Property: time to review

Continuing low housing affordability and upward pressure on interest rates are likely to be the key influences on national housing markets throughout 2008. Federal Government management of the economic issues and monetary policy direction as they affect the residential market will also affect the activity of home buyers and investors.

Unless we see a major economic downturn, there should be price increases – albeit at a slower pace – in most capital cities as growing demand continues to outstrip supply. With skilled overseas migration forecast to increase across 2008 and some continuing strong interstate migration, this stock shortage is likely to apply further price pressures to the established housing sectors.

In 2007 Sydney, Perth and Darwin reached affordability peaks and began to stall as a result. These markets are now likely to show steady, but much slower price increases during 2008. We now have entrenched multi-layered and multi-speed housing markets and in 2008 each of these sectors will react in different ways. For instance, if a short-term levelling-off of investment in resources industries – as predicted by the major banking groups – comes about towards the end of 2008 as this sector reaches a cyclical peak, price growth in resource-driven property markets such as Perth, Darwin and Adelaide, may decline or show only minimal growth.

By the end of 2007, an all-time low rental vacancy rate of 1.9% had persisted across Australia for two and a half years, according to Real Estate Institute of Australia (REIA) data. The national vacancy rate is likely to remain at these levels in 2008.

Property investors were slow to enter the market in 2007, largely due to rising interest rates and falling affordability. Investors also adopted a wait-and-see approach to the new Federal Government’s management of economic issues and monetary policy direction. However, there may be an increase in investor activity in prime capital city markets in 2008 as rental yields and capital values remain high.

Apartments snapshot

As affordability levels for houses continued to fall, prices for other dwellings such as apartments, units and townhouses showed stronger price growth than houses in most capital cities in 2007. This trend may be indicative of home buyers and investors looking to CBD fringe and inner-urban medium and higher density housing as a more affordable option.

Sydney was the only exception, with a slight 0.9% decrease in apartment and unit prices to bring the median apartment or unit price to $360,900, according to the REIA. Melbourne, on the other hand, saw a 13.9% annual increase in apartment and unit prices – as opposed to 9.9% of houses – and a median price of $367,800.

In Brisbane, apartment and unit prices increased by 10.2% to a median price of $325,000. Perth’s other dwelling prices rose 8.8% to a median of $370,000; while Darwin’s other dwelling prices showed a dramatic 28.3% annual increase to $320,000.

Canberra’s apartment and unit prices showed an 11% annual growth rate to $346,000; Adelaide and Hobart’s other dwelling prices were beginning to show some signs of smaller percentage rises.

Sydney

Our largest city bucked the trend in 2007 with little change in its median values and only a slow recovery towards the end of the year, when selected sought-after areas began to rise by about 5.2%. The current quarterly median house price for Sydney is $538,000, according to the REIA.

The Sydney market reached an affordability peak before the other capital cities and still remains the nation’s most expensive housing market. This market has remained relatively flat since meteoric and sustained price increases began in 1999 and peaked in 2003. While the luxury end of the market and the most sought-after inner-urban zones continued to return record prices, the reality is that the vast majority of the population does not and is unlikely to buy at this level.

Sydney’s outer-urban fringe saw price decreases as interest rate rises impacted severely on the low affordability levels in the “mortgage belt” and this had the effect of pulling median prices down across the board. Ongoing affordability constraints are likely to keep growth in this market more subdued than some other capital cities in 2008. Sydney’s affordability fell by 5.4% in 2007.

Rental prices will remain among the country’s highest and tight rental supply will continue throughout 2008.

Melbourne

The Melbourne market has seen solid price growth throughout 2007 – with an average annual increase of around 17.8%, according to the REIA, particularly in the sought-after inner-urban zone two to 12 kilometres from the CBD; and middle ring areas 12 to 20 kilometres from the CBD. Although solid price growth is expected to continue in 2008, it is more likely to be at a slower pace, of about 7%, paving the way for increased investor demand.

The Melbourne market saw extremely high clearance rates of 80% or more throughout the year and remained at an unusually high average of 79% during the period of highest supply levels as the market came to the traditional Christmas–New Year close. These clearance rates indicate that continuing pent-up buyer and rental demand will lead to a strong start to the 2008 market at the end of January.

However, like Sydney, Melbourne’s outer suburbs are likely to be more affected by low affordability and any further interest rate increases.

Increased investor activity, coupled with first and second homebuyers seeking a foothold in the high capital growth inner urban sector of the market, is expected to continue in 2008. Tight rental vacancy rates, the slow turnaround in new dwelling construction and increasing migration is likely to attract more investors into this market in 2008. This is particularly the case in regard to interstate investors seeking a more affordable entry point than some other major capital city markets, with Melbourne’s continuing record low rental vacancy rates, rising rental yields and consistent capital growth. Victoria’s stable and diversified economy also provides safe, long-term investment prospects.

