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26 minutes

Published:

01 December 2011

Property Report – December 2011

The only thing missing was confidence

by Terry Ryder.
creator of hotspotting.com.au

Introduction:
The year that was: pretty much as I expected

This time last year I recorded my predictions for 2011. I suggested it would a better year than 2010 and in my view that’s the way it turned out. The Australian economy was stronger, unemployment was lower, incomes were higher, the resources sector came roaring back and many areas had strong property markets, with housing finance picking up strongly in the second half of the year. Certainly my business, which tends to be a good barometer of what’s happening in real estate, had a much better year.

The only thing missing was confidence – the lack of which caused consumers to be cautious and keep their money in their pockets. Years from now they’ll wonder what scared them so much.

I said 12 months ago that there would be “stark differences from one region to the next, from one city to the next”. That was certainly true this year: the best of the regional centres have enjoyed strong economies and growing property values, while the worst went seriously backwards. The best regional towns out-performed the capital cities for the second consecutive year, in line with my prediction that there would be “spectacular growth in key regional centres around Australia”.

I suggested this time last year that large numbers of consumers would desert the big 4 banks. I don’t know that this happened to any great degree in 2011 but certainly the level of dissatisfaction with the major banks grew – and we now have laws that allow people with mortgages to switch without incurring big fees.

I was certainly right with my predictions about “resources companies threatening to scrap projects on which they have already spent billions because they don’t like government policies”. There was another major scare campaign about mining projects being killed by the mining taxes, but it was all bluff. Miners are engaged in the greatest expansion phase in the history of the nation, notwithstanding the carbon tax and the minerals tax.

There was indeed “more solid evidence that developer lobby groups are lying when they talk about chronic housing shortages”. Groups like the HIA, MBA and Urban Taskforce continued their campaigns to generate the perception of a crisis in real estate, including an affordability crisis, but the official data proves them wrong.

Finally, I suggested 12 months ago economists would be shown to be misguided with their predictions of interest rate rises. Most economists were adamant we would have multiple rate rises in 2011 and we were given, instead, two interest rate cuts.

In the end, 2011 turned out to be a year with lots of hot air from economists and politicians, with outcomes that made fools of them. Interest rates did not rise, housing values did not collapse, mines did not close and, despite all the rhetoric, nothing really bad happened.

For a detailed analysis of markets nationwide, click on the topics below …

 

National Overview Generalised data disguises the many areas that did well in 2011.
Feature topic Rising inquiry and interest rate cuts suggests improving markets in 2012.
Adelaide SA looms as the new boom state.
Brisbane Brisbane to improve and regional centres to continue to thrive.
Canberra Satellite towns present opportunities for investors.
Darwin Two pieces of good news point to a bright future.
Hobart Still struggle street but there’s hope for a better future.
Melbourne Too many units and too many of them being sold to foreign buyers.
Perth Offices, warehouses and hotels are booming: houses will be next.
Sydney Regional NSW is alive with busy regional economies.
Conclusion Step one is any wealth plan: stop reading newspapers.

National Overview:
Generalised data disguises the many areas that did well in 2011

One of the problems with the way research companies and media report real estate is the tendency to generalise.

The market for Sydney, a city of 4.5 million people and over 700 suburbs, is distilled down to this: Sydney home values fell 1.1% in the 12 months to October (RP Data report).

What does that tell us that’s useful? Absolutely nothing. Worse than nothing, in fact.

Nor are we better-informed by reading that RP Data’s home value index records a 3.4% decrease for regional Australia.

We’d be better off being told nothing rather than being fed information that’s not only meaningless but downright misleading.

Of course, the objective for organisations such as RP Data is not to inform but to generate publicity to help the business make money.

Nothing wrong with making money but it would be nice if the process generated information that’s useful to consumers.

The general theme of media coverage of real estate in 2011 is that it’s been a bleak year, based on those generalised numbers generated by profile-hungry research companies.

