January Market Update

Market Overview

Table 1 shows the capital growth, rent and sales summary for December 2015.

Table 1: December 2015 Summary

Capital City Summary

Source: Residex

Most markets saw modest growth in 2015. Sydney was an exception – where houses and units achieved annual growth of 18.36% and 13.48% respectively. Melbourne houses also recorded strong annual growth, of 13.00%.

Perth houses saw an unexpected surge of 2.30% in the month of December, while Adelaide, Hobart and ACT houses showed steady capital growth over the last 12 months.

End of the Sydney Boom – Will Growth Spill-Over?

The end of 2015 marked the end of the Sydney housing boom. The upswing in the current cycle lasted almost two years and, in real dollar terms, the median house increased by approximately $375,000.

Historically, Sydney has been the leader of growth with the Melbourne and Brisbane markets following. Given this, the Melbourne house market could peak sometime in the first quarter of 2016 while Brisbane could follow later in the year. However, global economic trends and a national crackdown on speculative buying may hamper growth for these other east coast cities.

Graph 1 shows the monthly capital growth trend of Sydney and Melbourne. The graph depicts Melbourne’s peak growth in houses following Sydney.

Graph 1: Monthly Capital Growth Trend: Sydney and Melbourne

Monthly Growth - Sydney Melbourne

Source: Residex

It is difficult to say what exacerbated the last upswing in Sydney and whether similar factors will impact other major dwelling markets.

Many have speculated and reported anecdotes of Chinese foreign investment pushing up real estate values. There is currently no reliable dataset in existence that documents foreign investment in Australian residential real estate[1], so it is not rigorously sound to say that this contributed to the enormous value increases.

In any case, the People’s Bank of China has placed restrictions upon citizens taking capital out of China to encourage investment within their own country (citizens are permitted to take just US$50,000 out of the country each year[2]). This action could limit the growth experienced in other Australian cities.

It is also not necessarily true to say that speculative domestic investment bid up the market. However, there is some evidence suggesting that investors became more active than owner occupiers in the latest housing boom.

The ABS collects data on the amount of money lent for the purposes of owner occupation versus investment. In recorded history, 2014 was the first time investor loans overtook owner occupier loans. Graph 2 presents this dataset over the last 5 years. It is worth noting that the figures in Graph 2 are for Australia wide lending, so the phenomena of investors overtaking owner occupiers may not be specific to the Sydney market.

Graph 2: Significant Lender’s Finance Commitments to Investors vs. Owner Occupiers

Investors v Owner Occupiers

Source: ABS Catalogue Number 5609.0 – Housing Finance, Australia
Note: Excluded refinancing for owner occupiers

 

The graph suggests that either investors were paying more money for dwellings or investors were buying a higher volume of dwellings at this time.

Theoretically, investors who owned property in Sydney could have continued to bid up prices in the market while interest rates were low. The ability to borrow equity against property facilitates this – the higher property prices go, the more equity investors have to purchase new dwellings.

In July 2015, the Australian Prudential Regulation Authority (APRA) announced regulations[3] that would require lenders to hold more capital against home loans. By the beginning of July 2015, a downswing in the Sydney market had begun. Sydney house values fell 0.14% in the month of December, the first fall in the aggregate market since January 2014.

One of the criticisms of APRA’s decision was that it was not specific to the rapidly growing markets of Sydney and Melbourne. However, of the 514,066 sales Residex recorded across Australia for 2015, approximately 20% were in the Sydney metropolitan region and a further 20% were concentrated in the Melbourne metropolitan. If anything, high home loan rates may have caused investors to spread their wealth among more affordable cities across the country.

Property developers Stockland and Mirvac have reported that there are Sydney buyers interested in Brisbane apartments. Private developers have also recorded Sydney buyers making up as much as 40% of investment in new developments[4].

While spill-over of investment from Melbourne and Sydney may result in capital growth for the Brisbane market, it is important to note that short term growth is not necessarily synonymous with a long term investment.