The strong flow-on price rise effect is likely to continue in selected pockets in the middle ring suburbs, where demand for larger family accommodation and access to sought-after schools, access to public transport and other infra-structure means buyer and rental demand will continue to outstrip supply. REIA data shows Melbourne’s affordability fell by 6.8% in 2007. The current year to date median house price is $431,000.

Brisbane

Brisbane’s strong economic growth saw the median house price increase by 18.1% across the year, according to the REIA. A buoyant job market and expanding economy has attracted high levels of interstate and overseas migration.

The maintenance of strong wages growth could prove a key element in Brisbane’s property prices continuing a steady upward climb as this has and is expected to continue to attract a high level of interstate migration, particularly from Sydneysiders seeking more affordable housing options and lower price entry points.

Brisbane’s rental vacancy rates are among the nation’s record lows and the average annual rental yield exceeded 10% in 2007, with median rents for houses sitting around $300 a week.

Queensland is also high on the list of states where new housing starts are likely to continue to fall well short of demand and this is likely to keep the upward pressure on the established housing sector and limit affordability for many aspiring first home buyers.

Affordability levels fell by 8.4% across 2007. The current median house price is $425,000.

See James Frost's reviews of Queensland regional property: Port Douglas; Cairns; Sunshine Beach; Gold Coast/Hedges Avenue.

Perth

Following the astronomical price increases off the back of the resources boom, the Perth market hit its affordability peak in mid-2007 and prices generally stalled or dropped by about 2% in some areas. The REIA says the current Perth house price median stands at $400,000.

Ongoing low affordability is expected to have a major effect during 2008 (affordability levels fell by 9.7% in 2007) and any slowing in economic activity should keep prices stable. Demand is expected to remain high due to overseas and interstate migration. Rents reached a median weekly level of $300 for houses and there was a 15.4% increase in rental costs across 2007, the REIA data shows. However, investor funds have and are likely to continue to flow out of Perth and to the more affordable eastern states that offer long-term capital growth.

Adelaide

The South Australian capital showed signs of following Perth and Brisbane in 2007, with house prices growing by about 22% as resources activity increased. Adelaide showed one of the sharpest declines in affordability. However, these rises have come off a relatively low and stable price base and a more limited supply situation.

Adelaide’s smaller population base and less economic diversity than other major state capitals is likely to see the level of price growth begin to level off and any further rises will be more modest. The current median house price is $320,000, according to the REIA.

Rental yields remained relatively low in Adelaide and it is listed as the nation’s cheapest capital city rental location with a median weekly rent of $255 for a three-bedroom house. This was an annual change of 8.5%. See James Frost's review of the Adelaide market.

Darwin

Also reliant on the resources sector, Darwin has reached an affordability peak relative to the buying capacity of its population. Even a slight drop in business investment in this market could affect the housing sector and it is highly unlikely that we will see other than small and slower price increases in 2008. The median house price in Darwin reached $400,000 in 2007.

Darwin has become the most expensive rental location, with a 34.4% annual increase in median rents and the median weekly house rental reaching $440. Already limited levels of rental stock will continue to be pressured in 2008 as more employees are attracted to resources jobs.

Canberra

The REIA data shows that Canberra has undergone significant price growth since 2004, and by the end of 2007 the affordability boundaries were reaching a peak as affordability fell a further 8.3%. The median house price reached $425,000 at the end of the 2007 September quarter.

The Canberra market has its own unique cycle and is more predicated on Federal Government activity. High public sector employment levels across 2006-07, coupled with an increased inflow of overseas and interstate migration, saw demand outstrip supply. However, an expectation that house prices would continue to grow by around a further 5% in 2008 will hinge on the new Federal Government’s actions in regard to public sector spending. The Government has flagged cuts in the federal public service and, depending on the extent of any cuts, this could cause housing prices to fall.

The fact that the ACT also has Australia’s highest median weekly family income – $2171, compared with the Australia-wide median of $1228 – also skews the affordability factor.

Canberra’s rental vacancy rate mirrored the national record low levels and yields exceeded 10%. However, if major cuts to the public sector are brought about, the level of rental stock could rise in 2008. See James Frost's review of the Canberra market.

Hobart

Hobart’s growth has been steady, but it was the only Australian capital where affordability actually improved, by 2% over 2007. Tasmanians sought lower loan limit levels than mainland borrowers and this is seen as a reflection of lower median weekly incomes. This pattern is expected to continue in 2008. The REIA shows Hobart’s median house price was $425,000 at the end of the September 2007 quarter.

