Property Point: Investors still 'spoilt for choice' as house prices surge

Hello, I’m Alex Gluyas and welcome to Property Point. Australia’s surging housing market has been a major talking point recently with housing values reaching a new record high and have now actually surpassed pre-COVID levels by 1 per cent.

With record low interest rates remaining in the near future, there’s still an abundance of opportunities for investors so I thought it would be good to chat to Jeremy Sheppard who is the Head of Research at Select Residential Property about what investors should look out for in the current housing market, which areas are looking appealing and which areas to avoid.

For a look at the housing values data that has just been released for January by CoreLogic and a discussion on what’s driving the boom in the regional housing market, we’ve got their head of research, Tim Lawless on. And I also thought it would be good to chat with Nerida Conisbee who is the chief economist of REA Group which runs realestate.com.au, and she gives us an insight into how economic conditions are likely to shape the housing market in 2021 and what they’re seeing on their website in terms of the areas and types of property people are looking into.

Table of contents
Head of Research at Select Residential Property, Jeremy Sheppard
Head of Research at CoreLogic, Tim Lawless
Chief Economist of REA Group, Nerida Conisbee

AG: Here’s Head of Research at Select Residential Property, Jeremy Sheppard, to look at how investors should be approaching the property market at the moment. Jeremy, you put an interesting article together comparing state capital property markets to the regions and explained that while state capitals have outperformed the regional markets over the last 40 years, there’s been pinch points along the way where the cumulative growth of both markets converge but then diverge again, referring to it as the ripple effect. Is that what we’re seeing right now with regional markets, is that an example of this convergence?

JS: It could be, that’s one of my guesses. The whole problem with capital growth is that there’s no physical audit trail where we can pull a cable up out of the ground and say, “There’s where it’s connected.” We’re really only guessing what’s going on. There could be a number of reasons why there’s this push towards growth in the regional markets – affordability is just one of them, work from home is another, improvement in internet speeds with the rollout of broadband. Better remoting technologies like Zoom and Teams that we’re using now, and maybe even just a push towards online businesses without the need for a shop front or office in the CBD, or it could be just a gradual trend to favour lifestyle instead of career.

But I’m putting my money on affordability. The difference between the prices in regional markets and capital cities has become too extreme and that’s what I was hoping to present in that chart, that they’ve diverged significantly enough for there to be pressure on them returning.

AG: Is it safe to say then that regional markets are undervalued relative to state capitals right now?

JS: Yeah, that’s exactly what that chart is showing. But that’s not to say it can’t become even more undervalued, although CoreLogic just recently came out with a 12-month home index report comparing regional markets to the capital cities and for the last 12 months the regional markets have been outperforming the state capitals by about four to one, so it does look like the start of the next convergence towards a pinch point has happened.

AG: Going forward then, do you think that this gap between regional and state capitals will widen much further?

JS: No, I think it’ll close. I still think that there’s great capital growth potential in quite a few of the state capitals around the country, even the big ones, Melbourne and Sydney. But I just think there’s so much potential for growth in some of the regional markets, like Newcastle at the moment, that I think we’re going to see a convergence. There’s definitely that undervalued situation and people can’t put up with that for long. This is the whole concept of the ripple effect, we see it in neighbouring suburbs. Someone will pick out a suburb which has genuine beachfront, is a beautiful suburb, prices go up too much, buyers can’t afford that anymore and then they start looking for second best.

With higher prices, that subdues demand for the ideal suburb, with relatively affordable prices in the neighbouring suburb that increases demand there and you see the catch up take place. It’s the whole concept of the ripple effect just playing out on a grand scale.

AG: We’ve seen strong value growth in some of the capital cities, apart from Melbourne and Sydney, and particularly Darwin has performed really, really well. For investors, do you think there’s more value in these regional markets in Victoria and New South Wales, or the well-performing capital cities such as Darwin?

