Considering the mixed messages coming from the press regarding the state of our property markets, it is not surprising that some investors are confused. We tend to see these types of mixed messages when property markets are at their turning points and different indicators point in different directions.
The recent 0.25 % interest rate rise will dampen the enthusiasm of first home owners and investors, but these are not the segments of the market driving the next property cycle. The established property markets in the more affluent suburbs of Melbourne, Brisbane and to a lesser extent Sydney are where property values are currently increasing and the owner occupiers buying in these suburbs are not going to be deterred by a 0.25% interest rate hike.
Australia's residential property markets have defied the gloomy market forecasts of a couple of years ago when many commentators forecast a housing price crash.
Of course there isn't just one property market and each state is in a different stage of the property cycle. In fact within each state, different market segments are at different stages of the property cycle.
Let’s take a closer look at how the various markets are performing around Australia and at some forecasts for the next year.
Currently those regions with the strongest economies have the most buoyant property markets, in particular Western Australia and the Northern Territory. The other markets are at various stages in the cycle as show in the following graph:-
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| Source: Metropole Properties |
SYDNEY
New South Wales has Australia’s weakest economy and this has in part led to it having Australia’s weakest real estate market.
The Sydney markets have been in a downturn since interest rates roses in November 2003. In some areas property values are 10% below their peak, but in the more affluent areas, particularly in the $1 million to $1.3 million price brackets, prices have dropped even further.
But it is not all doom and gloom... whilst Sydney has borne the brunt of the last property slump; but despite all the bad news, Sydney has the makings of a recovery.
There are now positive signs emerging. There is a shortage of rental accommodation and rents are rising. Sydney vacancies are at historically low levels. Construction of new dwellings is at very low levels, yet migration to Sydney is picking up. This means there will be a greater demand for dwellings than there will be supply.
All this creates conditions for property prices to start rising late in 2006 or in 2007.
Having said that the price and rental growth in the inner Sydney apartment market will be constrained until 2007/08 until the current oversupply of apartments is absorbed.
At the peak of the property boom between 2001 and 2003 many investors committed to buying apartments which have been completed over the last year or two. This has flooded the Sydney apartment market and restrained rental and price growth.
MELBOURNE
Like Sydney, the Melbourne property market went into a downturn in late 2003. The difference has been that prices have remained flat over this period rather than dropping as was the case in Sydney.
While some forecasters are suggesting that property prices will remain depressed in Melbourne for another couple of years due to lack of affordability, we have seen strong growth in some middle and inner ring suburbs over the 8 months which would suggest the opposite.
The fundamentals for Melbourne are solid with strong underlying demands for property from owner occupiers, yet new dwelling construction has been subdued.
One area of the Melbourne property market that has remained strong is the top end. There seems to be plenty of cashed up buyers to purchase the limited supply of properties becoming available in Melbourne’s more expensive suburbs. In some more exclusive suburbs Owner occupiers have driven prices up by 10%.
While demand remains strong in inner and middle ring suburbs, investor confidence remains shaky and the outer suburbs, generally the domain of the first home owners, are performing poorly.
Melbourne’s property market has a solid underpinning of strong population growth. Melbourne’s population grew more the any other city than last year and Victoria added more new residents than any state except Queensland.
There are still great investment opportunities in Melbourne as the weak market sentiment makes this a buyer's market.
Vacancy rates remain very low levels forcing rents to rise, but the pent up demand isn't as significant as that in Sydney.
The REIV reports that the vacancy rate in the newly completed and previously untenanted inner-city apartment market in the CBD, Docklands, St Kilda Rd and South Bank areas has fallen from 3.4% at the end of last year to 2.5%, going against many analysts’ predictions when this rate was closer to 10% less than 2years ago.
The residential vacancy rate for inner Melbourne (0-4km from the CBD) dropped from 2.1% to 1.7%. Inner Melbourne (4-10km from the CBD) dropped from 1.8% to 1.2%. Middle Melbourne (10-20km from the CBD) vacancies rose slightly from 2.1% to 2.7%. Outer Melbourne (20km plus from the CBD) vacancy rates remained very low at 1.8%, slightly up from 1.6%.
BRISBANE
The Brisbane property market sauntered on for another year after Melbourne and Sydney slowed down in late 2003, and then experienced a flat period for most of 2005 and the beginning of this year.
While some regions experienced house price falls, others have risen modestly, in particular the southern corridor between Brisbane and the Gold Coast. The positive aspects for the Brisbane property market includes its strong economic growth underpinned by the resources sector and its high population growth.
Working against it is the fact that Queensland's population growth is now slowing with 20,000 fewer migrates entering a year compared to the peak in 2003.
Affordability has become an issue as Queensland is slowly priceing itself out of the market. It seems that purchasers appear unwilling to pay higher asking prices and this, together with lower rental yields, is encouraging investors to go elsewhere.
Following five years of strong rental increases, rental growth is likely to slow in Queensland as a record number of apartment projects are completed, relieving pent up demand.
While the major markets of South East Queensland, including Brisbane, the Gold Coast and Sunshine Coast are likely to be at the bottom of their cycles and are slowly beginning their recoveries; the major regional markets of Northern Queensland are still near peak and are unlikely to have significant price increases for quite some time.
CANBERRA
The residential property market in Canberra has peaked and is in it's decline stage having been flat throughout 2005. While house prices remained flat or fell slightly, units prices still increased a little over the last year.
The ACT has Australia's lowest population growth rate and there is some concern about an oversupply of apartments and townhouses occurring in Canberra, with a large number of units under construction or nearing completion.
This should result in no growth in property values and softening rents for most of this year. Canberra has not yet reached the bottom of its property cycle.
PERTH
Perth is still going through its property boom. The median price of Perth property has been pushed up to $335,000 and prices grew by over 18% in 2005. Vacancy rates are low and the number of properties for sale is at very low levels of just 5,500 while 12,000 properties for sale is considered "normal supply."
Underpinned by a resources boom, a strong economy, net migration inflow, low unemployment, strong investment sentiment and low vacancy rates this boom is likley to continue for a while, but like all property booms, this will eventually falter and affordability will become an issue. Eventually the commodities boom will come to an end and so will Perth's property boom.
It is a bit like musical chairs... be careful you are not the last one buying a property.
ADELAIDE
Adelaide's property markets have slowed right down in 2005 after having a property boom the likes it had not seen for a decade.
According to the REISA the Adelaide property median price is at $277,500 for the March quarter of 2006. This is a 2.7% increase on 12 months ago and a slight decline of 0.1% from last quarter.
It seems to have had a soft landing with house prices not having fallen significantly. But due to the oversupply of new dwellings, it is possible that property prices may fall by up to 3% over the next few years.
Adelaide suffers from poor population growth, addingonly 6,000 to its population last year. S.A's population growth rate is half the national average.
This plus a sluggish economy suggests that the next few years will not see South Australian properties performing strongly.
HOBART
A strong economy and interstate migration helped Hobart's median property prices more than double in the three years to mid 2005. But recently migration has slowed the property should remain flat over the next couple of years.
Darwin
The Northern Territory’s strong economy has meant an increase in migration which has kept its property market strong.
The continuing resources boom should see Darwin’s property market continue to grow throughout this year. There is a wave of new unit developments in the CBD and in the suburbs aimed at investors. I would be wary of this market, as it will be more vulnerable to a downturn.
