National Property Report – May 2012

NEW SOUTH WALES

A long period of poor performance might be coming to an end in NSW, but supply issues remain unresolved

The Sydney property market is due to pick up, thanks to a lengthy slow period and improved affordability, according to ANZ head of property research Paul Braddick.

“The market has basically under performed for the last decade, or since 2003, so affordability has improved over that period pretty dramatically,” he says. “Our measures show that the standard service on a mortgage back in 2003 was at 44% of the household’s disposable income, while currently it’s down to around 30%. That’s a big shift and much bigger than you can actually say about any of the other States, a lot of which have actually gone the other way.”

In addition to affordability and the period of stagnation, Braddick believes the significant shortage of housing suggests an upside is around the corner for Sydney.

“Sydney has been under-building for 10 years and continues to do so,” he says. “When you look at the market balance data, the supply and demand and the population growth, it’s obvious that they’re not building enough and that is reflected in the rental market, which is very tight at the moment.

“The rental vacancy rates are at near record lows. The latest figure we’ve got is at 1.4% Sydney-wide.”

Braddick estimates that population growth will pick up in the near future and this will keep an upward trend on rents.

“Sydney rents were up on average by 3.6% last year, so there seems to be quite a bit of underlying momentum in that rental market,” he says. “From an investor’s perspective, if you’ve got such low vacancy rates, you’re not going to have any trouble keeping a tenant.

“Population growth has slowed over the last 18 months, but the scarcity of skilled labour in a lot of sectors means the population’s actually going to accelerate over the next couple of years, so [competition for rentals] will actually get tougher.”

Development increases

According to the Australian Bureau of Statistics, Sydney had an increase in houses approved for construction in 2011, up 10.1% from 2010 figures. Apartment construction was also up around 7.4% for the same period.

In total, there were 23,051 dwellings approved for the year, but Melbourne was still ahead with 40,501, despite suffering a fall in approvals from 2010.

These figures may indicate Sydney has a long way to go in addressing its supply shortage, but the increase was a step in the right direction and there are currently a number of significant projects underway.

Sydney city will welcome a $104 million development by Metro Plaza Central in Haymarket, offering two-and three-bedroom apartments spread across two 16-storey towers. Other CBD projects include a luxury apartment building overlooking Hyde Park, 23 Manhattan-style apartments in the ‘Jade’ development on Sussex Street and a 22-level development in Waterloo.

In the east, the Old Swiss Grand on Bondi’s Campbell Parade will be transformed into a precinct housing a hotel, 95 apartments and a two-level retail and restaurant complex, as part of a $100 million project.

In the north-west, the second stage of a five-tower, 630 unit development adjoining Macquarie University and shopping centre in North Ryde is set for release in the coming weeks.

Major ventures are also getting underway in Potts Point, Five Dock, Erskineville, Hunters Hill and Mosman.

QUEENSLAND

Resurgent mining towns existing alongside perennially struggling tourist areas is evidence of a still deeply divided market

Airlie Beach is not a place accustomed to unhappiness. There are an average 285 sunny days a year in this international tourist favourite and with its dazzling white sandy beaches and world-class diving sites, some local residents confess to not always knowing what day of the week it is.

But recently Airlie Beach has been having a tough time. Property values have been on a downward slide, posting large-scale falls as far back as 2009.

It’s not the only tourist area rolling in the deep. Nearby Clermont and further up the coast, in Cairns, property values have also struggled, with 12-month falls exceeding -20%.

As this happens, property prices in Mackay, the gateway to the coal mining Bowen Basin region and an hour’s drive from Airlie Beach, are showing signs of recovery. Resource-led investment has brought new life to the market and the Real Estate Institute of Queensland reports December quarter growth of 2.4%.

Other resource-driven centres are also looking strong. REIQ December data shows that Gladstone, a major exporting centre for the coal industry, posted 8.4% growth, while coal producing centre Moranbah saw three-month growth exceed 15%.

These are just some of many illustrations of the two-sided nature of the Queensland property market at the moment. Tourist centres are struggling, resource-driven areas are recovering.

“The data we’re getting is that resource-driven markets are doing particularly well. In some ways, many of these markets may be past bottoming out. In tourist towns, recovery has not been as pronounced,” says REIQ president Anton Kardash.

The problems

The recent problems that tourist areas have had to endure are well-known. Floods have been a frequent occurrence over the last two years, and some of the northern parts of the state are still yet to fully recover from damage left by Cyclone Yasi in February last year.

