National Property Report – July 2014

New South Wales

Could a new premier and airport lift NSW to new heights?

There has been radical change announced in NSW state politics. But how will this affect the state’s property market?

Who would have thought that a bottle of wine would be enough to sink a premier? On the day that Barry O’Farrell was to make an announcement with Tony Abbott about infrastructure spending associated with the Badgerys Creek airport, he opted to resign instead.

Enter Mike Baird, former Liberal Party treasurer who was in charge of keeping the state’s economy growing at a healthy rate. Baird’s elevation is highly significant for property investors for two key reasons.

Firstly, as premier he will have a big say on legislation relating to residential property, which could affect things like stamp duty and land tax. Secondly, his decisions about infrastructure, transport and other spending (and cutting) will influence which suburbs show capital growth over the next few months and years.

So what can we expect from Baird? Well, if you’re going to guess what somebody is going to do in the future, a good place to start is to look at their past.

As treasurer, he consistently showed he was capable of making tough decisions, says Henry Lawton of Property Council of Australia.

“He has stabilised the budget, exercised spending discipline, and been smart in recycling capital towards more productive uses.   “He also re-geared stamp duty concessions to stimulate the supply of new homes and has been prepared to invest in infrastructure that unlocks housing and employment opportunities,” Lawton says.

Lawton believes NSW still faces challenges to ensure the economy stays on the right track, such as the modernisation of the planning system.

“Mr Baird was correct in recognising the significance of the planning system to the state’s economy by appointing two ministers to cover the portfolio,” he says.

“We will encourage the new [planning] minister [Prue Goward] to undertake a root-and-branch transformation of the planning system in order to remove needless red tape, time and complexity – and give investors more comfort about placing capital in NSW.”

Sydney’s second airport

The proposed Sydney Airport is causing a lot of excitement in Western Sydney as speculation about further price increases this year gathers pace.   When the initial construction phase for Badgerys Creek gets underway, it will generate about 4,000 jobs, and the development of the airport itself is expected to produce approximately 35,000 jobs by 2035.

This economic boom for the general Western Sydney area will be of particular benefit to the property market, says Vince Labozetta from Raine and Horne Liverpool.

“Capital growth of between 5% and 10% annually will be achievable between now and the beginning of the construction phase,” he says.

“We already have low rental vacancy rates in Liverpool. This announcement will squeeze vacancies further and push up rents by up to $50 to $100 a week as more construction workers move to the region.”

Moreover, Andrew Wilson of Australian Property Monitors argues that the airport will be of particular benefit to satellite areas.

These areas will not be ones adjacent to the airport itself, due to the flight paths and noise. “However, regional centres with easy access to an airport tend to attract FIFO workers, and this development will also open up that prospect for the West.”

Victoria

Infrastructure spending ramps up

Despite not having the scale of mining-related infrastructure projects, Victoria’s impressive collection of road and rail infrastructure projects  are now making up for  the shortfall

An economy that is heavily reliant on manufacturing does have a few downsides, especially during an economic slowdown. But now it seems the tables are turning in Victoria and the government’s aggressive stance on infrastructure spending could be just the ticket back to the top of the economic leader board.

While WA and Queensland have enjoyed the enviable economic benefits of resource-related investments in recent years, they have had to deal with the inevitable fallout of the softening industry and the completion of these projects.

“Victoria did not see the surge in resource-related construction or the associated upshot in economic growth that occurred in the resource-rich states in recent years. But having less exposure to the upside also means less exposure to the inevitable downside,” says the latest Deloitte Access Economics report.

“With the impressive collection of road and rail infrastructure projects to call its own, Victoria’s engineering construction sector is set to make back some lost ground on the likes of WA and Queensland.”

The ABS reports that the total value of work done on Victorian railways, bridges, and harbours has surged by almost a third in 2013. Deloitte says much of that work has related to part of the $5.3bn Regional Rail Link project from West Werribee to Melbourne’s Southern Cross Station, the largest discrete rail project currently underway in Australia.

