here is plenty of growth to come in most of our cities
by Terry Ryder.
creator of hotspotting.com.au
It’s easy to be misled by media hype into believing you’ve missed the boat if you didn’t buy in 2013. Many writers have characterised last year as a boom market nationwide.
The truth is that only Sydney among the capital cities had a boom year. Some of the others had good years, with solid growth, while some only began to lift in the latter part of the 2013.
So there is plenty of growth to come in most of our cities. I’m expecting solid price growth in Brisbane, Perth, Sydney, Melbourne, Adelaide and Hobart. Darwin, however, appears to have peaked and is unlikely to have a big year in 2014 and Canberra is struggling.
Within the cities where I expect to see growth, there are exceptions – markets where investors would be wise to steer clear.
One of the underlying themes of this report is the importance of prioritising safety. This means avoiding speculative markets and also being mindful of vacancy rates and building approvals in locations under consideration.
For analysis of markets nationwide, click on the topics below …
|National Overview||Avoid inner-city apartments to stay safe in 2014|
|Adelaide & SA||Poised to join the price party.|
|Brisbane & QLD||Everyone seems to agree that this is the year for Brisbane.|
|Canberra & ACT||A rare down year in prospect for Canberra.|
|Darwin & NT||Darwin peaked in 2013 but will have further (moderate) growth.|
|Hobart & TAS||Positive signs start to emerge in some parts of Tasmania.|
|Melbourne & VIC||Affordable precincts look most likely to show 2014 growth.|
|Perth & WA||After a solid 2013, Perth continues to grow.|
|Sydney & NSW||Set to rise further, but probably not as much as 2013.|
|Conclusion||Safety first is always a smart strategy in real estate investment.|
Avoid inner-city apartments to stay safe in 2014
Major markets around the nations are buoyant. But there are exceptions investors need to know about.
Sydney, Melbourne and Perth all had good years in 2013 and are expected to deliver further growth in 2014. At the end of last year Brisbane, Adelaide and Hobart were showing first signs of joining the price growth party – and I expect these three cities to have much stronger years in 2014.
Indeed I expect Brisbane to jump to the front of the pack this year.
The two exceptions among the state and territory capital cities are Darwin and Canberra. Darwin started 2013 as the No.1 growth city but as the year progressed it was overtaken by Perth and then by Sydney. My feeling is that the Darwin market peaked during 2013 and is likely to be a fairly moderate performer in 2014.
Canberra was struggling as 2013 ended and it’s likely to get harder in 2014, as the new Federal Government plans to take a heavy chainsaw to public service numbers and/or pay deals. So investors should approach Darwin and Canberra with caution.
But the real danger markets are inner-city apartment markets. I believe the safest course for property investors is to ban buying in all inner-city unit markets, plus the Gold Coast high-rise market. There are many better, safer, wiser places to invest in 2014.
The big issue is over-supply. Several inner-city unit markets are seriously over-supplied already and others are in the throes of developing surpluses.
The big target for developers is China and the plan is to keep building, even in seriously over-supplied markets, in the belief that they can sell their product to distant investors without knowledge of Australian market conditions. It’s a new variation on a very old theme for unethical developers: if you have product you can’t sell to locals, head out west or interstate or overseas and flock your units there, usually at inflated prices.
The problem for Australian investors is that these markets can appear to be flourishing. Media will be publishing press releases from developers claiming they’re making lots of sales at good prices and the illusion is created of a boom market. The reality is that the buyers, mostly Asian investors, will find themselves unable to find tenants or will need to cut rentals to attract tenants.
High vacancies mean falling rentals and that translates into falling values.
The over-supply in Melbourne is already serious. Some inner-city markets like Docklands have vacancies as high as 10%. More towers are being built and still more are being approved by Planning Minister Matthew Guy, who appears to be both incompetent and corrupt. The situation is likely to become so serious that it may bright down the wider Melbourne market.
Perth and Brisbane also have high vacancies in their inner-city markets, while an over-supply of apartments in Canberra is one reason the ACT market is struggling at present.
The residential vacancy rate in the Brisbane CBD is now above 6% and rising. Inner-city suburbs such as New Farm, Kangaroo Point, South Brisbane and Woolloongabba all have vacancies above 4%.
There’s a similar scenario with the CBD and near-city suburbs of Perth.
Currently vacancies at the Sydney CBD and nearby suburbs are at acceptable levels and the number of unit sales is rising strongly here. But investors need to be cautious in this market as well. The pattern emerging is that Sydney developers want a piece of the Chinese investor action and many big projects are in planning. Two years from now Sydney may be producing vacancies data similar to Melbourne’s.
