Property Report – October 2010
Those who ignore the regions are the losers
by Terry Ryder.
creator of hotspotting.com.au
Those who ignore the regions are the losers
I’ve been wondering what it would take for Australia to notice that there is a bustling life beyond the coastal areas and the capital cities. The nation is full of amazing towns and small cities with vibrant economies but they seldom attract any attention because they’re mostly inland, away from the beaches and big cities.
Given that affordability is such a big issue, I’m surprised more people aren’t buying in places like Orange, Toowoomba and Bendigo. Cheap real estate, superior rental returns and good growth prospects are pretty much everything an investor wants. Our obsession with café culture real estate stops us seeing where the best opportunities lie.
But perhaps the time of the regions is at hand. The non-outcome that emerged from the most mediocre election in the history of Australia has forced a re-direction of focus and resources to the regions.
That’s the price Julia Gillard has to pay for the support of the key independents. It may turn out to be a very good thing because Australia’s inland communities deserve a lot more attention than they’ve been getting.
For a detailed analysis of markets nationwide, click on the topics below …
|National Overview||Making sense of what really happened early in 2010.|
|Feature topic||Federal deal means more focus on regional centres.|
|Adelaide||Quietly kicking goals, not that anyone notices.|
|Brisbane||Market running on the spot, awaiting starting gun for big projects.|
|Canberra||National capital is a construction site – and property continues to grow.|
|Darwin||Alice takes over from Darwin as the Territory’s star market.|
|Hobart||Desperately seeking a pick-me-up.|
|Melbourne||Over the top and down the other side.|
|Perth||It’s only a matter of time before WA market takes off.|
|Sydney||The Sydney boom was short and narrow.|
|Conclusion||Cheaper prices, better rental returns and strong growth in the regions.|
Making sense of what really happened in markets early in 2010
The lack of expertise in media reporting of the real estate market means consumers have been misled about the market in the first half of 2010.
The general media theme has been an “unprecedented” or “extraordinary” boom in home prices across the nation. Nothing of the sort has occurred.
I looked at figures describing markets around Australia and feel confident in saying this:
- The top end of the Melbourne market had a short boom. This pulled up the overall median house price for Melbourne (because more high-priced homes were selling). This has been misinterpreted as a market-wide escalation in values above 20%. Only a small number of suburbs had growth at those levels (prices have declined since). Most suburbs had good growth in median prices but few had “boom” growth.
- The top end of the Sydney market also had a brief surge in prices, again dragging up the overall median for the city. But the middle price ranges and the bottom end of the Sydney market had moderate growth only. RP Data price growth measure says only 10% for Sydney in the past year and Australian Property Monitors says 13% (which suggests a solid year, but not a boom year).
- The Canberra market has had solid annual growth, as it usually does – but nothing approaching the stellar increases reported for Melbourne and Sydney. RP Data says its prices rose about 11%. Adelaide, according to most sources, had similar average growth – but again, it was not spread evenly across the city.
- There was only moderate median price growth in Perth, Brisbane, Darwin and Hobart. RP Data and APM have recorded single-digit annual price growth in these cities in the past 12 months.
- Darwin is a market in decline, with its growth rates falling quarter by quarter, dampened by apartment over-supply and declining affordability.
- Few regional markets have had, to date, any growth other than moderate single-digit increases in median prices. One notable exception is Alice Springs which, for local reasons, has had a sharp upturn in home prices.
- The situation with apartment prices has been quite moderate. RP Data attributes single-digit growth to Perth, Canberra, Brisbane and Adelaide, about 10% in Sydney and 16% in Melbourne.
Looking behind the stark figures reported by newspapers, it’s clear that the boom was very localised. Melbourne certainly had an elevated market, but it was not widespread. Sydney had its strongest upturn since 2004 but not at the levels felt in Melbourne. Canberra and Adelaide delivered solid performances, but no boom. Perth, Brisbane and Hobart have been rather subdued and Darwin is in reverse.
The RP Data-Rismark Home Value Index, which combines houses and apartments has “homes” in one index, finds growth ranging from poor to solid in the eight capital cities for the 12 months to 31 July. Melbourne’s index rose 13.6%, which is the highest growth, while Brisbane with 2.1% and Hobart with 4.8% are the lowest. The average across the eight cities is a rise of 9.7%. That’s a solid year, but it’s not a national boom.
