New hotspots: Terry Ry­der Where to look

As the hous­ing mar­ket in Syd­ney and Mel­bourne cools, more af­ford­able growth mar­kets are get­ting ready for their time in the sun

Money Magazine Australia - - CONTENTS - STORY TERRY RY­DER

The di­ver­si­fied na­ture of Aus­tralian prop­erty mar­kets is shown by the rel­a­tive con­di­tions of the cap­i­tal cities. While Syd­ney and Mel­bourne have been de­liv­er­ing solid to strong growth for three or four years, Perth and Dar­win have been in re­verse, and the other state and ter­ri­tory cap­i­tals have per­formed only mod­er­ately.

Now, as signs emerge that the bull run in the two big­gest cities is grad­u­ally draw­ing to a close, both Ho­bart and Can­berra are com­ing into growth phases and may take over from Syd­ney and Mel­bourne as the lo­ca­tions with the high­est price growth.

At the same time, there are indi­ca­tions that the worst is over for Perth and Dar­win, while Bris­bane ap­pears poised for stronger per­for­mance un­der­pinned by an im­prov­ing state econ­omy.

There are sim­i­lar dis­par­i­ties in re­gional mar­kets. There is grow­ing ev­i­dence of ris­ing mar­kets in cen­tres close to Syd­ney and Mel­bourne, and in the stronger re­gional cities fur­ther afield in NSW and Queens­land.

Lo­ca­tions strongly de­pen­dent on the re­sources sec­tor con­tinue to de­cline, al­though there is ev­i­dence that some have passed the bot­tom of their down cy­cles.

New South Wales

Syd­ney has had a strong run for four years, and while there’s ev­i­dence of per­sis­tent strength in the mar­ket over­all, the days of dou­ble-digit price growth are al­most over. Hotspot­ting anal­y­sis shows that, in terms of sales ac­tiv­ity, the Syd­ney mar­ket peaked in late 2014. Al­though high sales vol­umes con­tin­ued in 2015, ac­tiv­ity fell away in 2016 and early 2017, though not dra­mat­i­cally enough to pre­vent price growth.

The lat­est fig­ures from the Aus­tralian Bureau of Sta­tis­tics (ABS) record an­nual house price growth av­er­ag­ing around 10% for Syd­ney, while SQM and Do­main both have growth fig­ures around 13%-14%.

A num­ber of fac­tors sug­gest Syd­ney growth will mod­er­ate. Sales ac­tiv­ity is trend­ing down, af­ford­abil­ity is in­creas­ingly an issue and the gap be­tween price growth and rent growth (there has been only mi­nor ren­tal growth, ac­cord­ing to both SQM Re­search and Do­main) means yields are painfully low.

While va­can­cies gen­er­ally re­main tight in the Syd­ney metropoli­tan area, there are ar­eas of con­cern for in­vestors, es­pe­cially lo­ca­tions dom­i­nated by apart­ments. Par­ra­matta has above-av­er­age va­can­cies and new sup­ply in the pipe­line at a time when sales ac­tiv­ity has fallen markedly.

The in­ner-city apart­ment mar­ket may de­velop over­sup­ply prob­lems if a large pro­por­tion of the pro­posed de­vel­op­ments go ahead.

Clearly the best time to buy in Syd­ney has passed and many in­vestors are look­ing else­where. Those who feel com­pelled to buy in Syd­ney should follow the in­fra­struc­ture trail, with the sec­ond air­port in western Syd­ney set to be­come the cat­a­lyst for other in­fra­struc­ture, in­dus­trial de­vel­op­ment and ris­ing res­i­den­tial val­ues in nearby lo­ca­tions.

The best prospects for in­vestors in the NSW mar­ket now ex­ist in the re­gional ar­eas. It’s note­wor­thy that the 10 fastest-sell­ing mar­kets in NSW are all re­gional.

There are strong mar­kets in cen­tres close to Syd­ney, such as Wol­lon­gong, New­cas­tle and the Cen­tral Coast. Partly this re­sults from catch­ing a “rip­ple ef­fect” from Syd­ney and partly from lo­cal eco­nomic events.