But it hasn’t been so bleak if you happened to own real estate in Melton in Melbourne’s north-west, or Blacktown in the west of Sydney, or Gawler in the north of Adelaide. Or in hundreds of other capital city suburbs where property values rose this year.

Nor would you be suicidal if you owned property in myriad regional centres around Australia where economies are strong and property values have grown.

All we hear about Queensland real estate is the single figure for Brisbane, which says property values dropped 8% in the past year (thanks primarily to the January floods).

But what about Gladstone, where many suburbs recorded double-digit growth? Or Toowoomba where most suburbs recorded solid capital gains? Or towns like Chinchilla, Roma and Miles, which began to experience real estate impact from the emergence of the Surat Basin resources province? Or Emerald, nicely situated between two major coal precincts, the Bowen Basin and the Galilee Basin?

Many of the regional centres of NSW had solid years in real estate, including Gunnedah, Narrabri, Tamworth, Glen Innes, Inverell, Port Macquarie, Orange, Singleton, Muswellbrook, Dubbo, Broken Hill, Goulburn and Wagga Wagga.

In Newcastle, one of Australia’s most under-rated cities, most suburbs recorded price growth and some delivered double-digit growth.

Sydney overall records a small decline in overall values – again, a quite meaningless statistic – but within that vast metropolis many suburbs recorded solid to strong growth in prices. They include cheaper areas favoured by first-home buyers, such as Blacktown, Liverpool, Cabramatta and Camden.

The pattern has been repeated around Australia.

The generalised data tells that values fell 4% in the capital cities and 3.4% in the regions in 2011. But for anyone who understands real estate and has bought property in the right places, it was a pretty good year.

Feature topic:
Rising inquiry and interest rate cuts suggest stronger markets in 2012

There is a strong and positive alignment of many of the elements that influence real estate trends. And this points to rising real estate markets in 2012.

Here are some of the key factors underpinning the property markets of the near future …

All of that should provide a strong foundation for markets generally in 2012.

But, as you know, I hate generalizations, so here’s a more micro look at what I expect in 2012.

The two weakest markets in 2011 (generally speaking) will be among the strongest in 2012. I refer to Brisbane and Perth. Brisbane was seriously weakened by the floods which started the year and Perth spent most of this year completing the correction in values that started after the exaggerated peak in 2007.

Both Queensland and Western Australia are coming into resources booms unprecedented in the nation’s history.

I sometimes wonder if people fully comprehend just how big this is. Just three of the gas projects approved and ready to go in WA – Gorgon, Browse and Wheatstone – represent a total investment of $102 billion. The four CSG-to-LNG projects targeted on Gladstone in Queensland total $70 billion.

The core events are happening a long way from the capital cities but the companies receiving the big contracts from these upcoming projects are based in Brisbane and Perth. They’re expanding, which is why both cities are experiencing rapid take-up of CBD office space and industrial premises. The next phase in this chain of events is demand for homes.

Adelaide is looking at a strong future also, for similar reasons. South Australia is fast becoming the No.3 resources state in Australia and Adelaide is starting to develop similar dynamics to Perth and Brisbane.

Adelaide also has the defence construction contracts, such as the current Air Warfare Destroyer fleet project and the future development of a new submarine fleet.

Big business is starting to take Adelaide seriously and we will see more major corporates establishing a significant presence in the SA capital.

Melbourne is still recovering from a major market peak and has a growing problem with too much construction of inner-city apartments. But selected areas will still do well in 2012, particularly the more affordable suburbs with good transport connections.

Sydney is going to be much stronger in the coming year. It’s been the weakest capital city market in recent years, not helped by the worst state government in the nation. But there is now a new government in charge and there are signs that they’re serious about building the infrastructure that Sydney so desperately needs.

So there are better prospects for the big cities, which were subdued in 2011.

But I believe the best investment opportunities will continue to be found in the regions. This is something I started to speak about at the beginning of 2010 and I think it’s a long-term factor for Australian real estate.