JS: I think it’s a case by cases basis. I think that right now you’re spoilt for choice as an investor. There are a lot of investors who would feel insecure buying in some regional markets, although some of these regional markets are larger than state capitals. I mean, Newcastle is larger than Hobart. But I think there are opportunities in both the tried and tested secure large population areas like Sydney, Melbourne, Brisbane, Perth, Adelaide. And there are also great opportunities in regional markets. All up and down the New South Wales/Queensland – the Eastern Seaboard in fact is littered with great growth potential, starting from say, Kiama and Shell Harbour, Wollongong in New South Wales, Newcastle which I mentioned before, Lismore, Ballina…

There are loads of locations – Sunshine Coast, Gold Coast… All of these regional markets have excellent growth prospects according to the supply and demand metrics that we’re reading at the moment. If you’re an investor, there’s no reason to put off places like Melbourne and Sydney, there’s still opportunities there, but there are great growth opportunities if you’re a little more prone to chasing the opportunity in some of these regional markets.

AG: Can we just rewind a little bit in terms of discussing what investors should look out for when deciding where to invest in the regional market? What do you think are important factors to look for at the moment when assessing how appealing a property might be?

JS: The one thing that I would advise investors to be cautious of is vacant land. There’s attractive vacant land between Brisbane and the Gold Coast which is being developed. New development means additional supply and supply is the enemy of capital growth. What a property investor wants, what makes them truly wealthy, is the capital growth, the increase in value of that property. To maximise that capital growth you’ve got to find those locations that of course are in higher demand and limited supply. One big risk factor is vacant land and even if you’re choosing a major capital city, there are risky locations on the fringe of that city where developers could be going nuts.

Usually, there’s a delay in development because of the cost of infrastructure, but there are occasions where local council and state government just open up what they call a growth corridor – and it’s not a capital growth corridor, it’s a capital growth black hole. Investors should be steering away from additional supply and that means buying a house in an already built up area. If you are going to pick one of these regional markets, make sure it’s not one of those fringe suburbs.

The second thing that I would advise is that you don’t buy new. New property depreciates faster than old property and as a result, it tends to have lower capital growth. Historically, we’ve seen in the data that established properties tend to outperform new properties. Number one, avoid vacant land; number two, avoid new property; and number three, preferably buy a house rather than a unit.

AG: You also have written about – I think you mentioned it there – one of the enemies of property investors being oversupply and the need to identify currently oversupplied markets to avoid them in the future. Could you elaborate a bit about the importance of considering the percentage of sale metric, or you referred to it as the SOM%?

JS: Yeah, so we call it SOM for short, it’s just ‘stock on market’, and we calculate it as a percentage. Adelaide has quite small suburbs, they may have only, say, 500 houses in it. You pick a really large suburb like Reservoir in Melbourne and you might have as 5,000 houses. You can’t just look at the total count of houses that are currently for sale and say, “That’s the supply, that’s the stock on market.” It needs to be calculated as a percentage to get a better idea. Typically, we’d be looking for less than 1 per cent. During the course of a month, you probably see about less than 1 per cent of the property market change hands, so it’s really quite a small percentage each month and this is why monthly figures in real estate when you’re calculating capital growth can be quite misleading, because which 1 per cent was it that transacted on that month. The percentage stock on market is just a great indicator for supply and supply being the enemy of capital growth, obviously you want the percentage of stock on market to be as low as possible.

That metric is just a current measurement, it’s the state of affairs right now, today, if we were to measure it. There are certain things that affect stock on market, the additional supply into the future, for example, new developments. If you purchase a house in a built-up area there can’t be more houses built because there’s no vacant land there and that’s the problem with vacant land being a risk to investors on the supply side of the equation. With units, they can spring up anywhere. You could have the only unit that was available for sale in a block of units this month and then next month a developer releases a new project and they’re selling them off the plan and then a year later a block of units pops up around the corner.

Maybe a couple of houses across the road get sold to developers and more units come up. There’s always going to be a risk of oversupply for units, but the protection against oversupply for investors is to purchase a house in an already built up area and then you’re relatively safe.

AG: And we have seen houses outperform apartments over the last 6 to 12 months. What do you think is behind that? Do you think that’s solely investors thinking about what you’ve explained then or is there other factors to it as well?