It hasn’t helped that the strength of the Australian dollar has been at record highs, discouraging many international tourists from visiting areas such as Cairns, the Whitsundays area and the Fraser and Sunshine coasts.

However, Kardash believes that this might change. “Data is yet to come in officially, but the anecdotal stories we’re hearing from agents is that there’s been an increase in enquires and activity. Confidence is returning, though it is coming in slowly.”

VICTORIA

Melbourne buyers have the luxury of being fussy, as development projects take the city to the brink of oversupply

The Melbourne market is starting to resemble an ideal situation for buyers, thanks to myriad quality discounted properties to choose from and the option to think long and hard about purchases.

“Victoria has been the opposite end of the spectrum from NSW in some senses over the last few years,” says Paul Braddick, head of property research at ANZ. “It is the one state that has actually been producing adequate housing and arguably, over the last 18 months or so, has been overproducing.”

The ready supply of property has seen a notable increase in Melbourne’s vacancy rate, which is up from 1.5% 18 months ago, to 2.4% now, according to Braddick.

“You wouldn’t say it’s excess supply, but that listing means you don’t have the same upward momentum in rents that you’re seeing in Sydney,” he says.

“In terms of specific areas of the market, the one that everyone’s concerned about is the inner-city apartment sector, because the vacancy rates there have lifted quite significantly. There has been a lot of supply come on in the last 12-18 months again, as well as a substantial pipeline of new projects that are either under construction or committee and are going to be delivered into the market in the next two to three years. The extent of that supply will test the demand for that type of product in that location, the 0-4km ring from the city.”

Foreign influence fades

Braddick believes Melbourne prices have over-performed in recent years, due to certain stimulus measures in the wake of the GFC. In particular, he believes a nationwide relaxation of restrictions on foreign investors proved particularly influential to Melbourne property movements.

“In the wake of the GFC, the government was seeing house prices tank in the US, Spain, Ireland and so on,” he says. “So they basically opened up the Foreign Investment Review Board’s (FIRB) rules, so offshore investors, and as it turns out particularly Asian investors, were able to buy land and property.”

Ordinarily, in the interest of keeping Australian investments affordable and a decent percentage of ownership on home soil, the FIRB will refuse applications by foreign investors to buy certain assets. With property, they are often allowed to buy units, but not land and property.

“The risk [of relaxing FIRB rules] and actually what you saw happen, is that prices are pushed through the roof,” says Braddick. “You get very wealthy foreign businessmen, able to bid way above what you or I are able to afford.

“However, for the 12 months after the GFC, it was almost open slather and there were a lot of Asian buyers. The offshore interest was focused predominantly on the bigger capitals such as Melbourne and Sydney, largely because mainland Chinese people probably didn’t know as much about [other Australian capitals].”

Braddick believes the gloss of the foreign investment boom in Melbourne is now fading, due to FIRB restrictions being put back in place and the removal of stimulus such as the first home buyers’ boost.

WESTERN AUSTRALIA

The WA capital appears to have finally bottomed out, but even with all that mining activity, analysts are pointing to a slow and steady recovery for property

Western Australia’s housing market has been reading a bit like the old fable of the tortoise and the hare. The state’s mining towns are racing ahead in a cloud of dust and wild spurts, while the capital hardly appears to be moving at all.

Angie Zigomanis of forecasting firm BIS Shrapnel says his firm expects Perth to start moving ahead, albeit slowly. He says the market should be prodded along by Perth’s stronger fundamentals that are finally showing some of the flow-on effects from huge investment in the Pilbara and other mining centres.

“From an employment perspective, things are pretty good. From an economic growth perspective, things are pretty good, from an affordability perspective, things have improved,” he says. “All those things should point to a stronger residential market and we’re just waiting for that confidence to turn around more than anything else.”

The mining investment has helped crown Western Australia as the nation’s economic top-performer, so market confidence has started to pick up slightly. But over the first few months of 2012, the Perth market has posted mixed results, but that is an improvement considering a year of sustained declines, which saw house prices drop by around 5% across the WA capital.

SQM Research’s Louis Christopher says some of the investment up in the mining centres is finally putting wheels on a Perth recovery.

“Some signs suggest that housing supply or stock on the market is now peaking, and even falling, and that rents are on the rise again,” he says. “So we believe that the Perth housing market is actually close to a bottom or is already experiencing a bottom, finally.”