But growth mar­kets with af­ford­able prices can be

found from the Victorian bor­der in the south to the Queens­land bor­der in the north, in­clud­ing Wagga Wagga, Goul­burn, Dubbo, Or­ange, Tam­worth and the Tweed re­gion.


Mel­bourne has ar­guably the strong­est cap­i­tal city mar­ket at present and is chal­leng­ing Syd­ney on price growth. The lat­est fig­ures on an­nual house price growth from both Do­main and the ABS have Mel­bourne ahead of Syd­ney, al­though other sources still have Syd­ney lead­ing.

But the fun­da­men­tals sug­gest that the city’s run is at or close to its peak. An anal­y­sis by Per­for­mance Prop­erty Ad­vi­sory finds that the key in­di­ca­tors, while slightly mixed, sug­gest that Mel­bourne is now com­ing to the end of its growth cy­cle.

In­di­ca­tors point­ing to a mod­er­a­tion in price growth in­clude the firm’s af­ford­abil­ity in­dex, the level of ren­tal yields, the high price growth in the past three years rel­a­tive to longer-term trends and a de­cline in the in­flu­ence of for­eign in­vestors.

Per­for­mance Prop­erty Ad­vi­sory di­rec­tor David McMil­lan says: “From an in­vest­ment point of view, Mel­bourne is show­ing all the signs of a mar­ket run­ning out of steam.”

He says that from 2009 to 2016, in­comes rose about 15% while house prices rose 79%. “The out­per­for­mance of house prices against in­comes is, in our view, un­sus­tain­able and this is a neg­a­tive for fu­ture price growth in Mel­bourne.”

McMil­lan also notes that Mel­bourne has the sec­ond low­est yields among the ma­jor cities, with only Syd­ney lower. “Due to an out­per­form­ing me­dian house price, we have seen yields pro­gres­sively de­te­ri­o­rat­ing, which is a neg­a­tive for both in­vestors and first home buy­ers,” he says.

But price de­cline is not ex­pected, as there are counter-bal­anc­ing pos­i­tives for the Mel­bourne mar­ket. They in­clude a high level of pro­posed in­fra­struc­ture spend­ing by the fed­eral and state gov­ern­ments, the low rate of un­em­ploy­ment, rel­a­tively low lev­els of stock for sale, a low “days on mar­ket” in­di­ca­tor and strong lev­els of pop­u­la­tion growth (both ex­ist­ing and pro­jected fu­ture rises).

Per­for­mance Prop­erty Ad­vi­sory rec­om­mends that in­vestors avoid the off-the-plan apart­ment mar­ket. “This mar­ket is show­ing no value and price falls in the short term are pos­si­ble,” says McMil­lan. “There are no fun­da­men­tals that sup­port price growth in the short term.”

But he does see some value in the “life­style” and mid­dle-ring hous­ing mar­kets.

“This is re­ally a tale of two mar­kets, with house-and­land pack­ages on the metro fringe and in­ner-city off-the­p­lan prop­erty over­sup­plied, while the es­tab­lished school belt ar­eas of Mel­bourne are in short sup­ply,” he says.

These views are gen­er­ally en­dorsed by a re­search re­port from Mo­men­tum Wealth, which sug­gests there are “head­winds” in the Mel­bourne prop­erty mar­ket that may dampen price growth.

The re­port says fur­ther cap­i­tal growth may be lim­ited by a num­ber of emerg­ing fac­tors. “A po­ten­tial cash­flow crunch for in­vestors, in con­junc­tion with other head­winds, threat­ens to weigh on price per­for­mance,” says Prop­erty Mar­ket Spot­light: Mel­bourne.

The re­port finds that Mel­bourne’s strong pop­u­la­tion growth, grow­ing labour mar­ket and an un­der­sup­ply of es­tab­lished prop­erty list­ings would con­tinue to un­der­pin de­mand.

But Mo­men­tum Wealth man­ag­ing di­rec­tor Damian Collins says one of the larger chal­lenges for in­vestors is “the record low ren­tal yields”.

