From Money Magazine, September 2006
Home buyers and those buying to invest can be excused for being confused. Optimistic headlines proclaiming the return of the boom have mingled with pessimistic conclusions based on adverse interest rates, debt levels and affordability.
The reality is that the only booming markets are to be found in Western Australia, Darwin and parts of Queensland. Everywhere else is at or near the bottom of the real estate cycle – and its recovery has been further delayed by the August interest rate rise.
The market now faces a slow climb from the cyclical trough to a stabilisation phase, before a return to an upward cycle possibly next year, depending on who you talk to.
Although few expect the eastern seaboard markets to move into recovery quickly, they see a gathering of fundamentals pointing to a resurgence. Chief are low supply of new stock, shrinking vacancies and rising rents, leading gradually to better returns for investors.
Everyone seems to agree on what buyers should do in the meantime: buy quality property in good locations. And undoubtedly there are now good buying opportunities, particularly for first-time buyers who do not have to sell, and investors.
City and state run down:
Queensland: opinions vary
LandMark White, valuation consultants on the Gold Coast, believe Queensland is somewhat insulated from rate rises because of population growth, business investment and infrastructure spending.
BIS Shrapnel (in its Residential Property Prospects 2006-2009 report) nominates Queensland as the state most likely to outperform in the next three years.
There is evidence of slowing interstate migration flows, but Paul Braddick, head of financial system analysis at ANZ Bank, expects housing activity to pick up in the middle of 2007.
Rod Cornish, head of property research for Macquarie Bank, has a more pessimistic view. He says Brisbane’s prices have followed the migration patterns, falling from the high levels of 2003 in line with reduced interstate migration numbers.
Researcher Michael Matusik agrees price growth will be minimal. But he expects rents to rise 25% to 30% in the next two years because of limited building and tightening vacancies.
Water-based property and homes close to key infrastructure are expected to outperform. Key inner-city suburbs will do well, including West End (targeted for urban renewal) and Paddington.
Brisbane best buys
Key inner-city suburbs: West End, Paddington
Canberra: tentative market
Canberra’s outlook is relatively positive. Valuation firm HTW, in its August Month in Review, says Canberra has a steady sales market with tightening vacancies and a shortage of rental property and ANZ’s Braddick believes pent-up demand will grow.
Braddick says ACT residential building approvals have rebounded from the historic lows in 2004. The gradual replacement of houses destroyed in the 2003 bushfires has provided activity.
Buyers agent Paula Sharp, of Sharp Property Solutions, says quality properties, generally in short supply, have been selling for “very high prices” but the mainstream market is still struggling.
Sharp expects the market to be tentative next year and property without special qualities will be hard to sell. She sees good buying among the larger, older homes in Chapman, set among the new homes replacing those lost in the bush fires.
Canberra best buys
Larger, older homes in fire-affected suburbs: Chapman
Darwin: on an economic high
The commodities boom has driven housing markets in the Northern Territory, with Darwin the only recent challenger to Perth as the national outperformer.
“Darwin house prices have risen 73% since 2002 and 17% in the past 12 months,” says Braddick. “New development activity has also been strong. In contrast to falls along the eastern seaboard, NT dwelling approvals have managed to hold up well.”
He says strong economic activity has helped turn around the Territory’s “dismal” net migration performance – from a loss in 2003 to a net gain in 2005.
Valuers HTW expect northern suburbs such as Nightcliff and Casuarina to outperform.
Darwin best buys
Northern suburbs: Nightcliff, Casuarina
Hobart: defiant performer
Braddick expects Tasmania to continue its defiant performance since the end of the boom. Hobart valuer Andrew Peck of HTW agrees, and recommends the quality inner-city suburbs as the outperformers in the next few years.
Braddick says Tasmania’s housing markets have performed very strongly in recent years, following big improvements in net migration in 2004. Hobart house prices more than doubled in the three years to the end of 2004 and growth has remained robust at 10% in the year to March 2006.
“The medium-term outlook remains relatively solid,” he says.
Peck says the top end of the market will stay strong and expects the inner-city markets around Battery Point, Sandy Bay, West Hobart and South Hobart to do best.