JS: Well, I think there’s a number of factors. There has been the issue of building quality. I think most of those issues are probably past us. But the real reason why I believe that units underperform is simply because buyers pay too much for it. There’s too much of a focus on the dwelling, the construction, the bathroom, the kitchen, rather than the block of land. It’s the land that appreciates, the building actually does the reverse, it depreciates. Over time, as your dwelling ages, it becomes naturally less valuable. But over that same period of time, the land appreciates. I don’t think investors have a good way of assessing the land to asset ratio, the value of the land relative to the dwelling, and they place too much importance on the dwelling rather than the value of the land.

And so, they’re simply overpaying. I think that over time, eventually as the building degrades, deteriorates, depreciates, that eventually gets factored into the price and that results in lower capital growth. Older units have already had that take place. When I say old, I’m talking about 40 years or more. It’s had all that period of time for the depreciation to wash out of the dwelling and from then on, what you’re probably looking at is just appreciation in land value. I think that the reason why units have underperformed is simply because investors are paying too much for units.

That could be because of a keen interest in cash flow, because units generally do have a higher cash flow than houses and most investors are looking for something to perhaps replace their salary at retirement age and so, they’re aiming for high cash flow. But ironically, it’s the capital growth that will replace your cash flow more so than buying positively geared properties. I think it’s just paying too much at the start.

AG: You talked earlier about there being an abundance of growth prospects for investors, but just based on what we’ve discussed, are there any areas you see as being obvious ones to avoid?

JS: Yes. There’s been a lot of talk about Perth at the moment and I was looking at Perth just recently and I noticed there are a couple of hot spots there, but they’re just a couple. For a whole city, it’s not that flash. What you want is probably a city more like Canberra, Brisbane, Adelaide, where buyers have no other option, there are very few soft markets where there’s little demand and high supply. In Perth, there are plenty of those sort of alternative options, soft options. So I don’t think that Perth is a great option for investors, but it’s certainly a city that they should start thinking about now. The demand to supply ratio which we use to measure the heat in a market, for Perth on average, 12 months ago it was only 44 out of 100, which means supply exceeds demand. Over the last 12 months, it’s come up to 50, which is bang on, balanced.

There’s nothing there to indicate that Perth will have tremendous capital growth and the same for Darwin, even though there are one or two isolated suburbs. I’d still be adopting a wait and see approach for those cities. But there are so many other great options right now for investors with low interest rates, I wouldn’t even be waiting, I’d be allocating my money to either Canberra, Brisbane, Adelaide or Newcastle.

AG: Good to chat, Jeremy, thanks very much for your time.

JS: Thanks very much for having me on the show.

[Music]

AG: And now, here’s Tim Lawless, Head of Research at CoreLogic, to discuss the latest house price figures for January. Tim, CoreLogic released some interesting data for January that illustrated this property boom we’re hearing about, being that Australian housing values have reached a new record high and actually surpassed pre-COVID levels by 1 per cent. So, do you think there’s still a lot of gas left in the tank for this price growth to continue throughout 2021?

TL: It seems to be the case at the moment and we are expecting value to continue rising through 2021. I think nationally we could see values up around 7 to 10 per cent through the year, but probably stronger positions in some of the smaller capitals like Perth and Darwin are showing much stronger momentum than the larger cities like Sydney and Melbourne at the moment. I think the biggest factor that is working into our thinking here is that interest rates are set to remain around these record lows or at record lows for at least into 2022 at the moment, so I think that’s the biggest part of what’s driving the surge in housing values and is likely to continue this upwards momentum.

AG: We’re seeing this continued trend that became evident with the onset of COVID in March last year of regional housing values rising at a faster rate than the capital cities and this is still happening in January of this year. Is that something you’re expecting to continue at this sort of rate in the coming months?

TL: Maybe not at the same rate, but it is a trend we’re expecting to persist. To give you some context, over the past three months, we’ve seen regional housing values rise by 4.7 per cent. Capital city values are up 2.2 per cent, so roughly a little bit more than two times the speed in regional markets than capital cities. But over the full 12 months, we’ve seen regional markets rising in value at about 4.5 times the pace of the capital cities and that mostly reflects, there was hardly any decline during the peak of the COVID period across the regional markets, but capital cities, particularly Melbourne, to a lesser extent Sydney, were hit much harder.

