Property to cool, but hot spots remain

The Australian residential property market is likely to slow this year, but investors can still expect gains. Yet there are expectations for a property price dip in the longer term.

Summary: After achieving fairly solid gains over the last financial year, should property investors expect more of the same in 2014-15? That will depend on where you have invested, because some cities are set to outperform. According to several property experts, parts of Sydney and Brisbane should continue to record solid growth, while the pace of growth across Melbourne, Perth and Darwin generally will slow, and other markets will be flat.
Key take-out: Economic forecasters BIS Shrapnel predicts the momentum in price growth that emerged in 2013-14 is expected to continue to support prices in 2014-15 and to a lesser extent in 2015-16. Rising interest rates will potentially create conditions for price declines by 2016-17.
Key beneficiaries: General investors. Category: Property.

The 2013-14 financial year was good for residential property investors, especially in Sydney and Melbourne where dwelling values rose 15.4% and 9.4% respectively.

Across the nation, capital city dwelling values ended the financial year 10.1% higher. The broader market gains, combined with low mortgage interest rates, helped push many geared properties into positive territory.

But will the strong gains recorded in the 12 months to June 30 continue at the same pace this financial year? Probably not, although (as always) much will depend on where you live. Opportunities still exist for those choosing the right areas to buy.

Property market experts are generally of the view that investors should ready themselves for slower residential property price gains this financial year.

The momentum in price growth that emerged in 2013-14 is expected to continue to support prices in 2014-15 and to a lesser extent in 2015-16, according to economic forecasters, BIS Shrapnel.

However, BIS Shrapnel senior manager Angie Zigomanis said rising construction and the potential for oversupply in many markets, together with an eventual tightening in interest rate policy, will impact on prices and potentially create conditions for price declines by 2016-17.

House values have been growing at a slower rate since the peak in late 2013, with the latest data providing more evidence of the new trend. Residential prices fell 0.2% in the June quarter, according to the RP Data-Rismark home value index, substantially below the peak quarterly growth rate of 4% in the three months to August last year.

The data arrived on Thursday last week – the day Reserve Bank governor Glenn Stevens talked the property market down, warning investors to take care about potential price falls in Sydney amid a pick-up in borrowing levels.

Nationally, investor housing credit surged 8.3% for the 12 months to May 2014 – the greatest increase since August 2010, according to RBA statistics. In New South Wales, Stevens said the value of loan approvals has surged a whopping 130% since 2008.

As Adam Carr highlighted in Property still safe as houses, fears had been circulating that without people borrowing, robust house price growth will be hard to maintain. While lending is still well below the 16% growth average over the past two decades, the lift in housing credit at least adds support to property prices.

Further, property experts would be surprised to see prices fall in Sydney right now because of the supply constraints and strong demand for housing.

Zigomanis says the strongest conditions are forecast for NSW and Queensland, where BIS Shrapnel estimates sizeable dwelling deficiencies are in place, as reflected by their low vacancy rates.

In comparison, the rate of price growth in Melbourne is expected to slow in response to rising new supply and emerging affordability pressures, while rapidly weakening economies in Western Australia and the Northern Territory–as mining investment is wound back–will cause price growth to also slow in Perth and Darwin.

With limited dwelling deficiencies, or oversupplies, the markets in South Australia, Tasmania and Australian Capital Territory are expected to remain relatively flat.

Tim Lawless, head of research at RP Data, says that while the median value of house prices in the metropolitan area of Sydney has climbed to $800,000, there are still growth opportunities for investors where transport and infrastructure is being developed. These include the central coast and in the outer west region where the new airport will be constructed.

Indeed, statistics from RP Data show five of the 10 fastest selling suburbs across Australia are in Western Sydney, including Old Toongabbie, Parklea, Quakers Hill, Lalor Park and Werrington Downs.

Louis Christopher, managing director of SQM Research, agrees with Lawless that the biggest gains in the property market have been had, but he disputes reports the boom is over – particularly in the Sydney market – and doesn’t agree the June quarter saw a fall in house prices.

According to SQM Research, capital city asking prices rose by 0.8% for houses and 0.5% for units in the June quarter.

Christopher emphasises investors need to recognise that the 10% rise in property prices across Australia masks a very disparate set of data from city to city. In fact, when Sydney is taken out of the equation, average growth has been more around 4% to 5%.

“The question therefore becomes, will Sydney continue to drive the national market going forward, Christopher says. “And the answer is, yes it will – but potentially not at the same rate as the past 12 months.”

As well as a heavy emphasis on infrastructure spending, positive factors for Sydney include a strengthening state economy and seemingly unstoppable momentum. Indeed, these influences – as well as the absence of negative elements – could push prices above expectations.

Christopher agrees with Lawless there are still opportunities around the south-west, west and north-west of Sydney, given the area should benefit from the construction of the second airport. For Melbourne – where oversupply has curtailed price growth – investors should buy freestanding houses around the inner ring of the city.

Melbourne is likely to have slower prices rises ahead given it’s had strong growth over the longer term and has more supply, particularly within inner city units. The best positioned properties are detached houses at the premium sector of the market where there hasn’t been new supply additions, such as the inner bayside region, he says.

But Brisbane is the market to watch for 2014-15. With home values around 50% lower than in Sydney and 20% lower than in Melbourne, an attractive valuation gap has emerged. Further, rental yields are much higher at around 4.5% for houses and 5.4% for units.

“A lot of investors are also starting to tune into the Brisbane marketplace after realising the best buying opportunities are past in Sydney and Melbourne,” Lawless says.

Elsewhere, activity has picked up in the Gold Coast and could heat up further amid higher tourism if the Australian dollar falls. However, this region is more suited to investors with an appetite for risk as it has a history of oversupply issues.

As for the outlook for rental yields, Lawless thinks they will gradually improve over several years as capital gains slow down and more people rent rather than buy properties.

Christopher, on the other hand, warns investors not to expect rental yields to lift any time in the near future and to be generally careful about oversupply. In contrast to Lawless, he thinks interest rates could be cut again next year – further depressing yields for 2014-15.

Zigomanis says that as the Australian economy improves over time, the RBA will move to lift interest rates.

“The Reserve Bank is expected to enter a tightening phase towards the end of 2015,” he says. “Initial rises are likely to have a limited effect with the economy strengthening, although further rises will more significantly impact on affordability and prices through calendar 2016, while also eventually having the desired effect of slowing economic growth and inflationary pressures.”

The big question for every property investor is, how far will property prices eventually fall?

“A moderation in house price growth to low single digits would undoubtedly lead the RBA to recommence easing,” says Adam Carr. “… the RBA would act aggressively to nip even a modest price fall in the bud.”

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