Federal Government deal means more focus on the regions
In January when journalists were doing their usual New Year stories about what to expect for 2010, I was asked for my views. I said I believed this year and beyond was The Time of The Regional Centres. I have been telling people at workshops and in my writing that investors who ignore the regions are missing opportunities to buy affordably with good growth prospects.
Investors tend to focus on the capital cities and the Sea Change areas, but many of the best opportunities lie inland. Much of the stimulus spending on infrastructure and the bulk of the resources sector investment impacts most directly on regional centres (although the capital cities benefit also).
I am always careful to warn people about the risks of buying in mining towns and other locations dependent on one sector or one major employer. I believe the best way to exploit resources activity is to invest in the area’s major regional centre – the town or city that provides administrative, shopping, health and education services to a wide region.
My ideal investment location is a regional centre that has a diverse economy and can prosper without any impetus from the resources sector – a centre for which resources spending is a bonus. Geraldton in Western Australia and Townsville in Queensland are examples of regional cities that would thrive even if the resources sector closed down – but which benefit in various ways from mining activities in their regional sphere.
My strong belief in the importance of these areas economically and in real estate has been reinforced by events in both federal and state politics. The Labor Party under Julia Gillard has cobbled together an agreement that allows them to govern with the support of key independents. The price of their support is a redirection of financial resources to the regions. Ten billion dollars is earmarked for spending in regional areas, with hospitals a big target for funding.
Reinforcing that is the emergence of decentralisation policies by some State Governments. Queensland wants to ease pressure on the south-east by encouraging growth in the regional centres. Victoria wants to take some of the strain off Melbourne by redirecting growth and resources to key regional cities. Since the Liberal Party won power in Western Australia with the support of the Nationals, there has been a greater emphasis on spending outside Perth.
In terms of the Federal Government’s spending on regional infrastructure, we’re still awaiting the detail – so it’s not clear which regional areas will most benefit.
But, in the meantime, we can pinpoint areas that are likely to thrive on infrastructure spending and resources activity that is already known. We know that big spending on rail and port infrastructure is earmarked for Gladstone in Queensland, as well as $40 billion in new LNG processing facilities and $2 billion in a steel mill.
We know that the Queensland State Government has cemented the status of Townsville as one of Australia’s strongest regional economies by introducing a new de-centralisation policy that effectively makes Townsville the deputy capital city of Queensland, with a reallocation of resources to the North Queensland city. Townsville is already purring along nicely, with its strong elements of tourism, manufacturing, defence, education, government administration and various spin-offs from the mining sector. There are a number of billion-dollar property developments targeted on the city.
Newcastle in NSW has just completed a billion-dollar expansion of its port and more of the same is coming up. Rail infrastructure feeding into the city is being upgraded and the new Hunter Expressway was funded in last year’s Federal Budget. Mining and power generation activities in the nearby Hunter Valley are moving into a new growth phase. This is one of the nation’s most under-rated property markets.
Warrnambool is the key regional centre in the south-west of Victoria, with steady population growth, a diversified economy and plenty of government money being spent, including a $175 million expansion of the hospital. Warrnambool services a region which is coming alive with power generation developments, mostly wind farms but also gas-fired power stations and the possibility of geo-thermal and wave power facilities.
Bendigo is looking strong also, particularly since the State Government decided to spend $530 million on re-developing its hospital.
Geraldton in Western Australia is one of my favourite regional hotspots because it is a “real” regional centre with “normal” dwelling prices – compared to regional centres further north such as Port Hedland and Karratha where resources activities dominate the local economy and typical houses cost $700,000-plus.
Geraldton would continue to exist even if the mines closed down. It has strong elements of tourism, agriculture, aquaculture and manufacturing in its economy, as well as its export port for various minerals mined in the region. The $4 billion Oakajee port will start construction soon.
The WA State Government is focusing a lot of resources on developing the regions, including plans to evolve Karratha and Port Hedland into more rounded regional centres.
Adelaide and South Australia:
Quietly kicking goals, not that anyone notices
Adelaide has been behaving a lot like Canberra lately. It hasn’t done anything special but it’s been very solid. The various index and median price measures emanating from different research sources agree that the Adelaide market rose about 10-11% in FY2010.
That sort of market performance is very much in concert with the indicators describing the South Australia economy. Its population growth is steady, though below national averages. Ditto its employment growth and unemployment rate – solid, though slightly inferior to national averages. Economic activity as measured by State Final Demand has been marginally better than average.
Housing loans to investors have risen in line with the national average, as have residential building approvals.
