which has seen a median house price increase of 9% overall in 2015,” says Andrew Wilson, senior economist with Domain. “The Canberra market continues to rise after a subdued period of buyer activity.”

In contrast, the unit market’s performance has been relatively weak due to lingering oversupply concerns.

CoreLogic RP Data reported a drop of 3.3% in median unit values during the year. Despite this, the rental market remains buoyant with rental rates rising across the city, according to Lawless.

“Gross yields in Canberra have maintained strength and as at the end of January 2016 were recorded at 4% for houses and 5.1% for units,” says Lawless.

Wilson says the Domain results also revealed a weaker showing for units and blames the strong supply coming into the market.

“The fall of unit prices across 2015 demonstrates the high levels of new apartment construction predictably moving supply ahead of demand in the Canberra market,” he says.

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