Dennis Napthine’s government has promised $27bn worth of infrastructure spending, which includes $11bn for the new Melbourne city rail links.

The links will comprise new underground stations at Fishermans Bend and Domain, two 7.5km tunnels from Southern Cross to South Yarra, with new underground platforms, and the rail link to Melbourne Airport. Operations are planned to begin in 2023.   “It [the Melbourne Rail Link] will deliver a reliable, convenient and efficient rail link to Melbourne Airport, with services every 10 minutes during the day, to support massive growth in the number of passengers travelling to and from the airport,” says Napthine.   The infrastructure projects are expected to create thousands of jobs, including 3,700 from the Melbourne Rail Link, 3,000 from the western section of the East-West Link and 700 from the project to widen the CityLink tollway.

Queensland

Sunnier times ahead

After being hit hard by the GFC, infrastructure and innovation projects are helping to drive the Sunshine Coast’s property market into long-term sustainable growth

With its pristine beaches, sparkling freshwater rivers and lakes, lush subtropical forests and inviting climate, the Sunshine Coast is world-renowned as a holiday destination.   However, it is also the ninth-largest urban area in Australia and the location of some major infrastructure projects. And, thanks to the University of the Sunshine Coast’s Innovation Centre, it has started to emerge as a hotspot for entrepreneurial and innovative businesses.

Employment opportunities are increasing and the population is growing, with the growth rate expected to increase further.

This all bodes well for the future of the Sunshine Coast’s property market, according to Place Advisory director Lachlan Walker.

“Soon the Sunny Coast will not just be synonymous with words like ‘tourism’, ‘travel’ and ‘holiday’ – it is becoming a property hotspot, with huge growth potential.”

The GFC hit the Coast hard, with unemployment proving its biggest downfall. With not enough jobs to support the population, people left in droves and the price of million-dollar properties dropped 30%.

But the local government realised that it was necessary to rethink the way employment was structured, Walker says. “So rather than just relying on tourism, they started to develop other economic stimulants. By undertaking a multitude of infrastructure projects they have created employment opportunities and are bringing about a more sustainable long term.” These projects include:

• The Sunshine Coast University Hospital, which began construction last year. It will generate 2,000 construction jobs and 3,500 permanent jobs once completed in 2016, and is expected to inject approximately $680m a year into the local economy.
• The Coast Connect, which is a state-funded public transport upgrade intended to stimulate economic growth. This is expected to be completed in stages from 2014 to 2019.
• The Airport Expansion Project, which will create 5,000 new permanent jobs upon completion. It is expected to generate around $1.6bn in regional economic benefit between 2015 and 2050 due to increased tourism, business growth and freight capacity.

As a result, the Sunshine Coast residential market has made solid progress in recent times, and there are numerous factors that suggest it will peak in the coming years, Walker says.

“The Sunny Coast lags behind Brisbane in the property cycle. So now we are seeing growth in the Brisbane market, we should expect to see growth start on the Coast in the next 12 to 18 months.”   In fact, there has already been growth in the Coast’s rental markets. The Real Estate Institute of Queensland’s latest Residential Rental Survey shows very tight vacancy rates. For example, the Maroochy and Noosa areas are seeing all-time lows with vacancies below 1%, while in Caloundra the vacancy rate has tightened to 1.3%.

Walker says there has been about 5% to 6% growth in the Coast’s rental market and this will drive price growth in future. “For the savvy investor, buying into this area is a chance to take advantage of the renewed infrastructure, an emerging luxury market, and the increase in buyers with cash.”

Compact housing best bet for investors

The latest Matusik Property Outlook for the Sunshine Coast supports Walker’s views. According to the report, the Coast is in recovery and a potential big winner in this property cycle.