As Mel­bourne starts to wind down, a num­ber of re­gional ar­eas on the pe­riph­ery of the metropoli­tan area are grow­ing, as buy­ers seek af­ford­able life­style lo­ca­tions within com­mut­ing dis­tance of the city.

They in­clude towns in Mace­don Ranges Shire (in­clud­ing Kyne­ton and Gis­borne), Mitchell Shire in the north (Kil­more, Sey­mour and Wal­lan) and Car­dinia Shire (Pak­en­ham and Of­fi­cer) in the south-east.

Me­dian house prices in­clude $390,000 for Pak­en­ham, $360,000 for Wal­lan, $240,000 for Sey­mour and $450,000 in Kyne­ton, en­hanc­ing their ap­peal for home buy­ers and in­vestors seek­ing value. Yields in the 4.5% to 5.5% range are com­mon.

But the strong­est mar­ket on the fringes of Mel­bourne is the City of Greater Gee­long, driven by its strong lo­cal econ­omy and trans­port links to the cap­i­tal city. It is ap­peal­ing to a ris­ing num­ber of buy­ers as an af­ford­able life­style al­ter­na­tive to Mel­bourne.


Bris­bane has un­der-achieved in re­cent years but that may be about to change. There are grow­ing sig­nals of im­prove­ment in the Queens­land econ­omy and this is ex­pected to flow into bet­ter real es­tate per­for­mance in the state cap­i­tal and some of the key re­gional cities.

The Com­mSec State of the States re­port sug­gests Queens­land is hav­ing “a phenom­e­nal ex­port boom”, with ex­ports from the state up 43% in a year, led by gas, coal, cot­ton and crops. Mean­while, a Deloitte Ac­cess re­port says Queens­land is head­ing into a $14 bil­lion build­ing boom, much of it re­lated to tourism, with 20,000 jobs to be cre­ated. And the lat­est Sen­sis Busi­ness In­dex sur­vey shows con­fi­dence among Queens­land small and medium busi­ness own­ers is at its high­est level in seven years.

At the same time, the re­sources sec­tor is re­viv­ing and nu­mer­ous min­ing projects that were pre­vi­ously mothballed are now be­ing re­ac­ti­vated. In ad­di­tion, a list of ma­jor new projects is headed by the pro­posed $22 bil­lion Adani coal ven­ture. There is also an ex­plo­sion of ma­jor al­ter­na­tive en­ergy projects, fea­tur­ing both so­lar and wind farms.

Bris­bane has lagged on in­fra­struc­ture spend­ing in re­cent years but that is ex­pected to change as a sig­nif­i­cant list of new ven­tures starts to roll out, in­clud­ing the $3 bil­lion Queen’s Wharf Casino de­vel­op­ment, which is now un­der way.

Both the Gold Coast and the Sun­shine Coast are tar­gets of mas­sive spend­ing on new in­fra­struc­ture as well. The list of projects on the Sun­shine Coast alone to­tals around $20 bil­lion. Both coastal cities have busy prop­erty mar­kets with ev­i­dence of ris­ing prices but in­vestors are urged to stay away from the Gold Coast high-rise sec­tor, which has been blighted by over­sup­ply many times in the past and ap­pears likely to de­velop an­other glut in the near fu­ture.

Re­gional economies and prop­erty mar­kets that have suf­fered re­cent down­turns are poised for re­vivals, led by Townsville and in­clud­ing also Cairns, Rock­hamp­ton and Mackay. Toowoomba con­tin­ues to thrive as a re­gional centre of grow­ing im­por­tance.

Western Aus­tralia

There are grow­ing signs that the worst is over for Perth. It has been in steady de­cline for the past four years but indi­ca­tions are that it has reached the bot­tom of the cy­cle.

Right now the city con­tin­ues to pro­duce ugly numbers in its real es­tate mar­kets. Perth has the high­est va­can­cies in cap­i­tal city Aus­tralia, by a wide mar­gin, and prices are still fall­ing.

Un­like Mel­bourne and Bris­bane, where con­cerns about unit over­sup­ply are fo­cused on the in­ner city, Perth has 6%-7% va­cancy rates right across the city.