Unlike the other state capitals, Hobart is expected to see a decline in the level of incoming migration and could see a net migration loss to the mainland. Rents increased by 8% in 2007, but we are unlikely to see this level of growth in 2008. See James Frost's review of the Hobart market.

Property Q&A

This week's questions cover :

• Renovating for profit.
• Regional centre investing.
• One-bedroom investing in Cairns.
• Insuring an investment apartment.

Renovating for profit

We want to extend. My choice is to add a second storey or use the reasonable sized block we have to add rooms on the same level. The property is in a good location and there are a quite a few people renovating. I am favouring a second-storey addition as this way we would retain an attractive garden and outdoor area. Do you think these additions enhance or detract from an established house that does have some architectural merit?

Renovating rather than “trading up” has become a common option. However, not all renovations are created equal. Take the time to have a close look at the types of renovations others in the area are carrying out. It is important that any renovation, especially a second storey, be done sensitively and in keeping with the original architectural styles, especially from the outside. An architect or builder who can demonstrate a solid and specialised track record in second-storey additions for period style homes should be able to show you some of their work in a similar situation.

Done well, such additions can be quite discreet and attractive and if you live in a family-oriented, owner-occupier area, then a larger amount of accommodation will continue to be sought after. Bear in mind that not every house has the structure to take a second storey, so check all this thoroughly beforehand as large amounts of additional structural work can cause a considerable cost blowout. Building industry groups in your home state will have extensive information on the options, so I suggest you obtain their checklists and determine exactly what your options are before making a final decision.

Regional investing

I am looking to buy somewhere around regional Victoria as Melbourne is just too much. I want to rent it out and pay it off faster, then move in later. I’ve looked at various smaller country towns, but given that I am looking for capital growth, I wonder whether I’d be better off sticking to a larger centre such as Ballarat. Would brick houses would be better from a maintenance point of view, or should I consider cheaper priced weatherboards on larger inner town blocks? Attracting reliable renters is also a concern.

Regional centres can provide a good investment stepping stone, but if it is growth you are seeking, then stick to the larger centres and make sure the asset selection is spot on. This is because the local economy of larger regional centres is more diversified and will perform better over the longer term. In a larger centre such as Ballarat or Bendigo you will find assets with the combination of relatively higher land values and architectural scarcity. Smaller centres are too reliant on only one or two industries and even these produce a relatively small economic output.

Investment properties in a larger centre need to be in an architecturally consistent precinct and close to the city centre and all amenities. If a house is of an older style, always have a full building inspection done to check for structural soundness – whether it’s brick or weatherboard – before purchasing. When it comes to choosing between brick and weatherboard, opt for the predominant method of construction for that precinct – neither is inherently “better” than the other. Don’t feel tempted to try and manage it yourself. Appoint a competent property manager who is experienced in the area where any property you buy is located, and that agent should carefully check all rental applications on your behalf.

A studio in Cairns

I’m wondering whether a new development project in Cairns would prove a good investment. The project will not be built for 18 months. A one-bedroom apartment is selling for $258,000, and the sales team says prices have already gone up by 10% on this project. However, I get the impression that you are not a fan of one-bedroom apartments.

First, I am a big fan of one-bedroom apartments, provided they are established apartments in sought-after inner-urban locations, in small blocks, with dedicated car parking. These assets have and will continue to show strong capital growth. What you are describing is an entirely different kettle of fish, namely, a new development apparently being sold off-the-plan. You need to take into account the number of units in the complex and the extent to which this will dilute value over time.

Be mindful that most times, you will pay a premium for something that is brand new and this will be above pre-existing, established stock. Paying too much is a classic pitfall that adversely affects growth prospects. Developers often have to sell a certain number of units before they can secure the finance to begin construction. It is not uncommon for a projection such as “it won't be built for 18 months” to turn into a longer time frame. You also need to look at whether the Cairns market – which has been the subject of a great deal of new development activity – is becoming over-supplied.

Insuring an apartment

I recently bought an investment apartment in Sydney and was a little surprised to learn that the body corporate managers expect me to take out public liability insurance. I would have thought that the body corporate should have this type of cover.

The body corporate will have public liability for the common areas, but each owner must cover their own apartment. Although it is quite routine for the owners of houses to carry public liability insurance (it is frequently included in building & contents policies) apartment owners tend to assume that they are somehow covered under the general body corporate policy. Not so! In the event that somebody is injured or killed within your apartment – either the tenant, a friend of the tenant, a tradesperson or anyone legally on the premises – then you would be liable. Check the specific rules for your own state and get a detailed rundown of the body corporate conditions that apply in your individual case.

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.

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

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