Landlords have been the first to gain, with median rents in the capital at $425 a week, according to January figures from SQM Research – that’s up a robust 11.8% over the past year alone.

But Zigomanis warns that whatever the extent of the recovery, it will not be evenly distributed around Perth. He says some pockets in the south of Perth will likely continue to lag. “There was probably an element of overbuilding and speculative buying in some pockets there and so those areas tended to have been oversupplied,” he says. “So they are going to take a bit more time to catch up.”

The multi-speed market, however, is most apparent when you look to the mad dash to support the investment in the mining areas of the Pilbara region. Areas like Port Hedland and Karratha have posted double digit median price increases for several years running and show little signs of slowing – yet.

SQM’s Christopher warns against betting too heavy on the boom.

“The mining towns have experienced the run-up regarding these particular projects and Perth itself has not,” he says. “Potentially this year we think that since the Perth market is in the process of bottoming out, we could see a modest recovery this year.”

Christopher appears to be a believer in the old adage: “slow and steady wins the race”.

“The mining towns are looking very toppy at the moment, and if we were to see a hard landing in China that would be the key risk for them.”

SOUTH AUSTRALIA

Adelaide has had a slight change of character as the affordability that once defined it as a market shows signs of falling

Long hailed as Australia’s most affordable mainland property market, Adelaide has more recently got a sour taste of the wooden spoon.

While the city continues to be arguably the most affordable capital city market outside of Hobart, it holds the rare distinction of being the only capital city where affordability deteriorated over the last quarter. All other capital cities saw slight improvements in affordability.

This is according to a Housing Industry Association study that shows Adelaide is at risk of losing its crown in the affordability stakes.

The report indicates that despite interest rate cuts over November and December, the gap between the average cost of property and average wages has widened in Adelaide.

Evidence of this is that the cost of maintaining a standard loan has risen by almost $100 a month over the last three months. This is at a time when cuts in required payments have occurred in Brisbane, Perth, Sydney and Melbourne.

A debate brooding

The anomaly has so frightened observers that opposition housing spokesperson John Gardiner has labelled it a sign that “Adelaide housing is getting further out of reach as the cost of living increases across the board”.

Real Estate Institute of South Australia president Greg Moulden believes the situation has been blown out of proportion.

“Affordability has been so strong in Adelaide that I’d say it’s hardly surprising that affordability didn’t improve even though it did in other cities. We haven’t had the same sharp increases or falls that have characterised other markets. Things happen in South Australia at a much steadier pace. It’s just how our market works,” he says.

A greater concern in Moulden’s eyes is confidence. While buying activity and prices growth hint that a bottoming out may be occurring in South Australian property markets, confidence remains a missing ingredient.

“At the moment, the feeling about the South Australian market is not that good, but it’s fair to say that a lot of this has to do with what is happening overseas and in the global economy as a whole.

“For things to come off the bottom in a big way, the market needs to see confidence levels improve. That’s what’s missing.”

AUSTRALIAN CAPITAL TERRITORY

Canberra’s still a star but worries over supply and the upcoming federal budget could dim its luster

Canberra has been the star performer throughout the last year or so of hand-wringing over the country’s property market, and recent data shows it has maintained its position among the nation’s hot spots.

But there are several signs that supply is starting to catch up following record levels of unit development around the city centre.

“That’s something we’ve been keeping our eye on for the past 12 months or so,” says Angie Zigomanis of forecasting firm BIS Shrapnel. “And as you can see, there has been a huge swag of big apartment developments coming through – it’s a record level and it’s probably ahead of what’s being required by population growth, and over the next two years you’ll probably see vacancy rates go up.”

Good fundamentals

Canberra currently boasts the tightest rental market of any capital city, and rents are among the highest in the nation – two reasons that have consistently made Canberra a favourite among investors. Canberra’s fundamentals are also good on the income side – it was recently ranked number one in terms of housing affordability, but that had everything to do with the capital’s high household income, because house prices are also the dearest of the nation’s capital cities.

But Zigomanis warns that the high prices and median rents at $510 per week (up 5% on the year) have spurred a glut of development that could slow rental growth and especially impact the unit market. “We expect an oversupply to start coming through as all of these projects reach completion and are made available to the rental market.”

Federal government watch

Zigomanis says an added element that his group is keeping an eye on is the federal government’s progress towards their goal of bringing the budget back into surplus.