But I think, going forward, what’s really driving these regional markets is a combination of just sheer affordability. These markets are generally much more affordable than the capital city counterparts, but also it looks like demand is transitioning more towards lower density styles of housing. The fact that people can work remotely or particularly types of industries or occupations can work remotely now, those flexible working arrangements I think are probably just amplified this trend towards a sea change or a tree change that was already in existence. But as we see that affordability gap narrowing, which it already is, then the regional markets start to lose a little bit of their appeal. In that sense, down the track, without that affordability advantage then you’ll probably see this trend losing momentum gradually.

AG: This divergence we’re seeing between metro and regional housing demand is particularly evident in the larger states of New South Wales and Victoria. What do you put that down to?

TL: I think, again, it comes back to affordability. If you look at regional Victoria compared to Melbourne and regional New South Wales compared to Sydney, that affordability gap is much more substantial than other parts of the country. You can see that in the migration data as well, some preliminary data published by the Australian Bureau of Statistics really highlighted that there were a lot more people leaving the metro areas of New South Wales and Victoria and moving to the regional markets relative to the other states. In fact, every other state generally saw a fairly neutral level of internal migration or more people coming into the metro regions of the state. I think that affordability challenge in Sydney and Melbourne is a big part of encouraging people to look further abroad, as well as the fact that there were also the two highest density cities as well, particularly Sydney. So maybe that’s another factor as people look towards more lower density housing options. They do need to look a little bit further abroad in those markets.

AG: We’re also seeing extremely low listing numbers, Tim, so that lack of supply is presumably contributing to this price growth. Do you put that down to vendors still catching up from COVID and are you expecting them to ramp up listings in the coming months?

TL: Listing numbers are still extremely low. We started 2021 with the number of new listings coming into the market, roughly the same as what it was last year which is still a pretty low benchmark. But the total number of listings, which is new listings and re-listings added together, is still about 24 per cent lower than what it was last year. That really demonstrates this strong rate of absorption with buyer numbers outweighing the number of new listings being added to the market. I think going through 2021, we probably will see more new listings being added to the market. We’re already seeing signs that real estate agent activity is more active than what they were a year ago and that normally correlates with more new listings coming on the market within a two-week lag.

We are expecting more listings coming on in February, but we’re also seeing buyer numbers ramping up as well. It looks to me that this really rapid rate of absorption is going to persist for some time. Maybe it won’t last throughout 2021 because I think gradually affordability constraints and a wind-back of some of the fiscal support will probably work towards slowing down the level of buyer activity in the market. But I could be wrong on that as we see first home buyers at the highest levels since 2009 at the moment, I think they will gradually start to reduce in the market, again, probably due to affordability constraints and less incentives, but investors might step in to take up some of that slack as well. For the time being, I think that low advertised supplier levels is going to persist and that will continue to drive some urgency amongst buyers.

AG: Is there any concern for you, Tim, that this price growth could be unsustainable and could be a housing bubble? Do you think there needs to be measures introduced to slow down the growth?

TL: Whenever we look at sustainability and housing price growth, we look at household income growth as well. Generally, you’d expect at least over the medium to long-term, house values and household incomes would rise at fairly similar rates and clearly, that’s not the case at the moment. We are seeing housing values well and truly outpacing household incomes, of course, a bit of noise at the moment with a lot of the support that’s available, but I think gradually that is going to start to impact housing affordability. Should there be any sort of intervention in the marketplace? Probably not, I don’t think so. Normally, the market should naturally balance itself. I think the only reason we’d see some sort of regulatory intervention or a macroprudential intervention in the market, is if we start to see some of the lending standards slipping.

By that, I mean if we start to see a rise in interest only lending or a rise in the proportion of high debt to income loans or a high loan to income ratio loans, or if we start to see a lot more loans being issued on high LVRs for example, that would be the sort of triggers that I’d expect would see a new round of macroprudential. But at the moment, we’re not seeing any sign of that. The APRA data’s only up to September at the moment, so a little bit lagged, but up to that September reading, we weren’t seeing any signs of any sort of slippage in lending standards.

AG: Another interesting trend we’re seeing is this outperformance of houses over units. How much of that are you putting down to changing living preferences which you’ve discussed earlier compared to what investors might be perceiving as better value going forward?