The surveys show that most Australians still think the capital cities are the best places to buy, but I think the best regional towns and cities present a win-win-win situation for buyers: cheaper prices, better rental returns and stronger prospects for future capital growth.

Adelaide and South Australia:
SA, our most under-rated economy, looms as the new boom state

I recently spent some time driving through South Australia in the Hotspotting Mobile Office. It reinforced my belief investors should be paying more attention to the opportunities in SA.

SA is the nation’s most under-rated economy. When commentators refer to the two resources states (WA and Queensland) they’re overlooking the rising importance of SA. This will change over the next couple of years.

In the time that Mike Rann was state Premier, SA has gone from four operating mines to 18. Over 40 more are in planning, many of them multi-billion-dollar ventures.

Much focus is being placed on BHP Billiton’s expansion of the Olympic Dam mine, which is likely to cost around $30 billion. But the decision to open up the vast Woomera Prohibited Area to mining is potentially even bigger for SA. The WPA is known to contain most of the copper and uranium resources available in Australia.

The Eyre Peninsula is coming alive with multiple mining projects, most of them iron ore ventures. There is also the vast new mining province north of Ceduna in the west of the state, with one major mine operational and several more in planning.

One of the questions occupying the minds of investors is how best to profit from the Olympic Dam expansion at Roxby Downs. The first thought of many investors is to buy a house at Roxby Downs but I think there are better and safer ways to exploit the impact of this mega project.

Both Whyalla and Port Augusta will get substantial spinoffs from the project. Whyalla will provide a $700 million desalination plant and pipeline to provide the water supply for Olympic Dam. It also has companies in line for big supply contracts from Olympic Dam, like Cavpower which assembles the Big Cat dumper trucks.

Port Augusta will provide the landing stage and assembly facility for materials brought ashore from offshore suppliers. It is also likely to provide the main power supply for the Olympic Dam expansion.

But possibly the big impacts will be felt in Adelaide. BHP Billiton plans to relocate its global headquarters for uranium to Adelaide, to be closer to Olympic Dam which will be the world’s largest mine after the expansion. Many of the companies providing goods and services to the expansion will have offices in the state capital. And many of the mine workers will be based with their families in Adelaide, and fly in to Roxby Downs for work stints.

And Port Adelaide, with expanded facilities by BHP Billiton, will be a major point for imports and exports for the project.

I’m picking 2012 to be a strong year for Adelaide real estate.

Brisbane and Queensland :
Brisbane will improve and regional centres will continue to thrive

Brisbane will have a much better year in 2012. That, of course, isn’t saying much because 2011 started with the floods and most suburbs suffering a decline in property values through the year that followed.

History shows that recovery from natural disasters is swift for the broader market, although the suburbs most directly affected by floods take longer to return to growth. This time around Brisbane has added impetus from the emerging resources boom and major spending on infrastructure.

We’ve already seen major take-up of CBD office space and greater demand for industrial premises in Brisbane from companies winning contracts from resources projects. I expect 2012 to deliver the next phase in the process – higher demand for residential. And keep in mind that the resources boom is only just starting and will have considerable longevity.

Some Queensland markets were strong in 2011, primarily the ones receiving benefits from the upturn in the resources sector. Given that these are the early stages of something momentous, expect to hear more about real estate growth in Toowoomba, the towns of the Surat Basin, Emerald, Mackay, Gladstone and Townsville.

When considering where to buy in Queensland, keep these two thoughts in mind:-

  1. The top ten performers on capital growth in Queensland over the past five years have all been regional centres a long way from South-east Queensland.
  2. The mining boom is likely to maintain the supremacy of regional Queensland, although Brisbane will benefit also.

The Gold Coast has been in need of some good news, after four years of declining markets, and it came with the announcement that it will host the 2018 Commonwealth Games. The impact won’t be immediate but closer to the event there will be a rise in construction, with new facilities to be built and existing ones to be expanded.

