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22 minutes

Published:

01 January 2014

Property Report – Jan 2014

Time to review 2013 and contemplate the New Year

by Terry Ryder.
creator of hotspotting.com.au

Introduction:
Time to review 2013 and contemplate the New Year

As 2013 is behind us, it’s time to review what’s happened – because this informs what we can expect to happen, this year, in 2014.

2013 was characterised by a number of notable events, which have directly and indirectly impacted residential property.

My conclusion as we start 2014 is that this is as good as it gets – and the sharp rise in investor buying suggests many have got that message.

It’s apparent that the Reserve Bank thinks it has interest rates where they should be and that the economy is responding in positive ways. So rates are unlikely to get any lower. We’ve seen banks starting to lift fixed rates.

Prices have risen in the biggest cities, so the improvement in affordability has peaked.

In some cities, the best time to buy has already passed. In some cases, such as Perth and Sydney, the optimum time to buy was late in 2012. The best opportunities in 2014 will be found in the strong regional centres and in capital cities that have not yet taken off, notably Brisbane and Adelaide.

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

 

National Overview The growth in 2014 will be more “real”.
Adelaide & SA Lack of economic oomph is stalling recovery.
Brisbane & QLD It’s time to switch the investment focus to Queensland.
Canberra & ACT The national capital faces a testing time.
Darwin & NT Darwin slowing a little, but still a growth market.
Hobart & TAS Difficult to feel optimistic about growth in Tasmania.
Melbourne & VIC Cheaper areas will take the spotlight from millionaire suburbs.
Perth & WA Perth still a growth leader, with more to come in 2014.
Sydney & NSW Media distortions mean buyers need to be careful.
Conclusion Avoid the herd mentality to succeed in 2014.

 

National Overview:
The growth in 2014 will be more “real” after the media brain explosion of 2013

At the start of 2013, I forecast that capital city price growth would be led by Perth, Sydney and Darwin, followed by Melbourne and Brisbane, with Canberra, Adelaide and Hobart struggling.

The actual outcome was Sydney, Perth, Melbourne and Darwin (in that order) all doing well, followed by Brisbane just starting to show some life, and the other three struggling as predicted. It all happened largely as forecast, except that Melbourne did better than I expected and Brisbane was slower to join the recovery that I’d hoped.

So, what of the New Year? I’m expecting some changes, both in the pecking order of the capital cities and in the types of markets that will grow within each city.

The 2013 markets depicted a return to growth in the larger cities, though it has been some way short of the “white hot” property boom depicted in Sydney-based media. The reality is that only the millionaire suburbs of Sydney and Melbourne delivered anywhere near the heat portrayed by gushing journalists.

The glamour suburbs of the two biggest cities indulged the auction frenzy that seems to take place in those locations every three or four years – usually followed by a period of price correction.

If we take that out of the equation and look at what the nation overall was doing, it was all rather less spectacular than we have been told. If only Sydney-based commentators and writers realised that there’s a very large country out there beyond their narrow borders and even narrower perspective.

According to the House Price Indexes from Australian Property Monitors for the September Quarter, the weighted average price rise across the eight capital cities was 7.6%. That concurred with the findings of Australian Property Monitors, which found an annual rise of 7.8% for houses and 5.5% for apartments.

Those figures describe moderate growth only, following two years in which prices mostly went backwards. It’s a long way short of boom just yet, and nowhere near a bubble. To put that growth into perspective, in 2010 all eight cities had double-digit house price growth, including two with annual growth above 20%.

Is it asking too much to expect some expertise and balance in the reporting of real estate? Sadly, I suspect that it is.

So we can expect the same distorted reporting next year, resulting in still more misinformation.

Here’s what I think will really happen. The auction frenzy in the rich areas of Sydney and Melbourne will subside somewhat and we will see genuine activity and solid price growth in the more affordable suburbs of those cities.

Brisbane’s recovery will gather pace and it will challenge as a leader on price growth. Perth will continue to show solid growth, but Darwin will be more moderate in its rental and price growth.

Adelaide will show its best growth since 2013, though it will be fairly moderate, as South Australia lacks economic and population impetus. Hobart will suffer in the same way, unless something changes dramatically in its economy.

Canberra, which had an ordinary 2013, will probably struggle even more in 2014, as the new Federal Government axes public service jobs and cuts spending programs.