TL: I think that’s a big part of it. I think broadly we are seeing demand transitioning towards lower density forms of housing. Not necessarily just houses or detached houses, but also townhouses, villas, lower to medium density styles of dwellings. But compounding that of course is the fact that a lot of the demand that we used to see coming into the more higher density sector was generally rental tenancy demand that was being sourced from overseas. So I think that’s one of the factors that’s really weighing down on the inner city unit precincts at the moment is that, as you mentioned, investors are pretty slim on the ground at the moment, but also rental conditions in those inner-city unit precincts are extremely weak.

We’re seeing a lot of new supply has been added to those high rise apartment markets over the past five years, there’s still a lot more to come that’s currently under construction and due for settlement at a time when rental demand is very low. So I think that will continue to be an issue or a challenge for landlords or investors in those inner-city precincts, that they will struggle to find tenants. They’ll probably have to adjust their rental expectations in order to attract a tenant into those markets. That will continue until we start to see international borders opening up and overseas students and foreign migrants once again returning to Australia.

AG: Just to wrap up, Tim, for investors in the housing market, where are you seeing the most value currently? Would it be a house in the regional markets, for example?

TL: Yeah, I think regionally, if you look around Australia it looks like the best prospects to me are markets like Perth and Darwin, which your dollar goes a lot further. Both of those markets – Perth values are about 18 per cent lower than what they were back in 2014; Darwin’s about 24 per cent lower. Darwin, obviously not as diverse an economy, so maybe a little bit more risk than what you’d find in a market like Perth, but both those markets are also showing extremely tight rental conditions, which means you’ve got rising values but also pretty decent prospects for positive cash flow properties as well.

Outside of those two cities, I also think Southeast Queensland is looking very good – again, relatively affordable compared to the large cities, less exposed to overseas migration, we’re seeing a lot of interstate demand coming across the borders into that region as well. In some of the larger cities like Sydney and Melbourne, absolutely I see the best prospects would be around the middle to outer ring areas, markets where detached housing is more common and also areas where first home buyers have been very active. I’d still be a little bit wary of some of those pure outer fringe greenfield markets where there is a lot of supply being developed. I’d probably be trying to stick to areas where supply was more constrained and the housing stock is quite established.

AG: I guess, just the main concern and biggest risk to housing markets is the potential for more outbreaks and then border closures. Do you think we would expect to see an immediate impact on the housing market if there were a similar lockdown to what Melbourne had towards the end of last year?

TL: Absolutely. I think Melbourne is a case in point. A market that moves through a sustained period of restrictions, particularly where you can’t inspect a property or go to an open home or an onsite option, that had an immediate impact on the Melbourne market and we saw Melbourne housing values fell much more than other capital cities. We saw transactional activity fell for a long period of time, for several months during that lockdown period as well. Melbourne’s clearly bouncing back and so once the restrictions are lifted, the market seems to play catch up, but I think any sort of additional virus outbreaks would have a fairly immediate flow through into market activity and then consequently, probably some downwards pressure on prices while the lockdown persisted.

AG: Great to chat, Tim, thanks very much for your time.

TL: Thanks, Alex.

[Music]

AG: Here’s Chief Economist at REA Group, Nerida Conisbee, for a look at what’s to come this year for the housing market. Nerida, we’re at a very interesting time in the property market with strong increases in the housing market continuing throughout January. The RBA’s been pretty clear they won’t increase interest rates for potentially a few years, but they’re meeting today. Do you think it’s at the point that other measures need to be implemented to soften this growth in house prices?

NC: It is an interesting time. I mean, when we look back to what happened at the start of the pandemic, it did look quite alarming as to what would happen to property, there were certainly some very bold predictions as to what would have to drop. It certainly didn’t eventuate, we did see some quite incredible growth in parts of Australia last year. We did see a tiny dip in Melbourne and Sydney, but what we’re seeing now is prices starting to hit records again, it’s zooming ahead, people have got access to very low interest rates, very easy access to finance. They’ve got a high savings rate which is also really helping.