Research into previous events in Australia – the Sydney Olympics in 2000 and the Commonwealth Games in 1982 (Brisbane) and 2006 (Melbourne) – show that property values do tend to rise around the time of the major event.

Investors need to be careful, however. The Gold Coast property industry, which has spawned many of the worst scams to ruin Australian retirement plans, will milk the Games impact for all its worth. Pretty soon they’ll be telling us to buy now or miss out on the boom.

Keep these thoughts in mind: the Gold Coast has an over-supply that will take five years to absorb at current sales rates. Developers are still planning more and the Games are likely to incite another burst of over-development.

I don’t think even a Commonwealth Games can save the Gold Coast from itself.

Canberra and the ACT: 
Satellite towns present opportunities for investors

What can I tell you that’s new and different about Canberra? In a word, nothing.

Canberra is a small city with a rather homogenous property market. I can’t identify individual hotspots because the city has few contrasts and very little changes there.

And Canberra as a whole never diverts from the established paradigm: it’s the national capital, it’s full of well-paid politicians and public servants, it has the nation’s highest incomes and lowest unemployment, and its market is the steadiest of all the capital cities.

All this is reflected in the latest generalised data from RP Data. The Home Value Index suggests Brisbane fell 8% in the past 12 months; Perth, Melbourne and Adelaide dropped 5%; Hobart and Darwin declined 3-4%; and Canberra, being Canberra, hardly changed at all.

The unit market, for example, declined a massive 0.3%. That means, effectively, no change.

How boringly typical of the ACT.

But here’s something useful I can tell you about Canberra. It’s outgrowing its boundaries. The Canberra property market has spilled over into New South Wales, such that they’re actually talking about moving the boundaries to keep things nice and tidy.

The best way I know of to exploit the Canberra property market is to buy in Goulburn. Yes, I know, Goulburn is a regional town in NSW, about 80km from the national capital. But growing numbers of people live in towns like Goulburn and work in Canberra.

Here’s the thing: the median house price in Canberra is about $475,000, while typical Goulburn houses cost $270,000. That’s quite a difference.

Another possibility in this regard is Yass (median house price $360,000), which is a little closer to Canberra than Goulburn but more expensive.

Darwin and the Northern Territory:
Two big pieces of good news point to a bright future for Darwin

Two big announcements point to a strong future for Darwin and the Northern Territory.

The first arose from the recent visit of US President Barack Obama. Out of that came the announcement that 2,500 US military personnel will be stationed in Darwin. The economic impact of that will be immense.

The second was confirmation that the $30 billion Ichthys gas project is virtually unstoppable. The main proponent of this project, Japanese company Inpex, has signed up customers for everything the project will produce for the next 10-15 years. It has also received the federal approvals it needs to proceed.

The Inpex proposal involves extracting gas off the northern coast of western Australia but processing and exporting out of Darwin.

This is a colossal project for place the size of Darwin. This is a capital city but basically it’s a large country town. A $30 billion project and the influx of military personnel suggests a buoyant future.

It won’t happen immediately. The bulk of the US military grunts won’t hit town until 2016 and Inpex won’t make a final investment decision until late in 2012, but this bodes well for a prosperous future.

In the meantime, the Darwin market is somewhere near the bottom of the real estate cycle, weighed down by an oversupply of apartments and an evaporation of demand.

Values for both units and houses are down about 3% in the past year, according to RP Data, a reflection of an overdue correction after five or six growth years.

Hobart and Tasmania:
Tassie is still struggle street but there’s hope for a better future

Hobart has shown itself to have a resilient market over the years and resilience is what it needs right now. Tasmania is the struggler among the Australian state and territory economies, featuring last or second last with most of the major economic indicators like population growth, unemployment and economic growth.

It’s difficult for real estate markets to thrive against that background and, while the Hobart market has grown over the past five years, it has been only moderate. None of the suburbs that make up the metropolitan area has achieved a double-digit growth average (average annual growth in the median house price) at a time when this has been common in the other capital cities.