Beyond the capital cities, there’s that vast expanse of regional Australia, which is full of attractive options for property investors who prioritise affordable prices, strong yields and good prospects for capital growth.

Victoria, New South Wales, Queensland, South Australia and Western Australia will all present appealing regional opportunities in 2014. Qualities to look for in a regional centre include a diverse economy, a growing population, spending on infrastructure, affordable housing and solid yields (in many cases, regional cities offer gross yields above 6%).

Adelaide and South Australia:
Lack of economic oomph stalling SA markets, with 1 or 2 exceptions

Adelaide is a case study in the importance of solid economic underpinnings in driving real estate momentum.

South Australia is one of the weakest economies in the nation. Population growth is minimal and its economic indicators are well below national norms.

For these and other reasons, Adelaide has not joined the 2013 price growth party. The House Price Indexes from the Australian Bureau of Statistics for the September Quarter showed Adelaide and Canberra as the only capital cities to record a quarterly decline in their indexes.

According to the ABS, Adelaide prices are just 1% higher than a year earlier (compared to Sydney’s 11.4% and Perth’s 8.6%). Canberra is the only capital city with a weaker performance.

There have been similar results in regional South Australia – with one or two exceptions.

Port Lincoln, a location which we have highlighted many times in the past couple of years, continues to be the star performer in the South Australian market. Its median price has risen 16% in the past year, according to Australian Property Monitors, with over 230 houses sold.

Whyalla is another solid performer and remains a market worthy of consideration, despite the deferral of major industrial projects. Whyalla, unlike Adelaide, has some serious economic momentum driving it and four of the five Whyalla suburbs have recorded double-digit growth in median prices in the past 12 months.

Both Port Lincoln and Whyalla remain affordable regional centres on the Eyre Peninsula and I expect them to deliver further growth in 2014, with a number of major resources projects getting close to their construction phases.

Despite its generally mediocre economic prospects, I expect Adelaide to improve in 2014. It will follow the rising national lead, though only moderately. There will be some economic boost from infrastructure projects, including transport and medical infrastructure developments. And there is likely to be improvement in prospects in the resources sector, which is potentially a massive force in the South Australian economy.

Possibly the biggest driver of an upturn will be the state election in March 2014. A decisive election result often brings a boost to business and consumer confidence and may spark some life into the Adelaide market.

It’s noteworthy that a number of Adelaide suburbs have recorded increases in sales volumes recently – and that usually results in price rises down the track.

Brisbane and Queensland :
It’s time to switch the investment focus to Queensland

As the end of 2013 was approaching, Brisbane started showing the first signs of joining the national price party. The House Price Indexes published by the Australian Bureau of Statistics recorded a 1.2% rise in the September Quarter, for annual growth of 4.1%.

I expect Brisbane to emerge as a national property market leader in 2014. Indeed, I am suggesting to clients that now is the time for investors to switch their attention to Brisbane and Queensland. Brisbane’s growth is considerably less, to date, than in Sydney (11.4%), Perth (8.6%), Melbourne (6.8%) and Darwin (6.0%).

The best time to invest in cities such as Sydney, Perth and Melbourne has passed (although there is more growth is come). Brisbane is behind these cities in the up cycle and is only just starting to deliver price growth, having recovered from the triple whammy in 2011-2012 of the national market downturn, severe floods and major state government sackings (about 15,000 public servants).

As Brisbane generally rises, specific markets likely to do well include Ipswich City in the south-west, the Redcliffe Peninsula in the north and both Woolloongabba and the Toowong precinct in the near-city areas. Kelvin Grove, much boosted by infrastructure (hospital, university and new road links), is another market to watch.

Some of Queensland’s regional centres will be prominent in 2014 also, among them Rockhampton, Cairns, the Sunshine Coast and Toowoomba. Ones to avoid include Gladstone and Mackay.

The end of 2013  was marked by a significant negative turnaround in the Gladstone market. There was no reduction in demand, but a major (too major) increase in supply. Vacancies rose from near zero to 7%, causing rents and prices to drop. I expect this to continue in 2014. If will take time for the market to soak up the over-supply. Gladstone, long-term, has a big future as the No.1 industrial city in Australia, but I wouldn’t be buying there until the shakeout is completed.

I would classify Mackay in similar terms. Mackay has a very good track record of capital growth and will do well in the future, but currently the market is in a decline and these conditions are likely to continue well into 2014.

