What’s Ahead for 2007?
We are now well into 2007. Home owners and investors are looking to the property markets for directions but are confused with the mixed signals they are getting and the mixed messages they are reading in the press as the market seems to be moving in so many different directions.
I find you get a much clearer perspective if you stand back and take a big picture view. Or maybe it’s because I have seen it all before - this is the 4th major property cycle I have invested in!
Despite 3 interest rate increases last year there is still demand from first home buyers and there is particularly strong demand at the upper end of our property markets. At the same time other buyers are being squeezed by the interest rates rises and decreasing affordability.
Our markets are behaving normally – this is all part of the property cycle.
This year our markets will have to contend with a number of factors that will ensure we keep receiving mixed message.
Just some of what lies ahead this year includes a number of elections, the fear of further interest rate rises and a severe shortage of rental properties in every capital city. Some investors will quit real estate, lured by the stock market and the special concessions for superannuation which ends on 30th June and others will take advantage of the markets by taking a counter cyclical approach.
Over the medium term strongly rising rentals will attract more investors back into our property markets and the housing shortage will encourage builders and developers to boost construction.
The recent Australian Bureau of Statistics (A.B.S.) figures show that prices grew in all capital cities other than Sydney over the last 12 months.
Annual Median Property Value Change
(December quarter 2005 to December quarter 2006) |
Perth |
+36.9% |
Darwin |
+17.6% |
Canberra |
+9.2% |
Melbourne |
+8.1% |
Brisbane |
+7.1% |
Hobart |
+7.1% |
Adelaide |
+6.4% |
Sydney |
-0.1% |
Source: A.B.S.
In the December quarter median house prices rose in Brisbane (+3.0%), Darwin (+3.0%), Adelaide (+2.6%), Perth (+1.7%), Canberra (+1.7%), Melbourne (+1.5%) and Hobart (+0.2%), and fell in Sydney (-1.0%).
I have been surprised by many commentators describing our property markets as subdued following these results. With an annual growth rate of house prices of 8.3% our markets are behaving solidly – as I said earlier this is all part of the normal property cycle.
Of course our various State property markets are each at different stages of their own cycles and within each State the markets are fragmented. Some sectors are performing strongly and others are languishing.
So let’s have a look at how each is performing….
Sydney
The Sydney property market was hit the hardest by the end of the property boom on the east coast of Australia in 2003 and much has been written about how many Sydney property values fell by over 15% since the peak of the boom. In fact it is the only city where there have been significant price reductions in the wake of the boom.
Despite its strong underlying fundamentals such as low supply, low vacancies and better migration numbers, Sydney property prices were virtually unchanged over the last year. At least the figures confirm that the city has arrested its declining market since 2003.
Like other states, Sydney's housing market has been fragmented. The more affluent suburbs have recorded the highest annual growth in the median house prices according to Patrick Bright, director of Property Buyers Agent EPS Property Search, www.epspropertysearch.com.au Record house prices were set in 35 Sydney suburbs during 2006, including $22 million for a home in Vaucluse. There were 20 houses sold for $10 million or more in 2006, including two above $20 million.
With record low vacancy rates, strong rental growth and the prospect for capital growth, smart investors will begin searching the market for opportunities later in 2007 looking for a recovery in Sydney in 2008.
Along the way there will be some challenges the market will have to face. NSW is returning some of the worst economic indicators in the nation with modest economic growth now revised down to a mediocre 1.5% and poor unemployment figures. The continual negative press received by what looks like an impotent State Government is not helping perceptions about the economy or the property market.
Melbourne
Melbourne property values continued to grow last year, with 1.5% growth in the December quarter and 8.1% for the year. And the prospects for the Melbourne property look strong for 2007, boosted by a steady economy, strong immigration, low vacancy rates and strong owner occupier demand.
But these figures don’t show the true strength of the Melbourne property markets as many of the more affluent and bayside suburbs delivered double digit growth last year at the expense of the middle ring and outer suburbs.
“It’s a highly segmented property market” according to Jack Henderson, director of Metropole Buyers Agency in Melbourne www.metropoleproperties.com.au “The upper end of the market is buoyant as are many of the inner south eastern and bayside suburbs. There have already been a number of strong sales results in the first few weeks of this year.”
“It is likely that prices will continue to increase in these suburbs throughout 2007 because of continuing demand coupled with a lack of new developments, falling vacancy rates and higher rents. But many middle and outer suburbs are unlikely to see prices increasing because of the affordability issue,” said Henderson
Pamela Yardney, associate director of Metropole Property Management www.metropole.com.au believes Melbourne rentals will rise strongly this year. “With vacancy rates around 1.6% and a queue of prospective tenants every time we have a rental property open for inspection, I see rents for many properties in the inner and middle suburb rising by up to 10% this year,” says Yardney.
Overall Melbourne should perform much as it did last year with appreciation of property values at the top end of the market and in the inner suburbs. Middle ring suburbs will remain stable but the cheaper outer suburbs may face a slight downturn.
This is a great time for property investors to selectively claim their stakes in the Melbourne property markets and take advantage of the cyclical upswing that has already begun in some suburbs.
Brisbane
Brisbane is now in the early upturn stage of its property cycle and was the most solid performer in the December quarter with a 3% rise and 7.1% growth over the full year.
This has been under-pinned by considerably higher population growth than other states and a resources boom which boosted the State’s economy.
George Kafantaris, director of Metropole Buyers Agency Queensland www.metropoleproperties.com.au says “The inner suburbs of Brisbane have had strong growth over the last year with many good properties selling within days of being placed on the market.”
“This should continue throughout 2007 as we continue to benefit from a strong economy as well as interstate and overseas migration. One strong trend we are seeing is a wave of investors taking profits from the W.A. market and investing in Brisbane. We have never had as many prospective investors approach us. This is a strong forward indicator that our market should do well over the coming year” said Kafantaris.