A reported 20,000 mining jobs have been lost across Queensland. Although this has mostly been in regional areas, Brisbane’s state product growth could remain subdued as the result of revenue lost from mining royalties and a higher unemployment burden. Indeed, the latest state accounts data showed that Queensland was the only state to see a decline in gross state product per capita in the year to June 2015, of -0.9%.

I expect those in regional mining areas may start migrating to the south-east cities of Queensland in search of new work. However, as the dominant services and tourism sectors in Brisbane are not as highly paid or productive, the ‘new normal’ in the Brisbane economy may be low growth, which would filter into dwelling values over time.

Where to Now for the Resource States?

The house price index (HPI)[5] for Perth and Darwin dwellings are presented in Graph 3.

Graph 3: HPI – Perth and Darwin

HPI- Perth and Darwin

Source: Residex

The Perth and Darwin property markets have experienced patchy growth in 2015 but they seemed to have sustained higher levels of growth than the pre-mining boom period of the mid 2000’s overall.

Judging by movements in the HPI, the outlook for Perth and Darwin is quite positive. Perth houses went up 2.30% in the month of December, however it is important to remember that monthly data is volatile so this result may be seasonal.

The troubling thing about these markets is that although gross state product figures suggest buoyancy in these states, the state final demand and employment figures show a slightly different story.

At the moment, it seems that Western Australia is being propped up by exports from a sector that is shedding many jobs, which means wealth is not being widely distributed. This may limit dwelling demand and rental yield in the future.

Nationally, the shift from resources and agricultural sectors to the knowledge economy has been sluggish, with the federal government accused of being risk averse and discouraging of an innovative ‘start-up’ culture in Australia.

While employment in Australia seems to be improving, wage growth is still at a record low of 2.3% and consumer confidence fell 3.5% from December (2015) to January. This could indicate that the nature of new work being found is precarious. Research indicates that when employment increases but wage growth remains stagnant, individuals are bargaining for more hours of work over higher wages.

Despite official increases in employment, 2016 is likely to see difficult economic times across Australia. While there may be a continuation of growth cycles in Melbourne and Brisbane, and some short term upswings in Perth over the next quarter, investors and home buyers should keep long term growth fundamentals of a market in mind when looking to buy property.

Property Directions and Strategies for 2016

For those who are interested in learning more about the property market and the outlook for 2016, I will be speaking at the ‘Property Directions & Strategies for 2016’ seminar at SMC Conference & Function Centre (66 Goulburn Street, Sydney) from 7pm on Wednesday, 17 February 2016.

This should be a great event – and tickets are an affordable $19 (or $29 for two people).

I highly recommend attending if you are in the area, as it is an opportunity to learn insights on the property market in general and learn strategies for finding innovative ways to grow wealth through property.

Further details on the event, including speakers, topics, time, location and how to purchase tickets can be found here.

Event Details

Date: Wednesday, 17 February 2016

Time: 6:30pm registration for  7:00pm start. Concludes at 9:00 pm

Location: SMC Conference & Function Centre, 66 Goulburn St Sydney

Cost: $19 single ticket, $29 double ticket

Numbers are limited. Book now to secure your spot.

Hope to see you there!

Eliza Owen.
Market Analyst for Onthehouse.com.au.


[1]Source: https://theconversation.com/dont-be-misled-on-chinese-foreign-investment-read-the-facts-25316

[2]Source: http://www.businessinsider.com.au/chinas-crackdown-on-capital-flight-is-starting-to-bite-in-the-sydney-property-market-2016-1

[3]Source: http://www.apra.gov.au/MediaReleases/Pages/15_19.aspx

[4]Source: http://www.afr.com/real-estate/the-real-sydney-buyers-heading-to-brisbane-20151002-gjzqnn

[5]The HPI represents how many times the value of a property has increased by since the first data point. For example, a HPI of 5.97 in Perth Houses means that houses are 5.97 times what they were worth since the first point of data in 1993.