Emerald, another boom town where the market has declined through over-building, will recover sooner than Gladstone or Mackay. Emerald’s vacancies were 1% at the start of 2013; halfway through 2013 they touched 9% and now they are around 7%. But the key factors causing investors to buy there are yet to come – the $30 billion in new coal projects targeted on the Galilee Basin.

The State Government, early in November 2013, announced a plan of financial incentives for miners who make an early start on the Galilee Basin mega projects. Emerald, as the nearest regional centre and significant airport, will feel the positive impacts on its property market.

Rockhampton is rising as Gladstone and Mackay are falling. Rocky is less dependent on the resources sector than the other central Queensland cities and is significantly more affordable. Its economy is more diverse and this is a benefit in times when the resources sector is vulnerable.

Cairns and the Sunshine have both struggled in recent years, partly because of their over-reliance on tourism and partly because of over-supply. Both are rising again – and for similar reasons. Tourism has improved markedly, the over-supply has been soaked up and both cities are diversifying their economies and spending big on infrastructure.

Canberra and the ACT: 
The national capital faces a testing time

Canberra is known for its resilience and its consistency. The question for 2014 is whether it can maintain that record in the face of adverse forces.

Tony Abbott has made it clear that there will be major reductions in public service numbers. Canberra’s status as the state/territory with the lowest unemployment will be under threat.

There is also the problem of over-supply in the city’s apartment market and the ACT’s appalling record of delays in getting new developments under way.

In the September Quarter of 2013, the median house price fell 1.4% and the unit median dropped 0.8%, according to Australian Property Monitors figures. RP Data records a 1.4% decline in Canberra’s home value index in the three months to the end of October 2013. The ABS House Price Indexes published early in November rated Canberra the weakest of the capital city markets, with a 1.2% decline in its house price index in the September Quarter.

All this has been counter to the general capital city trend of rising values.

And that is Canberra’s situation before the cuts to public service jobs. Further decline is likely once the sackings start. Even before the Abbott razor has been sharpened, the ACT had recorded three consecutive monthly rises in its unemployment rate.

So even Canberra, which has been a remarkably consistent market over the past 10 years, is unlikely to be able to withstand those negative forces.

According, I expect the Canberra property market to struggle in 2014.

Darwin and the Northern Territory:
Darwin slowing a little, but still a growth market

Darwin was the first of the capital cities to get on a growth path. Sydney has got most of the headlines in 2013 (much of our media coverage is written by Sydney-based Sydney-centric journalists), but Darwin was the first city to move, followed by Perth.

Darwin’s property market started producing big growth statistics in the second half of 2012, particularly with rentals. Median rents for both houses and apartments were showing annual growth above 20%. Vacancies were low and prices began to follow the rental trend.

This was the situation early in 2013. As the year wore on, firstly Perth and then Sydney overtook Darwin as the price growth leader of capital city Australia.

The statistics for the September 2013 Quarter show Darwin is still a growth market, but some of the heat has dissipated. The ABS House Price Index showed a slight 0.4% quarterly increase in Darwin, for annual growth of 6.0%.

But, as is always the case, it depends on whose figures you believe. The House Price Report for the September Quarter from Australian Property Monitors recorded 5% quarterly growth, for an annual uplift of 8.1% in Darwin. The Median for units was up a similar amount.

So prices are still growing, though at a slower pace than Sydney and Perth.

Rental growth for houses has stopped, according to the Rental Report for the September Quarter from Australian Property Monitors. The median house rental is now 3% lower than a year ago. But Darwin still has the highest house rents in capital city Australia, by a considerable margin. The typical house rents for $680 a week, well ahead of Sydney’s $500.

Apartments rents are still growing, according to APM, with 7.7% annual growth to the September Quarter. The median unit rent of $560 a week is well ahead of Sydney’s $480.

I’m expecting further growth in Darwin in 2014, though relatively moderate. Much of the city’s recent growth has been inspired by the $30 billion Ichthys gas project and the Inpex factor has already been reflected in the growth figures of the past 12-18 months.

Palmerston, the satellite city south of Darwin, remains a focus for investors, because it’s a little more affordable than downtown Darwin and because of its proximity to the big infrastructure projects, including the Ichthys gas venture.

Hobart and Tasmania:
Difficult to feel optimistic about growth in Tasmania

Hobart is the hardest market to analyse. And that makes predicting 2014 a little difficult.