Only two of the city’s suburbs have averaged better than 7% and only 10 have managed 6% or more. Most of them have come in at less than 5%, which is pretty ordinary during a period that has included some strong growth years elsewhere In Australia.

And this year the Hobart market overall has dropped 5.5%. It’s not alone there, of course, but it’s the worst of the capital cities except for flood-hit Brisbane.

But, in my business, it’s the future that matters most – and there’s some hope for the market in the Tassie capital. The Hobart’ CBD has $1.3 billion of building developments planned or under way. Industry figures say 17 key projects will change the look and vibe of the city.

They include the $100 million Myer redevelopment, the $580 million Royal Hobart Hospital upgrade, the $200 million TMAG facelift and the $50 million upgrade to Wellington Court.

The Hobart Mercury reports: “Five years from now pockets of Hobart’s CBD will look quite different … Property Council of Australia Tasmania executive director Mary Massina said the developments would revolutionise the way our CBD looks and feels. Despite concerns about a downturn in retail trade, Massina said sentiment should be buoyed by the level of investor confidence in the CBD.”

Liverpool Street will be transformed, thanks to the redevelopment of the hospital, the construction of the Wellington Court shopping complex, the redevelopment of the Myer store site that was destroyed by fire in 2007 and the re-development of the Les Lees arcade.

“Suddenly you’re seeing a complete renewal of our main street,” Massina says. “That in itself is a really good shot in the arm, of confidence. It means the community is going to get new buildings and new services and it’s really important in terms of our building and construction industry.”

Perhaps more importantly, the developments will generate economic activity and jobs. And that translates into demand for real estate. So, if you own property in Hobart, be patient.

Melbourne and Victoria:
Too many units and too many of them being sold to foreign buyers

I remain concerned about the level of construction of inner-city apartments in Melbourne. Of particular concern is the level of selling to foreign buyers.

There are tens of thousands of new inner-city apartments being built or in planning. Too much of the forward product is being sold to offshore buyers for comfort.

In simple terms, if there is genuine demand for a product it will be sold to local buyers. If a significant proportion is being bought by distant investors, it’s time for buyers to beware.

My research indicates that half of the new product being developed in the Melbourne CBD, South Bank and Docklands is being sold to foreign buyers, with China prominent. In addition, Asian developers are buying development sites and selling off-the-plan to Asian investors.

One set of statistics which shows how extensive the construction “boom” is come from the Building Commission in Victoria. The value of building permit activity in Victoria in the 10 months to the end of October 2011 was $20 billion, which is 3% higher than for the same period in 2010.

But the significant data lies behind that general figure: house construction was down 11% but apartment construction was up 61%.

Most of it is happening in inner Melbourne, where building permits were up 24% to $9.1 billion. What that suggests is that almost half of all new building permits issued in Victoria in the past 12 months has been inner-city apartments.

I urge investors to be wary.

There is life in Victorian real estate beyond Melbourne, however. A number of the state’s regional markets have done better than the state capital in 2011 – including Geelong, Bendigo, Ballarat, Mildura, Warrnambool and Portland.

Those six regional centres are all on my list of places worthy of consideration by property investors. They each have these things in common: a strong and diversified local economy, affordable housing and solid prospects for future capital growth.

And none of them has any great reliance on the resources sector.

Perth and Western Australia:
Offices, warehouses and hotels are booming: residential will be next

There’s a pattern to the events leading up to a residential property upturn inspired by a resources boom. It goes like this:-

 

This pattern has been playing out in Perth and Western Australia throughout 2011. The Perth CBD office market is now the strongest in the nation, in terms of both low vacancies and strong rental growth.

Perth’s industrial property market and its hotel accommodation industry have also leapt to the forefront nationally.

As 2011 draws to a close, we are seeing the first stirrings of spinoff for the residential property market.

