Hobart goes back to sleep

Seduced by cash flow positive property in Hobart, mainland investors were behind one of the biggest property booms in recent times. But while property in Hobart might still be cheap compared with other capitals, the market no longer offers the all over value it once did.

Starting in 2000, several factors conspired to double prices in some Hobart suburbs. Federal and state governments launched schemes designed to support first home buyers, which fed through to prices, while investors from Melbourne and Sydney were attracted by the affordability and high yields offered by the market at the time.

Since then, the demand for property has tapered off and investors no longer make offers over the phone for properties sight unseen. Adrian Kelly, the state manager of Roberts RE, one of the largest real estate agents in Hobart, says: “We are almost at the bottom of the cycle right now. Our peak began in 2002-03 and had wound up by early 2004.”

As it stands, Tasmania lacks the factors that underpin most healthy property markets. It has the nation’s weakest population growth, a crucial component of a growing economy. Between 2003 and 2006 net migration halved in Tasmania, falling from 1.25% to just 0.6%.

Further, according to ANZ’s Australian Property Outlook, released on August 20, Tasmania’s economic growth has slowed over the past two quarters, putting the economy into what the bank describes as a technical recession. Aside from its manufacturing industry (which is tiny in comparison to the rest of the country), the main contributors to gross state product are government-owned businesses and services, not private industry. These are factors that don’t bode well for its capital of 200,000 people.

It’s easy to get around Hobart, which is one of the big attractions of living there. It can take less than 20 minutes to drive from wealthier inner suburbs of Sandy Bay and Battery Point to its outer suburbs. Middle Hobart extends as far south as Blackmans Bay and as far north as Glenorchy, across the Derwent to the nicer areas of the eastern shore. Outer Hobart is a broad term and can be used to refer to anywhere within a 30-minute drive of the city centre.

The city really is unique in that you really can afford a water view at any price range. The rolling terrain along the banks of the Derwent River and Storm Bay mean a higher proportion of properties in Hobart have water views than any other Australian capital. Despite this, most of the action is focused around the stately homes of Sandy Bay and Battery Point. This is where Hobart’s old money call home.

The Real Estate Institute of Tasmania (REIT) says median prices achieved over the weekend of August 18 and 19 in Battery Point and Sandy Bay were as high as $570,000 and $520,000 respectively. The suburbs occupy the coastline south of the picturesque café strip of Salamanca Place, between the ocean and Mt Nelson. Mt Nelson, which offers spectacular views from balconies attached to expensive modern homes, is referred to by locals as 'Mortgage Hill’.

But the prospects for investors here are few and far between. Australian Property Monitors says median prices in Sandy Bay have moved just 4% over the past year, while houses in nearby Battery Point have stayed on the market for a whopping 144 days. Kim Morgan, a director of real estate agency Charlotte Peterswald, says: “There seems to be a lot of stock in this area in the $800,000 to $1.1 million mark that has been sitting there for a long time.”

The yields in Hobart’s blue-chip property region aren’t much chop, either. REIT figures from Sandy Bay have a median house price of $520,000 and an average weekly rent of $215; that makes for rent of $11,180 for the year, or a yield of just under 2.2%. Adding in price growth of 4% and your investment property is barely washing its face.

At the other end of the market, the cash flow-positive property that once defined Hobart has become a lot more scarce. Hank Petrusma, a director of real estate agency Petrusma & Partners, says that instead of location, location, location, investors should adopt a different mantra: continuing strong demand. He explains: “If a three-bedroom house in Glenorchy is always going to be full of tenants, then that’s where you buy.”

Petrusma gives the example of a property in Chigwell, 20 minutes drive from the city. The unit is selling for $85,000 with a tenant currently paying $130 a week, delivering a yield of about 8%. Asked about price growth, he explains: “Well that’s a trade-off really, isn’t it. Price growth is usually found in better quality areas.” Data from Home Price Guide shows Chigwell’s median price has fallen by 4% over the past 12 months.

It’s in the formerly industrial suburb of West Hobart, on the fringe of the CBD, that the numbers begin to stack up. It is a well established area with good schools. On a median price of $396,000 and returning an average of $315 a week, properties in West Hobart deliver a yield of just 3.7%. But the average price growth in the suburb over the past 12 months is 10%. Although still negatively geared, the average investment property is delivering a combined return of about 13.7%. The figures for North Hobart are similar.

Kim Morgan of Charlotte Peterswald says: “I have a client from Sydney who holds about a dozen properties bought in West Hobart and North Hobart. Good, solid three-bedroom brick houses on plenty of land and I think that is a sensible strategy. I would probably steer away from a lot of the newer apartment areas '¦ I think the yields there aren’t quite as strong.”

Indeed the outlook for apartments is pretty grim. At the height of the boom a series of developments were completed, flooding the market. Hank Petrusma says: “I think some of the apartments were a bit of a disappointment. I think apartment development in Hobart could have had a bit more thought put into it.”

Among those properties to hit the market were Zero Davey, One Collins and the Henry Jones IXL project, which remains highly regarded in design circles. Unfortunately for investors, all three are crowded into Hobart’s north-east. Adrian Kelly of Roberts RE says: “Apartments had a bit of slide because during the boom years there just weren’t enough buyers and they were priced a bit high anyway.”

Property speculators were drawn to apartments in these areas because of the prospect of positive cash flow. Located on the edge of the CBD and within a brisk stroll of the hospital, it was thought that premium apartments could be bought and resold for quick capital gains or leased out for yield that would cover the repayments. Neither plan worked out.

One reason the Hobart property boom was so pronounced was because property in general was quite seriously undervalued. Since the upward price correction, it hasn’t been unusual for premium properties to be re sold after two years for absolutely no gain.

In the past, one of Tasmania’s biggest problems was its high unemployment, the biggest in the nation. However, the latest survey from the ABS showed unemployment falling from 5.2% to 4.8% so that dubious honour now goes to South Australia.

Tasmanians themselves appear to have a renewed confidence in their state’s prospects. Residents believe that, providing the employment situation holds up, property in Hobart will remain a good investment. Many agents view the arrival of investors from Perth over the past 18 months as a good sign.

The reality of the situation is that while property will move forward, it will do so slowly. The boom of 2002-04 will not be repeated. At the same time, cash flow positive property is not in abundance but there are pockets where it can be found.

A great number of the properties bought in Hobart and Tasmania are purchased because of lifestyle choices and not because of property fundamentals. Security, the environment and the wish for a 'quieter lifestyle’ are all emotional choices that are unlikely to fit a ready-made investment formula. After all, it’s hard to put a value on clean air.