Property heats up

PORTFOLIO POINT: The housing market is on a recovery path. Suburbs in Sydney, Darwin and Perth are on the hot list.

I now have a rather strong conviction the national housing downturn that has lasted for the past two years (and in some regions, four years) has come to its end for most of the capital cities.

The recovery will initially be modest, but at some point it may well accelerate where some cities start to record annualised double digit dwelling price increases. My opinion is that this may occur in Sydney and Darwin. I have included a table of the hottest postcodes further below.

Without question, Darwin has been the stand-out performer so far this year. According to the Australian Bureau Statistics, house prices have risen by over 9% just in the first six months of 2012. That’s a booming housing market by any measure and one that has occurred underneath our radar.

This time last year, there was no real evidence of that type of pick-up. Indeed, house prices were falling in Darwin back in late 2011. It wasn’t until about February this year that some of the leading indicators went bullish, being rental vacancy rates and then, overall listings.

Darwin has many things going for it energy wise including some very, very large gas projects that are driving very fast economic expansion at this point in time.

However investors should still be cautious. It seems to me to be very much a boom and bust kind of town and one would not want to be caught out on the wrong side of a housing bust there.

For the rest of the capital city markets, the affordable end of the market is likely to outperform the upper end.

The affordable end of the housing market is where the rents have been accelerating, and this is where transaction and holding costs are at their lowest.

This will be an affordability driven recovery. And on that front, I very much like Sydney’s west and south west.

Granted, they are not the most sexiest regions of Sydney’s real estate market, however, when looking at the numbers it really stacks up as being a good investor’s play given how tight rental vacancies are in these two regions right now plus the additional infrastructure that has been built and planned for in the future.

The biggest threat to housing (and to my forecasts) has got to be the mining downturn and its impact on the terms of trade. In the Housing Boom and Bust Report just released, I have given a dissection of the various scenarios that could play out. Believe me, falling commodity prices with no buffer from the exchange rate and no rate cuts would spell big trouble for dwelling prices in 2013.

On the other hand, rate cuts with declines in the Australian dollar would see to the best housing market experienced for investors since 2009. And for now, that appears to be a likely outcome.

The hottest postcodes

I tend to shy away from suburb predictions. That is because there is inherent volatility in the data at such a micro level and I believe it is very important to spend time on the ground to make a proper assessment.

As an exclusive service for Eureka readers, I have put together a list covering some of the best postcodes, which are either recording very tight vacancy rates, or recording strong income growth, or currently have very few listings compared to the total number of established properties. Below is a list of the fastest growth suburbs for income.

Click to enlarge

In the fastest income growth areas, it is clear that the resources towns of Western Australia feature in the list. But so do the inner, gentrified suburbs of Sydney. Mining towns in the West would be expected to be in the list as that is where ground zero of the commodities boom has been.

It is very interesting though that the Sydney suburbs of Waterloo and Redfern are there. Could they be the next Paddington of Sydney?

In the tightest rental vacancies, once again Western Australia features strongly in the list. It is no longer any secret that Western Australia is suffering from a very tight rental market right now, and it is one of the reasons why I have been a little more bullish on Perth, despite the potential hard landing for China.

And then, finally, the lowest listings to established properties ratio. This is a new type of measurement for me. The theory being these may represent the postcodes most tightly held. All I will say on this for now is how Sydney’s inner ring dominates this list.

In the report, I have also published my forecasts from last year. I do this in the interests of transparency. While I certainly did get a number of forecasts right, I didn’t get it all correct by any means.

And that’s the point. I believe it helps in the ongoing understanding of what drives markets if one can pinpoint why the markets moved in expected and unexpected ways. Importantly I would like to see the rest of the industry do this as well. Sadly, that’s unlikely to happen.

* This is an exclusive article written for Eureka Report based on the Housing Boom and Bust report.

Louis Christopher is managing director of independent property advisory and forecasting research house SQM Research.