City secrets

PORTFOLIO POINT: Property prices in Australia’s mainland capitals are being driven by factors as different as the cities.

Australia has enjoyed a solid six months of improving property prices, but looking through the data for 2009 reveals that stark differences in the performances of major cities.

The standout performers, according to RP Data numbers for June half, are Darwin 7%, Melbourne 6.5% and Sydney 5.9%, while Adelaide’s growth at 0.6% appears sluggish. So what are the driving factors?

Source: RP Data

Interestingly, the best performing cities are arguably the most different from each other. Darwin is the smallest centre and the most removed from the rest of the country in terms of geography, lifestyle and economic base. Sydney, the largest and most international city, is close to the demographic centre and has a number of large satellite cities; while Melbourne has fewer, smaller satellites but a broad economic base, which includes such heavy industries as manufacturing and transport.

So why are the cities that are leading the pack so different from each other? Running into 2009, these cities were some of the most expensive places to buy real estate in Australia and also had a broad economic construction. The combination of high land values and a more resilient economy meant the dramatic fall in interest rates found its greatest impact in these centres.

Sydney is a case in point. When I talked about the impact of interest rates to Rich Harvey, managing director of independent Sydney firm PropertyBuyer, he told me: “The drop in interest rates really struck the hip-pocket nerve. I’ve seen latent demand for housing rising in Sydney for four years but it took the fall in repayments to burst the dam walls open. Sure, the first-home owner’s grant and a nervous stockmarket had an effect, but it’s the improvement in affordability that has made the difference.”

Looking ahead, the global economy and financial industry’s strong influence makes Sydney’s outlook into 2010 even brighter, particularly if high-earning specialists and executives see their fortunes improve. Harvey said: “While the $600,000 and under market is hotly competitive right now, I see the best outlook in the $1–2 million bracket. For investors, I would suggest the best option is a period three-bedroom family home in the right street, near top-notch schools in the North Shore suburbs up to St Ives and eastern suburbs like Randwick.”

If interest rates had an impact in Sydney, what was their effect on Australia’s most affordable capital? Adelaide was the surprise top performer in the two years to December 2008, with median prices rising 29%, according to the Real Estate Institute of Australia. Robin Turner, president of the Real Estate Institute of South Australia, told me: “The Adelaide market tends to move more slowly. It doesn’t race ahead and then retreat. I think 2009’s results reflect a breather period after two strong years. But there is more intrinsic value behind the prices here than in any other market. Looking ahead, we have the Australian Submarine Corporation expanding and a new army battalion moving to town, so I think that value for buyers will be supported by the market, with the exception of some off-the-plan apartment developments where investors have been disappointed.”

Last December, I told wrote that Melbourne looked best placed for improvement (see Melbourne picks up the property baton), due to its strong net migration, broad economy and impressive auction performance. All these conditions remain positive for Melbourne property, but we can now add the state government’s recent urban planning debacle in to the mix. Unfortunately, government inaction is preventing developers from producing affordable housing and while the disconnect between supply and demand continues, prices will continue to improve, a good sign for investors but a worrying sign for long-term affordability. Investors are most likely to be rewarded by period houses targeted by upgraders in the inner-northern suburbs.

With Perth’s house prices more expensive than Melbourne’s, falling interest rates should have made it one of the nation’s standout performers, yet median prices improved by just 1.9%. Interest rates have been influential, but we also have to take into account the price falls in 2008 as the resources boom spluttered to a halt. I think we will see a broader recovery in Perth property driven not just by lower rates and first-home buyers but also by returning business confidence from deals like the massive Gorgon project announced last week (see Why Gorgon will fire the economy). Simon Moore, of Hegney Property Group, says: “The best opportunities for investors are established houses and strata properties in inner suburbs with high amenity and properties close to the northern beaches.”

Brisbane’s median price also appears to be underperforming, improving by just 1.4% in the June half, according to RP Data. But Meighan Hetherington, managing director of Property Pursuit, puts this result down to the composition of sales. “We’ve seen a heavy concentration in the under $500,000 market making 2009 figures a little misleading,” she told me last week. “I think the next release of data will show the recent effect of investors’ activity on the Brisbane market. They have only been active in the past six weeks or so, but I’m seeing portfolio buyers and expats returning to the market. The best buying opportunities are in the mid-priced sector up to about $900,000, particularly three-bedroom family houses along the major transport routes. But there’s not a lot of stock on the market so investors need to be highly selective.”

Darwin’s short to medium-term future also remains bright. Its economy is surprisingly broad for a city of its size, driven by the resources sector and two large government payrolls, the NT government and the military. “Land releases have a history of being restricted,” says Tod Petersen of Petersen’s Property Search, “so I expect prices for well positioned family homes to keep rising.”

In a nutshell, much of the variation in price performance between major cities can be explained by timing differences and the composition of buyers in each market. But there are real differences in the property types investors should be targeting, driven by the nuances of each centre’s urban structure, amenity and economic base. While the property investment fundamentals stack up across all major cities, the best watch phrase for investors should be that old Scottish saying: “Know thy place”.

Property Q&A

This week:

• How can you keep track of property prices?
• An investment in south-east Queensland.
• A taste for Thai.
• Will unemployment hurt property prices?

Keeping track

What data is used to determine the long-term capital gain growth rate of 7% a year for property? If just selling prices are used, the cost of renovations, maintenance and council rates won’t be factored in and the true long-term growth rate may be overstated.

Selling prices are the basis for the median price estimates published by all the major property information companies and the ABS, but Residex excludes prices for properties which been significantly renovated or extended.