The House Price Indexes from the Australian Bureau of Statistics says the Hobart house prices increased 1.1% in the 12 months to September.

RP Data says the house market fell 0.7% and the apartment market 0.3%.

But Australian Property Monitors records a 5.7% rise in the median house price and a 5.5% rise in the median unit price.

The first two sets of figures make some sense – the APM data does not.

Hobart is the capital city of Australia’s economic basket case. Tasmania is last among the states and territories on virtually every key economic indicator, including population growth, home loans, building approvals and economic growth.

Beyond Hobart, the only market that showed any life at all in 2013 was Launceston, which continues to be a steady regional centre and property market. Elsewhere in Tasmania it’s been a story of economic struggles and property market decline.

For 2014, there’s a glimmer of hope for price growth in some locations where there has been an increase in market activity recently. They include Hobart suburbs such as Claremont, Howrah, Lenah Valley, Mount Nelson, Old Beach, Rokeby and upmarket Sandy Bay

They also include Invermay in Launceston.

In most locations, however, markets are moving sideways or are in decline.

Melbourne and Victoria:
Cheaper areas will take the spotlight from millionaire suburbs

I’m expecting the affordable areas of Melbourne to show the most growth in 2014.

This year Melbourne produced similar signals to Sydney. An auction frenzy started in the millionaire suburbs and that produced a lot of excitement from media which has been happy to regurgitate the fanciful clearance rate figures concocted by the Real Estate Institute of Victoria.

Some of those glamour suburbs produced double-digit jumps in their median house prices, as people with more money than sense paid too much for real estate. This happens every three or four years in Melbourne, producing a price spike that is usually followed by price decline.

The process has been exacerbated this year because a federal election win by the Liberals coincided with all the Spring auction hype.

The sustainable growth will occur this year in the more affordable areas. Long-term the middle-ring and outer-ring suburbs show the best capital growth in Melbourne (and in every other major city, according to our research).

This means good growth in some of the less fashionable areas of the city, which is good for investors because most of us can’t afford Toorak (median price $2.06 Million) or Canterbury (median price $1.6 Million) anyway. Toorak, by the way, has the highest prices and also the worst capital growth rate among the millionaire suburbs.

One affordable middle-ring area that should command increasing attention in the Sunshine precinct, an area that is nominated as the key centre for western Melbourne in the new metropolitan planning strategy. The suburb of Sunshine has substantial infrastructure already, including a major hospital and two university campuses, and more is in planning.

Over $800 million is being spent on a new transport hub at Sunshine railway station as part of the $5 billion Regional Rail Link. Most suburbs in this precinct have median house prices in the $300,000s.

Other affordable Melbourne areas expected to rise in 2014 include the Berwick, Epping, Frankston and Dandenong precincts – all well connected and boosted by infrastructure spending.

The area that investors must avoid is the Melbourne inner-city apartment market. This sector is already over-supplied, with vacancies around 8%, and will worsen in 2014 as new developments are completed. Many of the new apartments are being sold offshore at inflated prices.

Outside Melbourne, Bendigo and Ballarat continue to rank among the most solid markets in regional Australia. They will soon be boosted by the new $5 billion Regional Rail Link.

Perth and Western Australia:
Perth still a growth leader, with more to come in 2014

Perth ended 2013 as it started it – as one of the headline markets in Australia. There’s more growth to come.

Perth and Sydney have been the growth markets among the capital cities in 2013 but there are fundamental differences.

Western Australia is the population growth leader, with annual growth almost double the national average. New South Wales is growing at a fraction of the national average.

WA has the nation’s No.1 growth economy. NSW lags some way behind.

Rents have grown strongly in Perth, while Sydney has had virtually no rental growth.

Sales volumes have risen strongly in Perth, while there are few Sydney markets in which the number of sales has grown this year.

What does this mean? While Sydney has had a flash-in-the-pan upturn driven by auction frenzy in the millionaire suburbs, Perth has experienced growth based on solid fundamentals.

The other thing that’s important to understand about Perth is that it will continue to receive considerable impetus from the resources sector. The simplistic and inaccurate media line that “the mining boom is over” has misled many Australians. The reality is that the resources economy continues to be immense and massive investment is still happening, including in the iron ore and gas industries in WA. The three leading iron ore miners – BHP Billiton, Rio Tinto and Fortescue Metals – are all expanding production, with exports at record levels.

