Residential Markets - Dec 2016
Almost every week we see news articles about the continuing escalation of housing prices in Sydney, Melbourne and Brisbane and the impending distress to come. Many of these are of course, sensationalised by the media but there are truths in among the rhetoric.
So what is happening in residential markets ? The short answer is - lots, but it depends on where you are talking about. Here's my summary....
Step Back and Slow Down
Lets step back a bit.......The macro economic conditions across Australia remain sound with inflation under control (1.3%), unemployment relatively low (5.6%), but with GDP growth slowing (1.8%) but with prospects of an improving terms of trade. Again, I am no ecomonist or politician, but the numbers look better than the feeling and as many people say they unimpressed with politics and the nation continues to be hamstrung by indecision, public confidence is only marginally positive.
In this context interest rates should remain on hold, however the RBA has been under pressure to slow the investor driven debt binge in the housing market, particularly in Sydney. The RBA don't have much to use in their bag of tricks so they have leaned on APRA to force banks to restrict credit growth in an attempt to cool the market as opposed to increasing interest rates which could do more damage to the existing home owners and reduce business investment.
The graph above shows just how far investor finance grew from 2013 to 2015 with declines now evident in 2016. Whether the declines have gone far enough to allay the RBA's concerns remains to be seen and will only show up when house price growth in Sydney shows signs of abating.
I recently wrote about the latest Building Approvals data and it is worth noting that Sydney continues to see Developers seeking approval for new apartments whereas Brisbane and Melbourne have seen noticeable declines in applications.
Real estate markets are cyclical and invariably have periods of excessive growth and periods below average growth and in some cases actually decline. The graph below shows the average value of apartment prices in Sydney, Melbourne and Brisbane from 1980 to 2016.
Sydney has clearly had an exceptional period of price growth since 2014, driven in part by strong foreign investment, but also easy access to relatively cheap money. Supply of new apartments has been strong and the recent building approval numbers suggest that there is no shortage of projects able to be built, if funding conditions exist.
Sydney's price rise has been well above trend and my belief is that Sydney is over priced by 10% however i don't expect prices to drop across the board due to ongoing strong demand for Sydney real estate. Prices are more likely to stagnate over the next 2 years to meet the long term trend.
Does this mean, I should ignore investing in Sydney residential markets - by no means.
Sydney's economic position is strong and employment and growth conditions are likely to continue for several more years. Whereas in past cycles, Sydney would start to see negative interstate migration due to the relative cost of housing and employment prospects, this time around, Sydney's employment prospects outweigh most other states and thus the conditions that drive relocation to other don't exist quite as much. At the end of the last cycle, in 2004/5, NSW had a net loss of about 25,000 people to other states, whereas in 2015, this has dropped to just 6,000 people.
So overall, my expectation is for Sydney prices to remain flat but supply to continue to increase but at a more modest pace.
Melbourne's history of price growth is more moderate with less variation over time than Sydney. Much of this is due to the access Melbourne has to land for development which enables detached dwellings to absorb demand relatively easily and keeps underlying land values low. As a result, apartment prices are reasonably well pegged to new home prices which are more competitively priced.
Since 2007, Melbourne's developers have submitted more apartment development applications per capita than Sydney with much of this concentrated in and around the CBD as a result of state planning policies. Activity however declined substantially in 2015/2016 due to concerns of oversupply and the uncertainty and delays caused by changing planning policies in the city.
The state's economic conditions are however strong, with Victoria adjusting well to the decline in automotive manufacturing. Strong gains in construction and finance sectors and attraction of more affordable housing are contributing to a high level of interstate migration to Victoria. In 2015, over 10,000 net additional people moved to Victoria, the highest in over 30 years.
Melbourne's average price appears to be on trend however Melbourne is more likely to see continuing price growth (albeit modest) due to the lower supply, strong economic conditions and high interstate migration.
So overall, my expectation is for Melbourne prices to continue to post a modest increase but for supply conditions to see signs of recovery.
By comparison to Sydney, Brisbane has tracked on average at about 28% lower than Sydney values since 1980 however due to the impressive price growth that occurred in Sydney from 1998 to 2003, the gap to Brisbane grew to be 50% of the price of Sydney.
Brisbane staged an impressive recovery from 2003 to 2009 during the period when the State GDP grew at an average of 6.4% pa and net interstate migration was at a high level, whilst people left Sydney and apartment prices stood still resulting in apartment prices between the cities being relatively equal.
Since 2009, however it has been Brisbane's turn to see apartment prices stand still showing only 27% growth over the last 7 years, whilst Sydney has put on an impressive 106% in value.
As shown below, the gap between Sydney and Brisbane is currently back to 43%.
Many people predict that Brisbane prices will drop significantly as a result of the oversupply of apartments in the inner suburbs. However with apartment approvals declining and far fewer new projects commencing, the supply conditions are not likely to have a long term impact on the market.
The state economic conditions are however the critical factor for Brisbane prices. Queensland GDP growth has been reduced in recent years due to the reduction in mining, agriculture and a reduction in public services however when these sectors improve, and employment conditions in Queensland also improve, there is likely to be a rebound in interstate migration and a strong increase in apartment prices.
So overall, my expectation is for Brisbane for supply conditions to ease significantly over the next few years and for prices in some areas to see a minor decline in 2017 as the supply is absorbed but then continue to improve at a modest rate until employment and interstate migration drives a period of strong price growth.
Our next update on the residential markets will be in late March 2017.