|Summary: Sydney, Perth and Melbourne led the property ladder last year as buyers flocked back to the market in force. Interest rates remain low and, on average, house prices have grown below household disposable incomes – making repayments more manageable for many. Supply and demand forces point to continued price growth, although some markets will be stronger than others.|
|Key take-out: House starts have been the lowest, relative to population growth and the past number of commencements, in Queensland and NSW.|
|Key beneficiaries: General investors. Category: Property.|
House prices ended 2013 on a very good note. As you can see from chart 1 below, Sydney, Perth and Melbourne in particular posted solid growth, not including any rental yield. The talk of the town now is whether this can be sustained or not, although I’m not really conscious of any consensus developing.
One of the more important developments to note, coming into 2014, is that people have given up on calling a housing market crash!
Anyway, the question remains whether the momentum we saw last year can be maintained. I suspect it can, and indeed there is every reason why house price growth can and probably should accelerate. I see more reason for that than for any loss in momentum. Here’s why.
For a start, we need to revisit some of the fundamental developments in the market. Yes, house price growth has been strong in Sydney, Perth and Melbourne. In the other capitals though, price growth has been modest. Regardless of where you look however, it can’t’ possibly be said that property valuations are stretched – even in Sydney, and even after that 14% annual gain. Why not? Because, on average, house prices have grown below household disposable incomes for at least the last seven years. Only in Melbourne has house price growth exceeded incomes growth over that period, and only just.
Indeed, according to the Housing Industry Association, housing affordability is around a decade high. That is, the most affordable in about a decade, despite rising house prices. Of course, not only has household disposable income exceeded house price growth, and that has certainly helped affordability, but we can’t forget that we face the lowest interest rates in about 50 years – that’s lending rates. This, ultimately, is why housing is so affordable.
This leads me to my next two points. Debt servicing costs – that’s households servicing their mortgages – is the lowest in about a decade. Some claim that consumers have high debt levels, but I don’t think that is right on average. Even it if it is, debt servicing is what matters. More to the point, the interest rate environment is unlikely to change too much over the year. The 30-day interest rates futures contract, which is a measure of Reserve Bank rate expectations, is in fact still pricing in a decent probability of another rate cut this year – roughly a 40% chance. That makes sense given the RBA exchange rate target, and notwithstanding the recent uptick in inflation. The board will be biased toward cutting for some time yet, judging from its recent rhetoric and the focus on the currency. That’s a mistake in my opinion; they should hike rates for certain – I doubt they will though.
Elsewhere, financial market economists have given up on the idea of more rate cuts this year. However, I must stress that the RBA’s moves are not an economic call – it is a political one given the exchange rate target and investors have to deal with a very high degree of political risk.
In addition to the above factors, we’ve still got great support from population growth, – 407,000 additional people in the year to June 2013. Moreover, and despite all the alarmism, the fact is there is no job shedding in Australia on aggregate and the unemployment rate remains very low.
The important issue of supply
So far then, I simply cannot see -in all sincerity – one single factor that would restrain house price growth this year. Even on the issue of supply, there is simply no threat.
Eureka Report’s Robert Gottliebsen believes there will be a surge in apartment building in Sydney over the next few years. I don’t know whether there will actually be a surge, but it makes sense that if there is going to be one, this is where it will be. Housing – no chance.
Part of the problem is that there is this great push to move citizens into higher-density dwellings . It works for policy planners and developers – it’s cheaper for them. That’s why you read, at regular intervals, about just how popular high-density dwellings are to live in, and it’s the next big thing. This is true for some demographics, but the fact remains that demand for free-standing housing by families in the suburbs is very strong. With that in mind, what do the numbers show us?
According to the Australian Bureau of Statistics, there isn’t any overall surge in starts just yet. Chart 1 shows the total number of dwelling starts and, as you can see, it’s around average. In fact, if you take into account the growing population, starts aren’t anywhere near sufficient. Consider that the numbers of dwelling starts since 2005 has been just below the number of starts in the previous decade. The thing is, the population has been growing by around 160,000 more every year since 2005 than in the decade prior.
Breaking starts down further in the next two charts, by state and by dwelling type (apartment or house), gives a few more interesting facts.
Firstly, house starts (chart 3 below) have been the lowest, relative to population growth and the past number of commencements, in Queensland and NSW. If you’re looking to buy a house as an investment, these two states are probably the best place to start your search. Not enough houses are being built. You can see that because starts have been lower in the period from 2005 to now, than the decade prior, despite much stronger population growth in each of the other states. In NSW starts of houses have been about 30% lower over the last eight years than the prior 10 (annual average).
As for apartments? Well, the chart below suggests steering clear of Victoria and maybe WA – starts have been very strong in both those states of late (noting the recent dip in Victoria). In NSW and Queensland the chart shows starts for new apartments rising rapidly, although it has to be said this is off a low base. Indeed, in NSW, starts since 2005 are still 20% or so below the prior decade. With population growth that suggests a shortage. So again my pick here would be NSW or Queensland. In Queensland, the number of starts now is higher than in the decade prior to 2005, but then again so is population growth. I’d say starts are simply matching population growth here.
Tying it up then, I see no reason to think that the housing market will lose momentum. Indeed, the onus is really on those claiming it, to prove with credible evidence, why momentum would slow.
The truth is there really isn’t any. Noting this, and if you are looking for an investment, the dwelling starts data suggests a good place to look, given the absence of any supply coming through, would be NSW and Queensland. Free-standing houses in those states, for those with the budget, are likely to outperform.
* This article is part of the “It's Time” series in Eureka Report focussing on new opportunities for investors in 2014. Click here to see the entire series.