There is also tremendous owner occupier demand partly boosted by the steady rise of middle-aged baby boomer numbers in Queensland
Vacancy rates low at 1.7% in Brisbane and rents have risen strongly in the past year. The median rent for three-bedroom houses rose 17% while the typical rent for two-bedroom units rose 18% with newspaper reports of tenants forced to out bid each other for vacant properties.
Perth
With Perth prices nearing those of Sydney and affordability declining 16% in 2006, the cooling of the Perth market has been confirmed by both the A.B.S. data and now the recently released REIWA figures. Both showing continued price growth, but at much lower (more normal) levels in both the September and December quarters.
According to the REIWA, metropolitan Perth grew 2.3% in the December quarter, lifting the preliminary median house price to $450,000. REIWA President Rob Druitt said “The quarterly growth rate of 2.3% was less than half the 8.6% of the previous quarter, but illustrated a welcome return to normality.” "Two per cent growth per quarter is quite normal for Perth. These results show the Perth property market has finally come in for a soft landing after three years of astonishing growth," Mr. Druitt said.
Personally I think it’s much too early to call this a ‘soft landing’ – let’s see what the next year brings us.
Price growth across the metropolitan area was varied with inner and middle ring suburbs generally performing better than many outer areas; a trend which started to emerge in the June quarter last year.
REIWA data shows that of 277 suburbs, 159 of these, representing 56% of sales, recorded some growth or no change in the quarterly median price. By contrast, 118 suburbs showed some decline.
Based on the preliminary median of $450,000, Perth experienced 33.3 per cent growth in house prices for 2006, while metropolitan unit prices grew by almost 30 per cent in 2006 to a new median of $350,000.
"The 3.6% quarterly growth rate in unit prices, higher than for houses, might suggest that affordability pressures are now placing greater demand on this part of the market," Mr. Druitt said.
Metropolitan land prices increased by 3.2% in the quarter, bringing the new median price for a residential block to $260,000, having jumped by an exceptional 60.5% overall for the year.
Pressure on the Perth rental market continues with a vacancy rate of about 1.6%. Median rentals rose 18% over the last year including a 4% cent rise in the last quarter of 2006. This lifted the median rental for units to $250 per week and to $270 per week for houses.
With all the recent media comments warning of doom and gloom in the WA property market and that first home buyers were the most affected by the rapidly rising WA property market, Premier Alan Carpenter is not waiting for the market to correct.
He recently announced a $300 million shared-equity program, the first of its kind in Australia. This will help 3,000 low to moderate income earners by taking a 30-40% stake in their properties and providing low deposit loans for the rest.
Clearly WA’s fairytale boom has ended and its property markets will be different this year than the last few years. Will they tumble like Sydney did after its last property boom or will they hold steady like the Melbourne and Brisbane markets as affordability catches up? I will be watching carefully and report my thoughts in future market updates.
While the fundamentals were right for the Perth property markets at the start of this boom, speculators took over the market, especially the apartment market, where they bought in the hope of on-selling before settlement. It’s the old storey of fear and greed driving our property markets.
Investors should steer clear of the WA property markets – there are better opportunities elsewhere.
Those who bought at the peak of the WA market last year face a nervous wait to see what prices do in 2007. I believe that prices have over-shot true value in many locations, particularly the cheaper suburbs in and around Perth.
Canberra
A strong labour market and improved migration have underpinned the ACT housing market with
Canberra’s median house price rising 9.2% in 2006. ABS figures show there was strong activity from owner-occupiers in 2006, with a 30% lift in loans to owner-occupiers.
Like other major cities the strength is largely confined to the upper end of the market while the mainstream market is less buoyant.
With pent-up owner occupier demand and improving net migration numbers the ACT property market is likely to remain strong throughout 2007
This has spilled over to rental demand, with vacancy rates falling sharply in the past year to 1.1%. Many property managers report queues of people outside rental properties and predict rising rentals over the year.
Adelaide
The Adelaide property market showed solid growth of 2.6% in the December quarter and 6.4% of the 2006 year.
Adelaide is still the most affordable mainland capital and its economy has performed strongly in recent years. Jobs growth has picking up and the unemployment rate is at record lows for SA and slightly lower than the national average.
A strong uplift in migration together with Australia’s lowest vacancy rate and ongoing minerals exploration in the state suggests the Adelaide market will continue to perform much the same in 2007 as it did last year
Adelaide has the tightest rental market in the nation with the R.E.I.S.A. reporting a 0.5% vacancy rate after 15 consecutive months with vacancies below 2%.
Darwin
Darwin’s house price growth seems to have peaked in mid 2006 yet still showed a respectable 3% growth over the last quarter of 2006.
In the full year prices increased by 17.6% but it is likely that 2007 will show some fallout from the huge rise in values over the last few years. The Darwin property market is not immune to the laws of nature.
The depth of the Darwin market is not the same as our other capitals, so I would be very wary of buying in the N.T. at present. It is likely prices will fall back to more realistic levels.
Hobart
Hobart property values ended the year a respectable 7.1% higher than at the start of the year but the trend is slowing with Hobart's median house price rising only 0.2% in the last quarter.
Hobart is also experiencing a rental shortage with a vacancy rate of around 2%.
There are a few worrying signs for the Tasmanian property market for the coming year.
Its economy has slowed sharply following a period of above-average growth. Employment growth has flattened and the unemployment rate has lifted to a local high. Net interstate migration has fallen in part due to the poorer economy, partly due to the unemployment rate lifting to a local high and also due to the decline in housing affordability.
Investors should avoid the Tasmanian market this year – there are better opportunities elsewhere.
Michael Yardney
Director
Metropole Properties
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