I think there’s a big challenge ahead with regards to house prices. I mean, as you said, the Reserve Bank, they’re unlikely to be able to increase interest rates at this stage. We’re certainly not seeing inflation at a level which would make any sense for them to start increasing interest rates, but at the same time we do need to look at what’s happening in the housing market and work out ways that we can calm it a little bit. As to what can be done, I think there’s a lot of the Government incentives that are available to people are likely to be rolled back and I think that will certainly help things out.

Then also just the better improvement of the economy. Although, that, in some ways, does put more money into property, it does also lead to better performance for other asset classes. As a result, it is likely that we’ll start to see money diverting elsewhere as well.

AG: We’ve got this situation where, as you mentioned, interest rates are really helping the property market, but on the other hand we’ve got international borders closed and therefore, we’ve got pretty much zero immigration which has traditionally been a key driver of the housing market. Does this just go to show how big low interest rates have been contributing to this growth in the housing market?

NC: Absolutely. If you have a look at what’s been happening with rents, for example, we’ve got his incredibly weak leasing demand still overall. It’s very consistent across pretty much all property asset types. If you go to the office market, it’s similar. Shopping centres are similar, residential’s obviously the same. In terms of being able to achieve a decent rental return, it’s not looking as good as it was prior to the pandemic. On the other hand, prices are continuing to surge and again, this is something that’s been happening across different commercial property, it’s coming through in residential property. There’s no shortage of money because, as you said, very low interest rates are helping.

I don’t think it’s just low interest rates though. I think if you have a look at what’s happened to the household savings rate, that’s gone up to incredibly high levels. We’ve also got very high levels of household wealth at the moment. On the one hand, the pandemic did impact employment and we saw that very quickly impacting employment, but it also impacted people’s ability to spend money because they couldn’t travel, there was very little entertainment, cafes and restaurants were really hobbled during the pandemic. There’s just this whole combination of things that have led to this situation where there’s no shortage of cash, property values are going up, people see it as a great investment and as a result, prices continue to grow.

AG: We’ve got this vaccine on the horizon, whether it be this year or next year in terms of opening our international borders again. What do you think will happen once international borders are open and we’re able to suddenly get this influx of immigration? What effect do you think that would have on the housing market?

NC: It is good news. I mean, on one hand, we’re talking about the fact that prices are rising, but again, coming back to the rental market, the rental market is still pretty challenged. If you have a look at the Sydney unit market at the moment, three-quarters of suburbs in Sydney are seeing rental declines, so it’s quite different to the price market where 95 per cent of suburbs are seeing house price increases, so there’s this real disconnect between what’s happening there. I think there’s a few things that will happen once we open up migration again. I think the big one is around foreign students. If you have a look at what’s been happening to rental levels in places like Carlton in Melbourne, Inner Melbourne, places around Macquarie Park in Sydney, what we have seen is very big drops in rents and very big increases in availability of rental apartments.

That’s probably the most challenged market at the moment, any unit market that’s reliant on university. I think that will be very good news for those markets, I think it’s good news for the new development sector as well. That’s been quite an interesting sector in 2020 that on one hand, what we did see with the house and land market was a very sharp acceleration in activity and really driven by Home Builder, lots of first home buyer activity. Again, coming back to that confidence issue, really helped out. But then on the other hand, what we saw in the unit market was quite different and the unit market is so heavily reliant on investors, heavily reliant obviously on renters. Renters are in short supply. Investors were in short supply, they are starting to come back now, but both of those factors really led to a lot of challenges in those markets.

AG: What are you expecting for the housing market this year then, Nerida, combining what we’ve just discussed alongside an improving labour market as well? Have you got a forecast for how much higher this growth could go in 2021?

NC: Yeah, it’s going to be a sharp acceleration. I mean, already, what we’ve seen in places like Northern New South Wales, we’ve seen places like Byron Bay shoot up 40 per cent over the past 12 months. We’re starting to see pretty strong growth rates in many parts of Sydney and many parts of Melbourne even, despite having a prolonged lockdown last year and some very negative business conditions. It has done very well in the housing market. I think what will happen, we’ll start to see capital city growth really accelerate throughout the year, it’ll probably start to exhibit quite similar conditions to what we’ve seen in regional markets around Australia.