The de­cline in the state econ­omy which has caused this has been so se­vere that the lat­est Com­mSec State of the States re­port ranked Western Aus­tralia 8th and last among the state and ter­ri­tory economies.

The key fac­tor for in­vestors to re­mem­ber is that this is not the norm for Western Aus­tralia and Perth. Of­ten the state has been a na­tional leader on eco­nomic growth and Perth has led the cap­i­tal cities on pop­u­la­tion and real es­tate growth. In 2012, ahead of Syd­ney’s surge and be­fore the end to the min­ing con­struc­tion boom, Perth led the na­tion on hous­ing price growth. Then it all went pear-shaped.

But there will be re­cov­ery and the list of com­men­ta­tors who think the worst is over is grow­ing. So Perth right now rep­re­sents op­por­tu­ni­ties for for­ward-think­ing in­vestors who can buy bar­gains in the cur­rent mar­ket with­out ma­jor com­pe­ti­tion from other in­vestors ahead of the ex­pected up­turn.

Big-ticket in­fra­struc­ture projects such as Perth Sta­dium and the For­rest­field rail link look set to pro­ceed, cre­at­ing thousands of jobs.

Equally, there are signs that re­gional mar­kets devastated by re­sources-re­lated down­turns are turn­ing around. In Port Hed­land, where the me­dian house price is about a third of the level of four years ago, the mar­ket is start­ing to im­prove. But in­vestors should be cau­tious be­cause mar­kets such as Port Hed­land, Kar­ratha and New­man will al­ways be volatile and high-risk.

South Aus­tralia

Ade­laide flies un­der the radar screens of most in­vestors. The city and its state sel­dom gen­er­ate head­lines through its econ­omy or prop­erty mar­kets, as it is deemed to lack growth driv­ers. But Ade­laide mar­kets have been busy in the past cou­ple of years and some pock­ets have de­liv­ered good price growth.

There is also solid in­fra­struc­ture spend­ing, es­pe­cially on ma­jor road links around the Ade­laide metropoli­tan area. There are prospects for im­proved eco­nomic per­for­mance from de­fence projects, en­ergy de­vel­op­ments and a revival in the re­sources sec­tor.

One of the core strengths of the Ade­laide prop­erty mar­ket is its af­ford­abil­ity rel­a­tive to

the big cities. The me­dian dwelling price for Ade­laide ($430,000, ac­cord­ing to CoreLogic) is ex­actly half that of Syd­ney.

In South Aus­tralia’s fastest grow­ing mu­nic­i­pal­ity – the City of Play­ford in the far north of Ade­laide – most sub­urbs have me­dian house prices be­low $280,000 in­clud­ing some be­low $200,000, with ren­tal yields above 6%.


Four ma­jor re­search sources – Do­main, the ABS, SQM Re­search and CoreLogic – all record an­nual house price growth for Ho­bart that ranks it third among the cap­i­tal cities, be­hind Syd­ney and Mel­bourne.

Three of those sources re­port an­nual price growth in the 11%-13% range.

In a re­cent re­port chart­ing the fastest-sell­ing sub­urbs in Aus­tralia, the lo­ca­tions with the short­est “days on mar­ket” were all in Ho­bart.

SQM also con­sis­tently ranks Ho­bart as the lead­ing ren­tal mar­ket, in terms of va­cancy rates. Ho­bart has had a va­cancy rate be­low 1% for some time. And it ranks along­side Can­berra as the cap­i­tal city with the best growth in res­i­den­tial rentals. So Ho­bart presents an ap­peal­ing trifecta to in­vestors: the low­est prices, tight­est va­can­cies and high­est ren­tal yields among the cap­i­tal cities.

The dra­matic change in Ho­bart’s ap­peal has oc­curred on the back of a big im­prove­ment in the state econ­omy. Tas­ma­nia has risen from No. 7 to No. 4 in the rank­ings in the Com­mSec State of the States re­port and con­tin­ues to strengthen.

Tourism is a big con­trib­u­tor and up­grades at Ho­bart air­port will ad­vance that con­sid­er­ably by al­low­ing di­rect in­ter­na­tional flights.