The Gold Coast high-rise market continues to be a place to avoid. Values have been falling for the past five years, thanks to a vast over-supply, and that surplus lingers still. There are numerous signs of pickup in the Gold Coast market, with tourism improving, Chinese investment rising, several major infrastructure projects being built and rising optimism thanks to the upcoming Commonwealth Games.
But developers are already hard at work to create the next high-rise over-supply. This is a perennial problem for the Gold Coast because the local development industry and the City Council seem unable to learn the lessons of the past. Stay away.
There is also over-supply in some Central Queensland markets, where an increase in developer supply has coincided with a reduction in demand because of contraction in the coal industry. Places to avoid include Mackay, Emerald and pure mining towns like Moranbah and Dysart.
Gladstone still has plenty of strong demand, because its boom is driven by the gas sector, not coal, but developers have grossly over-supplied that market as well.
So, while Australian real estate is generally on the rise, it would be a mistake for investors to assume they will get good capital growth regardless of where they buy. It pays to check local vacancy rates and building approvals data.
Adelaide and South Australia:
Poised to join the price party after a slow 2013
Adelaide has been slow to join the national growth party, but there are signs it will have a better year in 2014. There is also reason for optimism in some of the regional markets across South Australia.
The sluggishness in Adelaide’s residential property markets is largely caused by its lukewarm economy. Population growth is minimal and its economic indicators are well below national norms.
But while South Australia is not growing as fast as the bigger states, it is growing. And it’s also likely to catch a ripple effect from market upturns in other parts of Australia. Adelaide in the past has often followed the lead of Melbourne.
The best indicator that Adelaide will have a growth year in real estate in 2014 lies in sales volumes for individual suburbs. Many locations across the city have rising markets, as measured by the number of sales of houses and/or apartments.
The individual star is the City of Onkaparinga, which lies in the far south of Adelaide. This is one part of South Australia that has good population growth. It has strong lifestyle elements, including bayside suburbs with good beaches and also a noted wine district.
Onkaparinga is receiving a significant boost from new transport infrastructure. The new rail link to Seaford is completed and trains are running. Meanwhile, the major upgrade of the Southern Expressway is under way. These two key pieces of infrastructure will greatly improve links to central Adelaide, and that helps local property markets.
Seaford and Aldinga Beach are the places likely to rise the most.
Another standout region is the Campbelltown Local Government Area, a cluster of middle-market suburbs north-east of the Adelaide CBD. Six suburbs in this LGA have rising markets. Most of them have median house prices between $400,000 and $450,000.
As one example, sales in the suburb of Campbelltown (median price $425,000) have risen in consecutive quarters from 17 to 31 to 34 to 39.
In the north of Adelaide, the municipalities of Playford and Salisbury stand out for solidity and consistency. In Playford, where many suburbs have median house prices below $200,000, there are a number of suburbs with consistent sales or with market activity rising steadily.
Outside of Adelaide, Port Lincoln, Murray Bridge and Strathalbyn all have growing markets, while Ardrossan can expect growth in the near future.
Port Lincoln was South Australia’s growth star last year, with its median price increasing 15%. Ardrossan is a small town destined to get bigger, with two billion-dollar projects (one a wind farm and the other a mine) to happen on its doorstep.
Brisbane and Queensland :
Everyone seems to agree that this is the year for Brisbane
It’s not often that analysts and commentators agree about anything in real estate. But there’s a broad consensus that 2014 is the Year of Brisbane.
That’s certainly the way I see it. Brisbane lagged Sydney, Melbourne, Darwin and Perth in price growth in 2013, with its recovery delayed by the lingering impacts of the 2011 floods and the 2012 cutbacks by the State Government. But in the latter part of last year Brisbane prices started to move.
Throughout last year, there was a strong pattern of growth in sales activity in multiple suburbs across the Brisbane metropolitan year. This inevitably leads to price growth, with a time lag. This year will see Brisbane have its biggest year in price growth since 2009-10.
The standout areas for Brisbane are in the north. The northern suburbs of the Brisbane City Council LGA and the neighbouring Moreton Bay LGA have the greatest concentrations of growth markets.
Suburbs like Chermside, Nundah and Zillmere rank nationally, in terms of the growth impetus in their housing markets. Markets on or near the Redcliffe Peninsula are also exhibiting strong growth signals, no doubt boosted by news of the rail link.
Logan City in the south of the metropolitan looks like coming back to life as well. Logan City, along with Ipswich City, is a long-term capital growth star of the Brisbane metropolitan area and, after a couple of down years, is starting to recover. This region between Brisbane City and the Gold Coast offers affordability, good transport links and plenty of good infrastructure.
