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
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.
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.
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.
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.
Powering ahead ... Newcastle, adjacent to Lake Macquarie, is growing strongly thanks to the “ripple effect”.
Rich resources ... with the Great Barrier Reef at its doorstep, Townsville is set to emerge from a downturn.
Prices are right ... affordability is a strong point for Adelaide, which will benefit from solid infrastructure spending.