It states that, for investors, strong employment growth combined with tight rental supply and underbuilding should make the Coast an attractive alternative to capital city investment. However, it recommends that investors should aim to buy compact housing, priced under $500,000, rather than traditional detached housing. It also suggests they buy and hold for a full cycle.

This suggestion is motivated by the demographic profile of the rental market, combined with affordability issues. The report states that, while the trend towards compact housing has just started, it is already quite pronounced in the rental market.

Chinese investors love Queensland   Meanwhile, the Queensland property market is proving to be particularly popular with Chinese investors, because of its affordable prices, strong infrastructure and education options.

A recent report from global law firm DLA Piper revealed that Chinese investors prefer South East Queensland, particularly Brisbane and the Gold Coast. Regional favourites include the Sunshine Coast, Toowoomba, Cairns, Rockhampton and Townsville.   According to Juwai.com chief executive Andrew Taylor, it is the state’s reasonable property prices that are the big drawcard for investors.

“In Queensland, investors can live like movie stars for less than a two-bedroom apartment in Beijing. Apartments in Beijing sell for 111% more than in Brisbane on a per-square-metre basis.”

Western Australia

Taxman collects in WA

The WA economy may be the strongest in the nation, but the state government’s latest budget has not been embraced by those looking to purchase a property. There a few reasons why

The latest state budget is not popular one with prospective home buyers in WA.

For starters, first home buyers have been hit, with the stamp duty levy threshold lowered from $500,000 to $430,000. And this isn’t the first measure in recent times that has set this segment back.

Last September, Colin Barnett’s government slashed the First Home Owners Grant, for people seeking to buy established properties, by more than half to $3,000.

Real Estate Institute of WA (REIWA) president David Airey says these measures have been frustrating for the first home buyers and a worry for the property market’s future.

“The property market in WA is only just stabilising after several volatile years, while current REIWA data indicates a market downturn for the second half of this year,” he says.

“The clear evidence from NSW, which recently scrapped its tax concessions for first home buyers, is that first home buyer activity collapsed and hasn’t recovered. It has been a similar experience in Victoria where other tax concessions for the first home buyers were removed or diminished.”

Laing+Simmons general manager Leanne Piklington argues that first home buyers are already struggling and the country risks an entire generation missing out on a place in the property market.

“A no-brainer in this whole discussion is the removal of stamp duty. Notwithstanding the obvious advantages of its complete abolition, stamp duty exemptions for all first home buyers should be implemented without delay,” says Pilkington.

“Stamp duty has the effect of nullifying a potential deposit. What could be a suitable, conservative deposit for many home buyers too often becomes a permanent barrier to entry once stamp duty is taken into account.”

Land tax hike

The budget also includes a 10% increase in land tax rates this year, which is a 23% increase over the last two years. There is also a 50% increase in the Perth Parking Levy, which is an increase of $365 a year. This equates to about $1 a day and will be phased in over the next two years.

It’s not a budget that makes the tax system fairer or more sustainable, says Joe Lorenzo, executive director of the Property Council of Australia.

“It is a bookkeeper’s budget for the short term that masks the structural faults in the state tax system and the government’s inability to reign in public expenditure,” says Lorenzo.

“The Property Council will launch a public campaign to show government that when you take the shortcut through property tax increases, you hurt the broader WA community.”

Economic leader continues its domination

If the mining boom is over, nobody told the WA economy.   According to the most recent Deloitte Access Economics Investment Monitor report, work is well underway at Australia’s largest iron mine, Gina Rinehart’s $9.5bn Roy Hill project. It employs more than 3,000 workers and recently began mining its first iron ore. Once completed, it is hoped to produce 55 million tonnes of iron ore a year.

Despite this, it seems that population growth and increasing retail spending are the driving forces behind WA finishing first in CommSec’s latest State of the States report.

Population growth is not only the highest in the nation but above decade-average levels, providing the economy with momentum in the housing sector.