The figures of 7% or 8%, which are often used for property’s long-term growth, should always be treated by investors with caution, as this growth rate will not magically apply to all residential property. First, as the rate of inflation varies over the years, so will investors returns. Second, as you rightly point out, the sale prices of some properties will include extensions, alterations or renovations and this can distort the capital gains picture. This highlights the importance of practical market knowledge; there’s no substitute for pounding the pavement and knowing the nuances of the market you’re dealing with. If the purchase price was say $700,000 in 2007 and the same property sold for $1.6 million in 2009, it would be a fair assumption that it has undergone an extensive renovation. A lot of data doesn’t reflect that and to a large extent it can’t.

So as an investor, the key is to focus on ensuring that a property you’re considering has the attributes that drive growth and none of the characteristics that detract from growth. This will prove to be the best guide for investing in property rather than relying on median prices alone. If you do buy what I call an investment-grade property, it should be achieving a growth rate of 5–7% above the rate of inflation, assuming it has just been well maintained. as opposed to substantially renovated.

Queensland’s south-east

My husband and I are hunting for our first investment property and we’re interested in south-east Queensland between Brisbane and the Gold Coast. Our budget of $295,000 won’t buy us house and land so we were thinking of buying a duplex. Is this the right area to invest in and are duplexes worth considering?

Duplexes can work just as well as any other property type over the long term, provided they exhibit the right characteristics.

Your question about this location is an interesting one. The area between Brisbane and the Gold Coast has seen continuous development over the past 20 years and in the long term, I suspect it will be at the centre of a huge metropolitan area. However, the types of property in that region are very generic and often lack scarcity value. Moreover, if urban development around this area increases in the meantime, you will find your property competing with many others for tenants or buyers, should you wish to sell. Transport links, infrastructure and shopping have improved over the past 10 years but for those not working nearby, getting to central Brisbane in peak times is still quite a journey. The moderate demand from tenants, home buyers and investors in this area – and the possibility of large increases in supply of new property – means capital growth in these areas is unlikely to prove as profitable as other areas in south-east Queensland or in Brisbane itself.

I would suggest with your budget of about $300,000 that you should try to find a well-positioned one-bedroom apartment in an inner- or middle-ring suburb of Brisbane. Make sure you only look at apartment blocks with a low number of units in a high land value area near a major transport route. Your apartment should have a logical floor plan, superior position in the block, a pleasant aspect and allocated parking.

If the position and the attributes of the apartment are right, these properties will typically outperform larger properties in a location with an equal balance between supply and demand over the medium to longer term. In a premium growth area, you should be able to get a rental yield of about 4–4.5%, which is likely to be less than a more compromised suburb, but more importantly, will deliver better capital growth over time.

Thai on the menu

I have seven investment properties, all in South Australia (five residential, two commercial), and I am looking at purchasing a small condominium in Pattaya, Thailand. This will be my first overseas purchase in a fairly vibrant city, and it should be easy to let out, and hopefully make capital gains. What do you think?

Pattaya is a beach resort south of Bangkok, known for attracting Bangkok residents and '¦ how shall we put this '¦ middle-aged Western men courting the company of much younger Thai companions. While I’m not an expert in the Thai property market, I can see a number of risks with this strategy, including the future state of the Thai economy and government, a significant fall in inbound tourists due to poor economies elsewhere or higher aviation costs, and a determined attempt by the Thai government to remove some of the more seedy aspects of the Pattaya local economy.

You may also recall images from earlier this year of Asean leaders being evacuated by helicopter as thousands of protesters stormed a summit in Thailand. Well, that summit was held at the convention centre in Pattaya! I’m not sure that this choice of locality for an investment property will prove optimal.

If I were contemplating investing in overseas property, I would start by looking at stable, prosperous, growing metropolitan markets where the supply and demand equation supported the case for price improvements over the medium to long term. There are some good prospects around the world, but given this investment equation, Australia has some of the best. Staying close to home allows you to invest in a country where you understand the rights and obligations of property ownership and so don’t have to take on board the risks of currency movements or an unfamiliar tax regime or social conditions.

Jobs and prices

I am a modestly successful share investor and confused real estate owner. I have held on to a family member’s house in a middle-ring suburb in Melbourne’s east after she went in to aged care two years ago. However, I remain concerned, as rising unemployment could affect property markets as it has in the past and our current government is trying to spend its way out of our problems. Won’t this drag down property prices in the near future?

Earlier this year (see Why property is surviving jobless tremors) I talked extensively about how unemployment could affect the property market. I won’t revisit the entire column here, but there are two primary points you should consider. First, property did suffer from unemployment in the early 1990s, but unemployment then was nearly double the rate it’s at now, while interest rates were nearly three times their current level. Suffice to say that while the current economic environment has detrimentally affected some people’s lives, it is not at the same scale or menace as it was back then. This is why property values have continued to improve even as unemployment has risen from about 4% a year ago.

I agree with you on government debt – it always worries me when we see governments or anyone else for that matter attempting to spend their way out of trouble. While Australia’s net debt position is likely to peak at 15% of GDP, other governments such as the US and the UK, may well peak at 100% of GDP or more. To my way of thinking, one of the primary reasons Australia has done comparatively well over the past 12 months was because we essentially had no federal government debt. I hope we can get back to this position soon as it would seem to be a much safer option.

But even if the government’s borrowing continues as the Treasury has outlined, I would think residential property in an area like Melbourne’s inner to eastern suburbs would be one of the safest places to have an investment.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique Wakelin? Send an email to monique@eurekareport.com.au.