So I’m expecting further solid growth in Perth prices in 2014. The increases to date have been quite moderate – around 8% in annual terms, according to most of the major research sources. It’s worth keeping in mind that this is the first year of price growth in Perth since 2007, when the last up-cycle peaked after prices went over the top.

We’re really at the beginning of another up-cycle in Perth, one that’s somewhat overdue.

Although the resources sector is still strong in WA, investors need to be aware that some of the mining towns have markets in decline. This more to do with prices being unsustainably high and, in some cases, developers building too many new homes. Newman, for example, has seen a sharp decline in its median house price, although it will pick up again once the $8 billion Roy Hill mine moves into its construction phase.

We have been warning investors about Port Hedland and Karratha for some time. Prices have gone so high that you pay over $1 million for the average house in Port Hedland, and not much less in Karratha. This is unsustainable, particularly as the State Government is seeking to inject more affordable dwellings into those markets.

More rational regional markets worth considering include Mandurah, Geraldton and Bunbury. Mandurah, once a headline act in population and real estate growth, has been a declining market for several years – but is now showing signs of a return to price growth.

Sydney and New South Wales:
Media distortions means buyers need to be careful in Sydney

Sydney is a market where buyers will need to be cautious in 2014. And it’s the perception more than the reality that’s of most concern.

Media, as it so often does, has gone overboard in its coverage of the Sydney property market in 2013. It has generated the perception of there being the mother of all booms happening across the city. According to some commentators, like the high-profile but somewhat misguided John McGrath, this has demonstrated the supremacy of Sydney as a place to invest. Media has chattered excitedly about a spectacular boom and, indeed, a bubble.

Here’s the reality. Sydney has been the worst performer among the capital cities over the past 10 years. Since 2003, even Hobart and Adelaide have delivered higher capital growth. Now, Sydney is playing catch-up. But to date, as an average across the city, the price growth has been relatively moderate.

The Australian Bureau of Statistics, Australian Property Monitors and RP Data all agree that the average price growth in Sydney over 12 months has been about 11%. That’s certainly good growth and indeed it’s the highest among the capital cities in 2013. But, to put it in perspective, in 2010 all eight capital cities recorded double-digit price growth including two that delivered 20%-plus.

Most of that Sydney growth has been in the upmarket suburbs, where there has been an auction frenzy. Well-heeled individuals who should know better have got caught up in the hype and paid too much for homes. In due course, many will regret their actions. The smart ones would have bought late in 2012, when prices were down and competition was weak. It was clear then that real estate would rise in 2013 – but most people are pack animals and follow the stampeding herd.

I’m expecting 2014 to be a little more rational in Sydney. The price growth will be more widespread and there will be solid, sustainable price increases in the middle-ring and outer-ring suburbs.

I would be targeting affordable suburbs with good transport links, especially train links, and identifiable drivers of future growth, such as major spending on infrastructure.

Sydney locations that fit the criteria include the Blacktown, Liverpool, Westmead, Hurstville and Rouse Hill areas.

There’s more to New South Wales than just Sydney, although the media seldom acknowledges it. NSW has a raft of strong regional centres where investors can buy affordable with good prospects for capital growth.

They include Dubbo, Tamworth, Wagga Wagga, Gunnedah, Port Macquarie and Goulburn. Many have discounted the prospects of Newcastle because of (incorrect) perceptions that the resources boom is over, but Newcastle has been a growth market in 2013 and will continue to prosper in 2014.

Conclusion:
Avoid the herd mentality to succeed in 2014

Success for investors in 2014 will depend on whether they have a clear objective and strategy, rather than simply following the herd.

Too many investors dive into rising markets without a coherent plan. They act because everyone is. They’re driven by the FOMO Syndrome – the Fear Of Missing Out.

This is the worst possible reason to buy real estate. But it’s exactly what many Australians have been doing in 2013, particularly in Sydney and Melbourne. They have been diving into the market, not as a result of a plan but because everyone else is buying. They have been paying top prices in a frenzied market.

The catch-cry for these people is: Buy in haste and repent at leisure.

Don’t be a “me too” investor. Think about your objectives with property investment and then map out a plan for getting there.

All the people I know who have been truly successful with property investment are people who have the ability to think and act independently. They’re all people who have strategies and who do lots of research.

They don’t follow the herd: they lead it or, better still, they run in the opposite direction.

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