As the year goes, we’ll continue to see employment levels come back. We’ll start to see borders open, foreign students will come back and we’ll start to see an increase in migration. Again, we’re going to have this situation like we did just prior to the Financial Services Royal Commission that we’ve got a really strong housing market and we’re going to have to look at lots of different ways to try and ease up the very strong conditions.

AG: A lot of the housing market’s momentum is being fuelled by this surge in regional markets. What are you seeing happening on realestate.com.au in terms of users looking at the regional market, are you seeing this demand growing?

NC: Yeah, it’s been quite interesting looking at regional markets and what we did see very early on in the pandemic, by about April/May, was the rate of growth in views per listing in regional Australia versus capital cities was far stronger. Everything’s been well documented as to what’s been happening and obviously, people want more space, work was freed up and they didn’t need to go back into the office, so they could use anywhere. We saw these incredible conditions in many mining locations, even many agriculture areas – wheat prices have hit a record level last year and really helped places like the Western Australian Wheatbelt. There was this real diversity in terms of what happened.

Even second homes or holiday homes are often a casualty of a recession, but given people were restricted by travel, international travel and also had quite a bit of extra spare cash, there did seem to be quite a bit of money put into regional Australia. I think what will happen with this year though will be a little bit different. I think one of the big factors that will change conditions is that people are getting called back into the office and on one hand, most people probably won’t be back in the office every single day. I think what will happen in the future of work will be very different and people will be back maybe two to three days a week.

As a result, it will likely start to soften that very, very high demand that we saw for areas that weren’t within commuting distance from capital cities, but will continue to lead to strong conditions in those areas that are within commuting distance. One of the strongest price growth areas in Sydney over 2020 was the Central Coast, Mornington Peninsula did really well, you’ve got places like Wollongong, Gold Coast, Sunshine Coast… Those areas I think will be the ones that will continue to power ahead but if you look further afield I think those regional areas will be the ones that will start to not necessarily soften but slow down in terms of pricing.

AG: How do you think that will translate into how investors are looking at the housing market? Do you think there’s still quite a bit to play out in terms of the regional markets or should investors sort of be looking back in close to the capital cities?

NC: I think it depends on what sort of investor you are. If you are someone that is prepared to take on a bit of risk and you’ve got a reasonably positive view as to how this year will play out in terms of the vaccine and migration and opening of borders. I think looking in areas, particularly units, is probably a good idea. If you go to Inner Melbourne, for example, there’s been some quite significant price declines and as a result, there are bargains to be had. If you are looking to buy somewhere like Byron Bay, that area, Northern New South Wales, places like Bangalow, Byron Bay, extending to Brunswick Heads, those areas have already seen significant price growth and we know that past price growth is no indicator of future growth and so, I suppose if you were hoping to get another 40 per cent this year, it probably won’t happen.

I think, again, it comes down to what sort of investor you are, how confident you are with how the public health policies will roll out during the year and as a result, really look at the different outcomes there. I think one thing that investors do need to be careful about though is that rental demand will take a little while to come back and again, coming back to the fact that the international borders/state borders have been shut, lack of foreign students, when we look at what’s happening with employment definitely it’s coming back but there’s still quite a few challenges in sectors like education and tourism which does employ a lot of young people and higher flow on a lot of renters.

I think you do need to be careful. On one hand, prices are moving, but there’s still pretty weak rental demand conditions.

AG: And just on the other hand then, are there any areas or types of properties you’d recommend that investors should steer clear of in the current state of the market?

NC: Again, I think it does depend on what sort of buyer you are. What we have seen is some very sharp increases in many mining regions, particularly those areas exposed to iron ore and also gold, copper to a lesser extent. Other areas that have done well are those areas that are exposed to, as I mentioned before, the wheat farming areas have done really well off the back of breaking of drought, off very weak conditions in places like Russia, our main competitor for wheat. Those sorts of things, they are a little bit more cyclical. I think you only have to look at what happened with China last year in terms of their block on certain agriculture and commodities in terms of importing them from Australia and see what a big impact that can have on those areas. I think there’s just a lot that you need to consider when you are investing in those areas. They can be highly cyclical and it can be quite difficult often to work out what will happen to those strong conditions over a prolonged time period.

AG: Good to chat, Nerida, thanks very much for your time.

NC: Thanks for having me.