I urge investors to avoid Brisbane’s inner-city apartment markets. There are a large number of new high-rise unit developments happening in and around the CBD and these are being marketed hard. Sales levels have risen (according to one agency report, the sales levels are the highest since 2002) but buyers are not being told about the high vacancy rates.
The vacancy rate in the Brisbane CBD is 6.3% and rising, according to SQM Research. Neighbouring suburbs, such as Fortitude Valley, New Farm, Kangaroo Point, Woolloongabba and South Brisbane all have vacancy rates above 4% (and rising).
The coming markets outside Brisbane are led by Cairns, Toowoomba and the Sunshine Coast. Cairns and the Sunshine Coast have suffered in the past because of over-supply and an over-reliance on the tourism industry. Their surpluses have been dealt with, tourism has recovered and there is major spending on new infrastructure in both cities. Cairns in particular is being boosted by tourism and investment from China.
Some sections of the Gold Coast market show signs of recovery, but they are primarily inland housing markets. I continue to urge investors to stay away from the coastal high-rise markets – more people lose money than make it in those speculative markets.
There is an extensive list of places to avoid in Queensland. Mostly they are central Queensland towns and cities where an increase in developer supply and coincided with a downturn in the coal industry. They include Mackay, Emerald, Moranbah, Dysart and Blackwater.
Gladstone isn’t particularly impacted by coal, because its boom-town status is mostly about gas projects, but developers have over-supplied the city with new dwellings. As a result, 2013 was a year of decline in the Gladstone market and there is more pain to come.
Canberra and the ACT:
A rare down year in prospect for Canberra
I hesitate to write off Canberra’s prospects because it has a history of resilience and consistency. But there appears to be little momentum in the ACT property market as storm clouds gather.
The factor most likely to rain on Canberra’s parade is the Federal Government’s cutbacks to the public service. Canberra, as I noted in the previous edition of this report, has been struggling even before the cuts take effect.
I was recently asked by a magazine to provide my top three hotspots for each state and territory. I was happy to do that, but had to decline for the ACT. There are no locations in the national capital where I can identify rising markets. Many Canberra suburbs have distinct patterns of falling sales numbers, which inevitably will lead to price decline.
Indeed, the ACT is the only state and territory where I have been unable to pinpoint any standout growth markets. While conducting research for my new report, The Price Predictor Index, I was able to find a handful of suburbs that I classify as “Consistency Markets” – places where there are consistent sales quarter by quarter – but none that I would classify as “Rising Fast”.
There were, however, numerous suburbs throughout the ACT with falling sales volumes.
This is a market to avoid until the future becomes a little clearer.
Darwin and the Northern Territory:
Darwin peaked in 2013 but there will be further (moderate) growth
Darwin’s property market peaked in 2013.
It was the first among the capital cities to hit a growth path, starting in 2012. First, it produced major rental growth and then prices followed. At the beginning of 2013, Darwin was the leading capital city on price growth. As the year wore on, Darwin’s price growth moderated and Perth and Sydney overtook it.
Darwin’s rise was prompted primarily by the Ichthys gas project. Given that Darwin is a small city (essentially a regional centre, as well as a capital city), a project of this magnitude ($30 billion) was always going to affect the property market.
But most of the real estate impact has worked its way through the system and the big growth has already happened.
This is reflected in the results of our survey of sales activity in the Northern Territory. The Darwin metropolitan area has few growth markets, measured by the number of dwelling sales in consecutive quarters.
So, while there will be price growth in 2014, it is likely to be moderate only.
The strongest sector is the housing market in Palmerston, the satellite city south of Darwin. This is where new suburbs are under construction to cater for Darwin’s population growth.
The danger market is the Darwin inner-city apartment market. Darwin has experienced over-supply in this market in the recent past, and may do so again. Investors should be an eye on vacancy levels there.
Hobart and Tasmania:
Positive signs start to emerge in some parts of Tasmania
I sense an improvement in the fortunes of Tasmania and its property markets. It’s been a while since I could write anything positive about Tasmania, which has had poor economic indicators and few growth factors in its property markets.
But there are signs of a pickup. Three months ago in this report, I wrote that most markets in Tasmania were moving sideways or were in decline. Now there is evidence of growth in some markets.
Central Hobart, northern Hobart and Launceston all appear to fighting back. The most important indicator of the health or otherwise of property markets is the number of sales occurring. When sales volumes rise, prices usually follow – with a time lag. And an increasing number of suburbs are delivering a rise in sales activity.
The City of Hobart, which encompasses the inner-city suburbs such as Battery Point, Sandy Bay and Newtown, is one of the improving markets.