Other mar­kets in Tas­ma­nia are ris­ing also, most no­tably that of Launce­s­ton, which is even more af­ford­able than Ho­bart. Launce­s­ton’s solid lo­cal econ­omy will be fur­ther boosted by the Launce­s­ton City Deal, signed by three lev­els of gov­ern­ment in April 2017. The fiveyear plan of in­fra­struc­ture spend­ing in­cludes a $260 mil­lion univer­sity cam­pus project.

North­ern Ter­ri­tory

Dar­win, like Perth, has suf­fered from three or four years of mar­ket de­cline, hav­ing risen strongly on the back of the re­sources sec­tor, be­fore gen­er­at­ing over­sup­ply and laps­ing into de­cline. All ma­jor re­search sources have house prices drop­ping fur­ther in the past 12 months, with CoreLogic and Do­main both sug­gest­ing around 3% de­clines but the ABS record­ing a 7% drop.

Ini­tially Dar­win was supercharged by the con­struc­tion of the $30 bil­lion In­pex gas fa­cil­ity but the pos­i­tive in­flu­ences have worn off – and the city needs ma­jor new de­vel­op­ments to gen­er­ate eco­nomic ac­tiv­ity, jobs and de­mand for real es­tate.

There are signs that the mar­ket has bot­tomed and a re­turn to growth may be near, helped by a re­cent change of gov­ern­ment and mea­sures to as­sist first-home buy­ers.

One fac­tor trend­ing in the right direction is the va­cancy rate. Ac­cord­ing to SQM Re­search, Dar­win’s va­cancy rate has dropped to 3.4% but ask­ing rents are still drop­ping. SQM’s ren­tal in­dex is down 5%-6% in the past year, both for houses and apart­ments.

Anec­do­tal ev­i­dence sug­gests that, with prices down and first-home buy­ers boosted by grants, the lower end of the mar­ket is start­ing to rise again, so we may see more pos­i­tive sta­tis­tics out of Dar­win later in the year.

Aus­tralian Cap­i­tal Ter­ri­tory

For most of the four years in which Syd­ney has been surg­ing, Can­berra, just down the road, has done lit­tle.

But in 2017 it has shown in­creas­ing signs of join­ing the party, though much less dra­mat­i­cally than Syd­ney. Ini­tially, as Syd­ney was ris­ing Can­berra was ham­pered by down­siz­ing of the pub­lic ser­vice by the fed­eral gov­ern­ment and an over­sup­ply of apart­ments. Those is­sues are no longer ap­par­ent and Can­berra now has the low­est va­cancy rate in cap­i­tal city Aus­tralia, ex­cept for Ho­bart.

Res­i­den­tial rents are grow­ing more strongly in Can­berra than in any other cap­i­tal city, ac­cord­ing to data from SQM Re­search.

There are also indi­ca­tions of good price growth in the past 12 months, with Do­main and SQM both record­ing house price rises in the 10%-11% range. CoreLogic (9%) and the ABS (around 6%) have growth fig­ures that are lower but still solid.

Lo­ca­tions in the north of Can­berra, such as the Bel­con­nen and Gun­gahlin districts, con­tinue to be mar­ket lead­ers. Some of these north­ern sub­urbs will be boosted by the light rail link now un­der con­struc­tion.

Two mar­kets that sit out­side the ACT but are in­flu­enced by their re­la­tion­ship with Can­berra are wor­thy of con­sid­er­a­tion by in­vestors. Both Quean­beyan and Goul­burn have growth economies and busy prop­erty mar­kets, helped by their prox­im­ity to the na­tional cap­i­tal, while of­fer­ing more af­ford­able prices.

Rich re­sources ... with the Great Bar­rier Reef at its doorstep, Townsville is set to emerge from a down­turn.

Pow­er­ing ahead ... New­cas­tle, ad­ja­cent to Lake Mac­quarie, is grow­ing strongly thanks to the “rip­ple ef­fect”.

Prices are right ... af­ford­abil­ity is a strong point for Ade­laide, which will ben­e­fit from solid in­fra­struc­ture spend­ing.

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