“They keep talking about cutting costs and up until now it hasn’t had a huge impact because it doesn’t seem to have affected employment,” he says. But he warns that that could change now that stimulus spending has phased out and the Labor government faces continued pressure from the Opposition. “So, if they do manage to follow through with their objectives then employment growth in Canberra will slow and may go backwards, and that should have an impact on the housing market as well.

“We saw a decade and a bit ago when the Howard government came in, they had a lot of cuts in the public service and the Canberra market went downhill for quite a few years,” he says. “Depending on what the federal government does now, or if a new government comes in [in 2013] and decides to do a bit of slashing and burning, then you could see a similar impact on the Canberra market again.”

NORTHERN TERRITORY

The Top End shows growing confidence and resource investment, but housing may take a bit longer to shine

Darwin has good reason to exude a bit of confidence amid the booming pace of resource growth happening in the Top End, but it is going to take a little more than that to help shake off the 5% shedding in prices homeowners experienced in the 12 months to February 2012.

But REINT CEO Quentin Kilian says he’s already seeing signs that a turnaround has begun, with data showing a 22% growth in sales activity in the December quarter last year, even before news broke that the massive $30bn Inpex LNG gas project was getting the go-ahead.

“So the activity is actually happening up here in a huge way,” he says. “Quite frankly, if investors sit around [doing nothing] waiting for a big signal, the signal has come and gone.

“The amount of open houses that are literally packed is astronomical. In September, you literally couldn’t attract someone to an open house.”

Louis Christopher of SQM Research has a slightly different reading of what that signal means for the market’s immediate prospects.

“The thing is a lot of the investment up there has already been taken into account into the price,” he says.

“So you see house price movements run up in anticipation of a certain project being completed. That’s not to say that the promise of future projects and outright prosperity for the city is not going to grow and grow, but house prices themselves can be overheated relative to the potential of that city.”

While Christopher expects to see growth in the long-term, he says Darwin is still facing a glut of new apartment dwellings that broke ground during the last run-up in prices that ended last year.

Angie Zigomanis of forecasting firm BIS Shrapnel sounds slightly more optimistic in his assessment of Darwin’s immediate prospects. But affordability, he says, is still a big issue following the Top End’s boom on the tails of the GFC.

“Darwin enjoyed a period of price rises through the GFC, so through an affordability perspective, I don’t think you can expect to see big double-digit rises,” he says.

TASMANIA

A wind farm and a dairy project are two multi-million dollar ventures providing a light on the hill, as the clouds gather over Tasmania’s job market

A tough start to 2012 has become even tougher for Tasmania, with a leap from 5.5% to 7% unemployment during February. The closure of factories and plants and the uncertain future surrounding mining sites are adding to the negativity already being experienced by the state’s housing market.

“The new 7% unemployment rate is probably an indicator that Tasmania doesn’t have the type of big investment projects getting the go-ahead that are helping the rest of the other smaller states, so it is being left behind,” says ANZ head of property research Paul Braddick.

“The Tasmanian population is only around 510,000, so closures of businesses will affect the unemployment rate more than in other states, like NSW, where you might have a population of 7.3 million.”

The bad news continues to roll in for the Tasmanian workforce.

At the end of 2011, BCD Resources announced the impending closure of its Beaconsfield gold mine in the state’s north, which was made famous by the rescue of two trapped miners in 2006.

Workers at the site are currently in the process of removing the available resources and once it closes, more than 150 jobs will be lost.

On an administrative front, the recent takeover of the TOTE betting agency in Hobart by the Tatts Group will result in job losses for 190 workers and contractors.

Recently, both BHP and Rio Tinto have suspended operations of smelting plants at Bell Bay, in the state’s far north, while the viability of operations there are reviewed. Around 1,000 jobs are at stake between the two sites and Andrew Peck, president of the Australian Property Institute in Tasmania, says nearby communities stand to be severely affected.

“Georgetown is an industrial based township, north of Launceston,” he says. “If either plant closed, let alone both, it would decimate the area, because that’s the sole employment base. There are roughly 3,000–4,000 people living there.”

Peck believes Tasmania’s problems will continue due to the cash strapped state government being unable to intervene. “The government is still about $200 million behind where they want to be in their budget and GST revenues are down,” he says. “Building approvals are still down and so are retail figures. With unemployment, the key economic drivers are still on the south side of positive. We’ve certainly got a soft outlook for price and we’re looking a bit shaky.”

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