Another is the municipality of Glenorchy, which includes a cluster of affordable suburbs in the north of Hobart.
Launceston, the state’s No.2 city, also has a number of markets emitting signs of improvement.
A state election has been called for mid-March and that will no doubt cause a temporary stalling of market activities. As long as the election result is a decisive outcome one way or the other, the election should be positive for the state economy and for property markets.
Melbourne and Victoria:
Affordable precincts look most likely to show 2014 growth
Melbourne has a number of affordable precincts that are likely to be growth leaders in 2014.
While all the media focus goes to the millionaire suburbs where auctions create fodder for the social pages but little else of value, it’s the middle ring and outer ring suburbs that are most likely to provide good growth in 2014.
I chart changes in sales volumes across the Melbourne metropolitan area and I’m finding that most of the municipalities that stand out as growth markets are affordable areas. They include the local government areas of Casey, Dandenong, Brimbank and Whittlesea.
These places have a number of things in common: good infrastructure, strong transport links, proximity to jobs nodes and affordable dwellings.
The City of Casey is a good case study. It benefits from good infrastructure, including university and TAFE campuses, two major hospitals, and good road and rail links.
It’s one of the Australia’s leading population growth regions, down in the south-east of the Melbourne metro area. Most of its suburbs have median house prices in the $300,000s or $400,000s. Cranbourne is a typical Casey locale: popular with buyers, it sells about 300 homes per year, with the current median price around $310,000 and rental yields in the 5% to 5.5% range.
There are five suburbs with Cranbourne in the name and they all have rising markets, as measured by sales volumes. In Cranbourne North, for example, the number of sales has risen from 83 to 90 to 111 in consecutive quarters.
There has been a lot of media about the fate of Geelong, with a number of manufacturing businesses announcing their intention to close down. It is, of course, expecting too much to hope for some rational, balanced analysis of the implications. What media always provides is cheap sensationalism, with an emphasis on negativity. So we’re led to believe that Geelong is doomed.
Here’s an alternative view: Geelong will be okay. Newcastle survived the BHP shutdown and today is a thriving city. Wollongong has absorbed a number of recent economic reversals and today is the standout regional area of New South Wales for real estate growth. Geelong will do likewise.
Geelong has evolved into a modern city, with much of its economy and employment provided by the health, medical and IT sectors. It’s much less dependent on blue-collar industries than in the past. A lot of infrastructure is being built there and it has a bright future. Another factor is its favour is that, in most cases, the industry closures will not be immediate. The city has time to adapt.
Perth and Western Australia:
After a solid 2013, Perth continues to grow
Perth has a good year in 2013 with price growth across the city. It raises the question of whether that was Perth’s moment in the market limelight or whether there is more growth to come.
I tend towards the latter option. Last year felt like the beginning of something, rather than a market peak, keeping in mind that this was Perth’s first significant price growth year since 2006-07.
Western Australia still has Australia’s strongest economy and the highest population growth. Media has simplistically declared that “the mining boom is over” but this is highly inaccurate: the major miners are exporting iron ore at record levels, mega gas projects are under construction and major new projects are poised to begin work, including the $9 billion Roy Hill iron ore mine.
The Perth property market has been lifted by WA’s strong economy and multiple precincts throughout the city have growth markets identified by Hotspotting’s Price Predictor Index, most of them at the affordable end of the market.
The municipalities of Armadale (south-east), Joondalup (north), Rockingham (south-west), Gosnells (south-east), Stirling (north) and Wanneroo (north) all have numerous rising markets. Only Stirling, where Karrinyup (median price $820,000) and Mt Lawley ($895,000) are among the best locations, is close to the upper end of the market.
Rockingham City has six suburbs classified as “Rising Fast”, while Armadale and Gosnells have five each, while Stirling and Wanneroo have four each. Typical locations are Cooloongup (median price $320,000), Armadale ($305,000), Gosnells ($355,000) and Warnbro ($355,000).
The suburb of Armadale within the City of Armadale has recorded four consecutive quarters in which house sales were 56, 72, 98 and 108. In the suburb of Gosnells within the City of Gosnells the number of sales in five consecutive quarters were 110, 117, 142, 140 and 174. This pattern of strongly rising sales volumes is a precursor to price growth.
Stirling and Wanneroo both have six suburbs ranked as “Rising Steadily”. Wanneroo also has five “Consistency” suburbs. Wanneroo performers include Butler (which will be boosted by new rail links), Clarkson and Quinns Rocks.