Denise Carlton, director of demography at the ABS, says WA showed strong population growth in the year ending 30 September 2013. “Western Australia continues to have the fastest population growth rate, growing by 3.1%, but is slowing from its record high of 3.6% in June 2012,” she says.   However, CommSec chief economist Craig James argues that if the Australian economy increasingly focuses away from mining investment, it could mean that other states climb further up the economic ladder.

“Western Australia continues to lead the rankings of best performing economies but in the latest quarter there was little to separate it from the Northern Territory economy,” James says.

“The mining construction boom is over, replaced by the home construction boom. As a result, winners and losers will change across Australia, not just industries but also state and territory economies.”

South Australia

Promising signs of recovery?

The SA and Adelaide markets seem to have been struggling along for some time, with little good news. But data and reports from a number of sources hint at a more positive future

Elegant and cultured, Adelaide was recently listed, by Lonely Planet, as one of the world’s top 10 cities to visit in 2014. The travel guide described the city as “effortlessly chic – and like a perfectly cellared red, it’s ready to be uncorked and sampled”.

Unfortunately, the same sentiments are not often voiced when talking about the SA capital’s property market. After years of correction and struggle, the Adelaide market still seems to attract unflattering press.

Yet there are ongoing hints that, just like the aforementioned red, the market is worth sampling.

According to the latest RP Data Rismark Home Value Index results, the Adelaide market hasn’t been performing too badly of late.

Over the last month, there was a 2.1% increase in dwelling values. More interestingly, over the quarter to April, there was a 3.3% increase in dwelling values. This result put Adelaide in third place, behind Darwin and Sydney, for the quarter.

RP Data’s Tim Lawless says that, overall, Adelaide residents are also showing surprising optimism when it comes to housing market conditions. Apparently, 76% of residents now believe it is a good time to buy.

The Adelaide market started the year on a positive note with good results from several different sources, REISA president Ted Piteo says. “With the median price at its highest level ever, the key indicators are all solidly pointing to a good year ahead for real estate.”

He points to the Valuer-General’s median house price data for the 2014 March quarter. This shows that the median house price in Adelaide rose by 4.43% from $393,000 to $410,399 over the 12-month comparison.

Last year saw the median price climb over the $400,000 threshold for the first time in three years, Piteo says. “This quarter sees the median price pass $410,000 – for the first time ever – representing a new record for the Adelaide property market.”

Further, the March quarter data from Australian Property Monitors (APM) shows that Adelaide house prices increased 1.3% over the quarter, which contributed to an overall rise of 4.1% over the year. Unit prices have risen 1% over the past 12 months.

The APM data summary described these figures as indicating ” a modest housing market revival”. They also indicated growth that is sustainable and should be attractive to buyers.

Piteo says Adelaide is always a moderate market and not prone to the sharp ups and downs of other markets. “From an investor’s perspective, this is a good thing. Four per cent growth is good: it’s not over the top and it means there are affordable increases in prices.”

Affordability essential for future?

Maintaining affordability is important to the future of the Adelaide market. While its median house price has hit a record high, the city is still the most affordable of the capital cities.

This is an important selling point, particularly for interstate investors, Piteo says. “Buying property at an affordable price, knowing there is going to be sustainable growth, is crucial for investors who are in it for the long term.” Affordable housing could prove to be crucial for the broader economy too.

The recent CommSec State of the States report ranked SA sixth or seventh on most of its key economic indicators. It described the outlook for the state as challenging and said that, hopefully, property investors would soon switch their attention to more affordable housing markets, like that of SA.   However, Piteo is more upbeat and believes the broader outlook is more positive than often represented in the media.

Investment projects steaming ahead

Meanwhile, it seems that as investment in the resources sector starts to decline further, SA has much less to lose than some other states.

According to the latest Deloitte Access Economics Investment Monitor, due to the fluctuating fortunes of resources in the state, SA’s major investment projects have been transport and utilities projects. This means that ongoing public-funded transport projects should keep investment levels in decent shape.