Already, the number of FIFO workers moving through Perth Airport is higher than in the previous resources boom in 2006-2007. This is significant because the new boom in WA’s mining sector is only just beginning.

The mega gas projects – including Gorgon, Browse and Wheatstone which together entail investment totaling $100 billion – are only now moving into the construction phase. The same applies to the expansion programs of major iron ore miners like BHP Billiton, Rio Tinto and Fortescue Metals.

After 3-4  down years, Perth is about to rise again.

In 2011 the Pilbara regional centres of Karratha and Port Hedland have continued to battle for the title of most remarkable property market in Australia. In both towns you pay close to $1 million for the average house – and the average house is very average. Just when I think their prices can’t go any higher, they rise again.

But the State Government is making strenuous efforts to introduce affordable dwellings into Karratha and Port Hedland. If this program succeeds, it may dilute those very high current values for established housing. Despite all the mega resources projects that will impact these towns, I worry about the sustainability of current house prices.

Sydney and New South Wales:
Regional NSW is alive with busy local economies

My recent research safari in the Hotspotting Mobile Office took me to several of the leading regional centres of NSW.

I was impressed, once again, by the busy economies and confident people in these thriving towns and small cities.

The trip took me through Moree, Gunnedah, Narrabri, Tamworth, Muswellbrook, Singleton, Cessnock, Goulburn, Yass, Griffith and Broken Hill. It’s difficult to reconcile what I observed in these places with the general tone of media commentary about national fear and uncertainty. It’s certainly not evident in these buoyant regional centres.

One of the key factors for many of these places is economic diversity. The cluster of towns in the north-west – Moree, Narrabri and Gunnedah – are considerably more than regional centres providing services to agriculture. They also have rising resources activity and significant tourism industries. Moree will soon have the added element of a $1 billion solar power station.

Broken Hill, best-known for its mining industry, has been working hard to diversify its economy beyond resources and agriculture, which are both vulnerable to the cycles. It has made particular strides in tourism, including eco tourism, and the arts – and has increasing renown as a place for artists and film-makers. It is also seeking to exploit opportunities from connection to the National Broadband Network.

There are many other standout regional centres in NSW which I didn’t visit on the recent trip but have explored previously: Dubbo, Orange, Wagga Wagga, Port Macquarie, Nowra and Glen Innes, among others.

They present a win-win-win situation for investors willing to think outside the capital cities: cheaper prices, better rental returns and good prospects for future capital growth.

Meanwhile, Sydney is shaping up for a better year in 2012. A new State Government helps, particularly as they appear serious about building new infrastructure. The north-west rail link is going ahead, an investment of $8 billion which will help real estate markets in that part of Sydney, like Rouse Hill.

Blacktown continues to emerge as the No.1 population growth region of the city, with an ambitious council keen to advance the area’s economic prospects. Affordability, good road and rail links, proximity to major jobs nodes plus strong medical and education sectors make this a precinct worthy of consideration by investors.

Conclusion:
Step one in any wealth plan: stop reading newspapers

Many of the people who come to my Master Classes on property investment think I’m joking when I suggest that the most important they can do is stop reading newspapers. But I’m deadly serious.

2011 has been a time of great opportunity for property investors but few took advantage because they were spooked by the overpowering negativity that pervaded media during the year. I think many will regret that they failed to buy in 2011 when some markets were at the bottom of the cycle.

Media is negative by nature because journalists think bad news sells. In 2011 media was more negative than ever before. Scare campaigns from the mining lobby, the building industry and the Federal Opposition were lapped up by newspapers and other forms of media, which also gave undue focus to events in Europe and the relentless negativity of Opposition Leader Tony Abbott.

I stopped reading newspapers years ago. I just don’t need that pessimism in my life. There are other, better ways to access the information I need to stay informed and to run my business. I say this as someone who started working life as a newspaper journalist and has been a writer/reporter ever since.

Anyone who wants to develop a strategy to growth their wealth should stop reading newspapers and start reading books.

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