PORTFOLIO POINT: The national property market is turning, but growth will be a mixed bag. Investors in Australia’s major capital cities can expect different outcomes.
The housing market isn’t an untamed, unknown wild thing whose performance seems erratic and unpredictable, but rather it performs like any other commodity according to the laws of supply and demand.
This knowledge is crucial in our current market, because our population growth rate of 1.4% each year now exactly matches the rate of new housing construction.
There’s no overall housing shortage any more – the market is in balance. This means that the overall growth our housing market will experience over the next few years can only come from inflation or the effect of renovations. It therefore becomes crucial to buy in areas where growth is possible and avoid those where it isn’t, because even though the housing market is in balance, some cities will have shortages while others will have surpluses. Some will have growing demand, and in others the demand will fall.
True believers in the housing market cycle will now be anxiously waiting for the next growth spurt to start, as we’ve had several years of no overall growth at all.
The constant interplay between investors and renters, as well as buyers and sellers, explains the otherwise apparently erratic performance of the housing markets in the major capital cities. Below is an overview of expectations for the property markets in the major capital cities.
The future of Sydney’s housing market
Because Sydney’s housing market is in balance, the shortages of rental accommodation in the inner suburbs are compensated by oversupplies in other areas. These are the outer suburban first homebuyer locations where prices have been falling, particularly for home units, and this situation won’t change until and unless the demand for housing in such areas picks up.
Rental demand in inner urban rental unit markets in the inner east, south and west of the city will continue to run ahead of supply as suitable sites for large-scale developments such as disused power stations, abandoned brick pits and derelict brewery sites has all but run out. Equally, the continual rental rises, lower interest rates and first homebuyer grants, such as the new state government initiative, will gradually change the focus of demand to outer suburban new houses and lead to a reversal of recent price declines.
The key dynamics to watch are the number of overseas arrivals and whether they’re growing or falling, as this will immediately affect rental demand in inner unit markets and ultimately the demand for first homes in the outer suburbs.
The future of Melbourne’s housing market
Melbourne’s economic revival in the mid-2000s was founded on a ‘populate or perish’ strategy, which led to a dramatic increase in the number of overseas arrivals. The good news for investors in Melbourne relates to the large numbers of overseas arrivals from 2005 to 2009. It takes several years for migrants to become settled in their new country before they can buy a home of their own, but they tend to do this as soon as possible, and when they do, the dwelling they purchase becomes a visible statement of their successful establishment in Australia. The new outer suburban areas of Melbourne such as Melton, Cranbourne, Sunbury and Werribee are poised for growth as the number of first homebuyers rise in the next few years, swelled by the overseas arrivals of four or more years ago.
The future of Brisbane’s housing market
Experts have been predicting Brisbane’s housing market boom for years, but it never seems to come. One of the reasons is that Brisbane has the most homogenous housing market in Australia, with a high percentage of houses valued around its middle price range, many of them in the new estates spreading out towards the Gold Coast, the Sunshine Coast and west to Toowoomba.
After a floodless summer, the first and most significant price rises of 2013 are likely to occur in the suburbs that were most affected by the Brisbane floods, suburbs where prices are now much lower than they were three years ago. Yet these are areas that would normally be highly sought after, such as Chelmer, South Brisbane, St Lucia and Milton. Brisbane’s unit market is still price pinned by the falls that have occurred in the large unit markets of the nearby Sunshine and Gold coasts, but when those markets start to recover Brisbane’s unit market will follow.
The future of Perth’s housing market
A rapidly growing population, booming economy and rising housing shortage can only lead to increases in rentals for both lower priced houses and inner units.
The first reaction after rental increases have forced up yields in inner units will be from investors, especially the inner unit localities of Perth and around the Swan River suburbs, creating a surge in prices that’s already long overdue for these prime areas.
Rent rises in lower-priced house suburbs will encourage aspirational buyers to make their move and, as established overseas arrivals from several years ago join in, lead to price growth in this market as well. A surge in housing finance for both investor and first homebuyer loans could result in another Perth housing market boom similar to that of 2004 to 2007, and there’s every indication that this will occur sooner rather than later.
The future of Adelaide’s housing market
The cause of Adelaide’s housing malaise is the constant drain of younger people to Perth, Melbourne and Sydney seeking better employment or education opportunities.
The reliance of Adelaide on overseas migrants, particularly industrial workers who tend to gravitate to the satellite cities of Elizabeth and Salisbury for employment and dwellings keeps up rental demand in these areas and eventually translates into some first homebuyer price growth. But the prospect of any ripple effect is diminished by the large numbers of top end homes that will be sold over the next few years.
Young people have been deserting Adelaide for years and unless they return, bringing along with them a substantial lift in Adelaide’s population growth rate from interstate or overseas arrivals, a gradual but continual slide in house prices will get under way.
The future of Canberra’s housing market
The fortunes of Canberra’s housing market are closely aligned to federal government programs that lead to an increase in public service numbers based in the Australian Capital Territory.
The huge number of interstate arrivals and departures in and out of Canberra drive its rents and housing demand up and down, with one-third of dwellings being rentals. At times of high demand the city’s housing rents and prices are the highest of any capital city, yet they can remain in the doldrums for years when there’s no increase in public service numbers. There’s an election due next year and history shows that new governments usually engage in some public service bashing when first elected and also take years to implement their promises with new programs. The outlook for Canberra’s housing market is quite sobering, given that the current federal government has already made large cuts in expenditure, programs and public service numbers in an attempt to deliver a balanced budget, rather than increasing spending in a desperate attempt to win votes for the next election.
The future of Darwin’s housing market
Although the planned increased US military presence is good news for Darwin housing investors, the proposed cutbacks in our overseas defence commitments, especially East Timor and Afghanistan, will lead to reductions in housing rental demand in Darwin.
Due to the large numbers of investor-owned properties in Darwin, any reduction in rent demand could lead to panic selling and cause an unnecessary fall in housing prices. This is definitely a market to watch closely and avoid the risk that comes from reading the wrong signals.
The future of Hobart’s housing market
Although Hobart is a capital city, its population of 220,000 is smaller than some of our larger regional centres and it has the lowest population growth rate of any state capital city.
The negligible population growth rate is a direct consequence of younger people leaving and indicates that family homes in Hobart will remain cheaper than their mainland equivalents for the foreseeable future, especially in the upper Derwent Valley and Eastern Shore suburbs.
Real growth is likely in units and the elegant period houses in the older inner suburbs, close to services and facilities as the demand of an aging population play out in the housing market over the next few years.
John Lindeman is chief property consultant at Property Power Partners, www.understandproperty.com.au.
Copyright Australian Property Investor magazine - www.apimagazine.com.au. This is an edited version, reproduced with permission.