The reports states that a number of factors have impacted negatively on SA’s commercial construction sector, but it adds that the state government is doing its best to boost the sector with public money.

Such state-funded projects include the redevelopment of Tonsley Park into a 25ha industrial precinct, and a series of major health projects, such as the new Royal Adelaide Hospital.

Tasmania

Moving on up

A host of recent reports indicate that Tasmania’s economy is still foundering in the doldrums. While this does impact on the property market, the situation may not be as dire as it initially seems

In maritime lore, the doldrums are famously renowned for prolonged periods of calm which trapped seafaring adventurers, often reducing them to intense states of anxiety. This state of being is one which aptly describes the Apple Isle’s economy, which continues to stall and flounder.

According to the latest CommSec State of the States report, Tasmania remains locked at the bottom of the Australian economic performance table on most key indicators. It describes the state’s economic outlook as challenging.

Meanwhile, the latest Deloitte Access Economics Investment Monitor states one of the major reasons for the steady decline of Tasmania’s economy is its consistently below-average population growth. Further, the state’s working age population declined by over 1.1% over the two years to the end of 2013.

Perhaps the biggest problem is the ongoing lack of jobs. While there has been a small improvement in the unemployment rate, it is still at 7.4%. And this has a significant impact on the state’s property market as it limits the pool of active buyers.

However, REIT president Adrian Kelly is more optimistic about the state’s property market – if not its economy overall.

He says that while REIT’s latest quarterly property market report shows a 4.6% decrease in house sales over the March quarter, sales were actually up 14.9% for the year. The median house price remained steady on $305,000 over the quarter, which equates to an increase of 4.5% for the year.

“Most positively, Hobart’s median house price increased by 4.1% to $385,000 over the quarter,” Kelly says. “This was its third consecutive quarterly increase in a row and is in conjunction with an increase in sales volumes.”

The latest RP Data-Rismark Hedonic Home Value Index results, which record that Hobart had a 2.8% growth in dwelling values over the quarter, add support to the REIT results.

While Launceston recorded an 18.5% decrease in sales over the quarter, Kelly says this is due to a market correction after an outstanding December quarter. Sales in Launceston were still up 25.1% on March last year.

Where are the FHBs?

It is the lack of first home buyers entering the market which is of most concern, Kelly continues. First home buyers now account for just 17% of house sales across the state.

“This is impacting on sales in the lower end of the market and the planned removal of the $7000 first homeowners’ grant on July 1 will just make the situation worse.”

But, according to the latest Herron Todd White report, first home buyers in Tasmania are responding to the state’s First Home Builders Boost (FHBB), and as this incentive applies to new build homes, it has not had an impact on existing housing markets.

The report states that building approvals and activity have increased by just over 8% since the same time last year. It adds that increasing volumes of building contracts indicate that first home buyers are active within the residential construction market.

This means that, unusually, property investors are not competing against first home buyers in the Tasmania market.

Further, the Herron Todd White report suggests the state offers investors a unique opportunity – due to low interest rates, a firm rental market, government incentives*, and capital values coming off a declining market. All of these factors mean good returns for investors.

The combination of ongoing affordability and a strong rental market should be attractive to investors, agrees Kelly. “Giving what is happening in the Sydney and Melbourne markets, we think some investors will be priced out of the market and start to look to markets like Hobart’s.”

Property industry confident

Despite some of the conflicting information, it seems that confidence is returning to the Tasmanian property industry. The latest Property Council/ANZ Property Industry Confidence Survey shows a seven point jump in confidence.

ANZ’s Paul Braddick said the increased confidence reflects an improving economic outlook following two years of very weak conditions. “Housing market activity is expected to improve – with expectations of further gains in house prices and residential construction activity.”

There is currently a general air of positivity among REIT members, Kelly adds. “Most of our members are reporting improvements in the market. We feel that, overall, the situation has changed for the better.”