Joondalup presents as a solid market, with three “Rising Fast”, five “Rising Steadily” and five “Consistency” suburbs. This is a cluster of middle-market suburbs with good infrastructure and strong lifestyle features. Performing suburbs include Duncraig (median price $685,000), Kingsley ($590,000) and Heathridge ($480,000).
The Price Predictor Index also identifies falling markets and, in WA, most of these are outside Perth. Port Hedland and Karratha, two regional centres that service the resources sector, have declining markets, largely because new supply has coinciding with some softening of demand, causing vacancies to rise.
Sydney and New South Wales:
Set to grow further, but probably not as much as 2013
Sydney eventually climbed to the top of the pack in 2013 and ended the year as the capital growth capital of capital city Australia. Keeping in mind that this was the city’s first significant growth years in a decade, and looking at the momentum in the market, I expect further growth in 2014, though probably at lower levels than last year.
There are numerous growth precincts across the metropolitan area, headed by the municipalities of Blacktown, Sydney City, Parramatta, Bankstown and Canterbury.
A reputation for being downmarket has not prevented Blacktown City from being the No.1 growth market in Sydney. Suburbs within Blacktown City feature prominently in our growth lists for Sydney: four suburbs in the “Rising Fast” list, five suburbs among the “Rising Steadily” areas, and four suburbs featuring among the “Consistency” markets.
The hallmark of these locations is affordability: most of the 13 Blacktown City suburbs featured on our lists have median prices in the $300,000s or $400,000s.
The City of Canterbury provides a number of the affordable apartment markets on the “Rising Fast” list. Several new unit developments are happening in this municipality as part of a concerted urban renewal program. Apartment sales in Campsie rose from 55 to 71 to 89 in consecutive quarters.
A feature of the growth lists for metropolitan Sydney is the prominence of unit markets. And many of the growth markets are in the City of Sydney, as inner-city units enjoy a resurgence in popularity. Chippendale, Darlinghurst, Woolloomooloo and Waterloo, as well as the CBD, feature on the “Rising Fast” list.
Potts Point, Pyrmont and Surry Hills are also active. A word of caution, however: while currently vacancy rates are at acceptable levels, there is a risk of over-supply as developers rush to exploit growing demand, including from Chinese buyers.
Outside Sydney, the Illawarra region has overcome recent setbacks, including major cuts by BlueScope Steel, to maintain a vibrant economy and growth in property markets. The municipalities of Wollongong and Shellharbour provide five growth markets and four consistency markets to be the standout location for Regional New South Wales.
Sales in Albion Park have increased from 52 to 60 to 63 to 67 in consecutive quarters; Dapto sales have increased from 43 to 50 to 63; and sales in the suburb of Wollongong have increased from around 130 per quarter in the early part of 2013 to about 180 per quarter the second half.
A number of locations in the Blue Mountains had rising markets last year, but the October bushfires have killed off their momentum. Apart from the loss of life, the destruction of 200-plus homes and the impact on local tourism, the bushfires extinguished the price growth that Blue Mountains home-owners were expecting.
Declining markets in NSW include the Hunter region, where a big increase in new supply has coincided in a drop in demand, thanks primarily to contraction of the coal industry.
Safety first is always a smart strategy in real estate investment
Many Australians approach real estate investment as a way to fast-track their wealth. But some have bad experiences because that can be the wrong focus. The first priority should be to stay safe.
Investors who chase exceptional capital growth and/or rental returns often end up with a horror story, because they buy in speculative markets such as mining towns or glamour high-rise markets like the Gold Coast.
The Central Queensland town of Moranbah provides a lesson for all investors. Until 2013, Moranbah was one of the most spectacular growth stories in Australia. Over 10 years, its median house price had grown by an average of 30% per year to reach $750,000. That’s 30% per year. For 10 years.
Rents reached $1,800 per week for typical houses. It was a classic case of a boom market over-reaching.
In the past 12 months, the median price has dropped almost 50%. Typical rents are now $500 per week, less a third of those former peak levels.
This has been caused primarily by down-sizing in the coal industry and increasing use of fly-in-fly-out workers, which has reduced housing demand in Moranbah.
Investors who own property there are hurting. I know of some who bought multiple properties in Moranbah when the market was rising (investors must never buy several homes in the one location).
So, the first priority for investors should be safety. It’s possible to buy in locations that provide good rental returns and good prospects for capital growth over time, without high risk.
There are many solid regional centres throughout Australia, some of which derive some benefit from the resources sector. But the key thing is that they do not depend on mining, because these places have diverse economies, as well as growing populations, good infrastructure and affordable dwellings.
Don’t chase speculative gains. You can still achieve excellent growth by adopting a safety-first policy.