Hobart best buys
Inner-city suburbs: Battery Point, Sandy Bay, West
Hobart, South Hobart
Melbourne: revival leader
Melbourne is ahead of Sydney and Brisbane in the cycle and moved into its stabilisation phase late in 2005, according to Cornish. Melbourne prices generally are now rising moderately, particularly in the city fringe areas. Underlying demand is boosted by good overseas migration numbers.
Braddick says dwelling approvals in Victoria have been below underlying needs and this is expected to continue, leading to rising rents and property values. He expects Melbourne prices will be growing around 5% a year by early 2008.
Buyers agent David Morrell says the “two-tier market” – the top end which is thriving and “the rest” which isn’t – widened with the August rate rise and people should be buying triple-A properties in prime locations, such as Hawthorn, Kew and Camberwell.
Melbourne best buys
Inner north west: North Melbourne, Kensington, Flemington, Thornleigh and parts of Moonee Ponds
Perth: spurred by resources
Western Australia’s housing market is on what Braddick terms a “whirlwind ride”. But he believes high dwelling approvals will move the market into surplus in the next couple of years.
He says Perth is now rivalling Sydney as the least affordable city. “Despite this, our expectation is for prices to continue[rising], though at a slower pace, before levelling out in the middle of 2007.
“The real risk is a sudden souring in economic conditions, triggered by a sharp fall in commodity prices. This almost certainly would see house prices fall.”
Cornish says Perth has outperformed because of its previous undervaluation and relative affordability three years ago. It started its upturn later than other capitals, while the strength of its economy has caused a strong pick-up in migration and employment.
Perth analyst Gavin Hegney of Hegney Property Group expects growth to fall back to 8% to 12% next year. He says diligent investors will find suburbs which haven’t matched the growth of their neighbours, particularly in the south-eastern corridor.
Perth best buys
South-eastern corridor: Gosnells, Westfield, Kenwick, Armadale
Sydney: strong fundamentals
Sydney presents the contradiction of being the worst market with, according to Braddick, the best fundamentals. He believes the recovery, probably in 2008, will be quite strong.
Fatouros says the interest rates rise will prolong the delay in recovery of the mainstream residential market until late in 2007 or even early 2008.
“The follow-on effect of this will be that the already-low vacancy rates will continue to fall,” he says. “This is expected to push rents higher.”
Cornish says Sydney’s affordability gap with other capital cities has narrowed towards levels not seen since the first half of the 1990s. With migration into NSW and affordability gradually returning to long-term levels, Sydney should have begun its stabilisation phase in the second half of 2006. But interest rate rises intervened.
Cornish says NSW, late in 2005, had its strongest annual pick-up in net interstate migration in four years, heralding a turnaround for the state. Fewer people are leaving Sydney for Queensland and underlying demand in Sydney is expected to improve. But interest rate rises have harmed sentiment. Cornish believes Sydney’s shift to the stabilisation phase will start in 2007.
Sydney buyers agent Patrick Bright says the quality suburbs will do best in the current climate.
“It’s just common sense – anything close to the beaches or close to the CBD,” he says.
He suggests the inner ring–where there is ongoing gentrification occurring in suburbs such as Newtown, Alexandria, Kensington and Erskineville – has plenty of upside. He also thinks the northern beaches precinct of Manly, Queenscliff and Harbord is undervalued.
Sydney best buys
Inner ring and inner northern beaches: Newtown, Alexandria, Manly, Queenscliff, Harbord
Adelaide: risk of oversupply
Braddick believes South Australia has the nation’s worst housing fundamentals and a weak economy. Prices have held up well recently but Braddick expects them to fall around 7% by the end of 2007, because of excess building, low growth in incomes and rising interest rates.
Adelaide agent Oren Klemich, on the other hand, expects Adelaide to remain steady in the next two to three years. While investors are still absent, demand for quality homes is strong. He expects quality city fringe suburbs to perform best: Norwood, always a solid performer, Malvern and Toorak Gardens are prime examples.
Adelaide best buys
City fringe: Norwood, Malvern, Toorak Gardens
For the complete story see Money Magazine's September 2006 issue. Subscribe now.