Australian Capital Territory

Room for improvement in Australia’s most liveable city

Despite rising to the top accolade, Canberra can still do more to make their city better, research suggests

Adelaide is no longer king. For the first time ever, Canberra has knocked the South Australian capital off the top of the ladder to become the nation’s most liveable city.

Indeed, Canberra residents raved that their city is clean, well-maintained, environmentally sustainable and safe. Furthermore, they said there are good healthcare services, employment and economic opportunities, good roads and minimal traffic congestion.

However, the most recent Property Council/ANZ Property Industry Confidence indicates that sentiment has dipped slightly for the March 2014 quarter dragged down by the uncertainties in the political sector.

Paul Braddick, ANZ Head of Property Research, says the results reflect a soft outlook for state economic growth, property construction and property sector employment.

“While the ACT economy has proven to be quite resilient, confidence has likely been weighed down by the planned Commonwealth Government’s fiscal repair and the likely associated public sector job losses,” says Braddick.

“In addition, the pipeline for ACT residential property construction is subdued compared to other states and territories, following a soft office property outlook and the slowdown from recent housing construction boom.”

According to the most recent Deloitte Access Economics Investment Monitor report, current construction projects are being led a series of upgrades to Canberra Airport valued at $480 million. There are only minor works remaining before final completion in the coming months.

In fact, the engineering construction projects the research firm recorded has halved during the past 12 months. “Of the seven projects currently in the database, six are currently under construction and the remaining one has funds committed. That leaves a stark pipeline with no projects planned beyond 2016,” it says in its report.

“Commercial construction has not fared any better, with the value of projects sitting at decade-low levels. And with completion dates for the $130 million upgrades to the Belconnen markets, the $100 million ‘One Canberra’ office development and the ADFA Campus refurbishment fast approaching, commercial construction activity may slide further over 2014.”

Northern Territory

Good times keep rolling

While news about – and future predictions for – Darwin continue to be dominated by the positive, one report suggests there could be an economic slowdown in the future

Thanks to its resources-driven economy, the tropical city of Darwin is going from strength to strength.

Much the same can be said of its property market, which is proving to be a top earner for investors. According to the April RP Data-Rismark Home Value Index results, Darwin was the best-performing capital city. Over the three months to April 2014, it recorded a 5.1% increase in dwelling values.

The RP Data results show that once again Darwin properties attracted the highest rental yields of any capital city. Houses recorded rental yields of 5.8%, while units recorded yields of 6.1%.

Real Estate Institute of NT CEO Quentin Kilian says that over the last 10 years Darwin has outperformed every capital city in rental yields. This is because high demands for rental properties and limited stock have led to high rental prices and strong returns. Given the city’s growing population and the current state of the NT’s economy, this seems unlikely to change soon.   The latest CommSec State of the States report shows that the NT is Australia’s second best-performing economy, just behind WA. In fact, it is ranked as the strongest on four economic fronts: economic growth, business investment, unemployment and construction work.

Further, the NT leads the rankings on economic activity and maintains the fastest annual economic growth in the country (up 11.5% on last year). The report says the economic momentum derives from commercial and engineering construction but is being held in check by the housing sector’s weak growth.

Amidst all the good news, one report does sound a note of caution. The latest Deloitte Access Economics Investment Monitor points out that work on many of the NT’s major projects is due for completion over the next year. Even the massive Ichthys LNG project is set to wrap up in 2016.

With activity in the non-residential construction sector modest and not much in the pipeline, a $300m mixed development planned for Palmerston is currently the leading light, the report adds.

Investors reign in Darwin market   According to the latest Herron Todd White report, Darwin’s market might be good for seasoned investors but is proving problematic for the first home owners.

Not surprisingly, affordability is the key issue. With Darwin being one of the highest-priced property markets in the country, first home owners are simply being priced out of the market. Meanwhile, continued low interest rates and the strong rental market are drawing in investors.

The report states that investors have been particularly active in the inner Darwin market. Up to 70% of some of the CBD developments underway have been sold off the plan to investors.

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