There’s been plenty of excitement generated by the national resources sector, but most of it has been about events in Western Australia and Queensland. South Australia, however, is quietly increasing its importance in the mining sector, without attracting a lot of attention.
There are rising numbers of iron ore mines in the state and they are attracting growing interest and investment from Chinese companies. The Cairn Hill Mine opened recently near Coober Pedy, with a 20% interest by China company Sichuan Taifeng. Wuhan Iron and Steel Corporation is contributing $260 million to Adelaide-based Centrex Metals for development of five tenements on the Eyre Peninsula, with the aim of developing two iron ore mines over the next 4-5 years.
Queensland Mining magnate Clive Palmer is also ramping up exploration activity in SA. Meanwhile, theProminent Hill copper-gold mine in SA’s Far North will be extended underground.Mine owner OZ Minerals has committed $135 million in pre-production expenditure to develop the underground operation, with work to begin immediately.
And quietly sitting in the background is the multi-billion-dollar expansion of BHP Billiton’s Roxby Downs operations.
Regional South Australia has delivered some good news, with positive economic events in both Whyalla and Port Pirie. There’s been a significant drop in unemployment in Port Pirie and it’s noticeable that residential vacancies have dropped there as well. Whyalla is to be the site of a rare earths processing complex which is expected to generate $1 billion in annual revenue.
In Adelaide, evidence of growth is seen in plans for vast new residential areas in the city’s north: the State Government is releasing enough land for 12,000 new homes. In addition to that, Delfin Lend Lease has prepared detailed plans for its 220-hectare Gawler East community, while plans for a new 360-hecatre suburb called Waterview have also been announced.
Brisbane and Queensland:
Market running on the spot, awaiting starting gun for big projects
Brisbane is in a similar situation to Perth. Its property market has been quite static in the past year or so, but it’s unlikely to stay quiet for long.
Like Western Australia, Queensland has a list of resources enterprises that boggles the mind. They’re in various stages of planning, though few of the headline projects are under construction. When things get to the point of digging and hammering, the jobs created will put pressure on real estate markets.
While much of the activity is some distance from Brisbane, its economy and property market will feel the benefit. More directly, however, it will impact on key regional centres. Townsville, Gladstone, Emerald, Bowen, Kingaroy, Toowoomba and Dalby can all expect to feel major changes.
Big ticket resources projects include Gina Rinehart’s plans for coal mines west of Emerald, linked by a new 500km rail line to the export port near Bowen; Clive Palmers equally massive coal enterprise for the same general area; all the coal seam gas projects in various stages of planning in the Surat Basin, with rail and pipeline links to Gladstone where $40 billion in processing plants will be built; the expansion of Gladstone’s port; the steel mill planned for Gladstone; and X-strata’s big coal enterprise at Wandoan (the one they said they would scrap in a dummy spit over the resources tax, but always intended to proceed with)
Each is a multi-billion-dollar enterprise.
There are transport infrastructure projects under way, including Airport Link in Brisbane, the Ipswich Motorway upgrade in the city’s south-west, the upgrade to the Bruce Highway in the Gympie area and various busway projects around Brisbane. Several more are in planning including the Northern Link tunnel.
There are some major property developments in the regions, including a couple of billion-dollar projects in Townsville. The Sunshine Coast isn’t my favourite investment market at the moment, but that region is starting to attract some big spending, including a major new hospital and a master-planned mini-city in the hinterland.
Queensland’s regions have provided the star performers of the state’s real estate markets over the past five years. The impact of the projects mentioned above – and many others that are in the pipeline – means that this is likely to continue.
Canberra and the ACT:
The national capital is a construction site – and property continues to grow
A recent trip to Canberra reminded me how much construction is going on in the national capital.
The ACT Government spent half a billion dollars on capital works in FY2010 and other entities have been busy as well.
The airport is a major construction site at the moment, with a $350 million upgrade under way. There’s ongoing expansion at Australian National University and the Australian Defence Force Academy is building more accommodation facilities. Several apartment developments are happening, a number of retail and commercial developments are in the construction pipeline, a $37 million electricity upgrade is under way and there has been upgrade work at Canberra Hospital.
Work has begun on clearing land at North Weston which, along with nearby Molonglo, will form a major expansion of the city’s residential footprint – eventually home to 60,000 people.
There’s plenty more coming up. A $130 million redevelopment of the Belconnen Fresh Food Markets is planned. A development of 350 homes in Canberra’s north is in the final stages of planning approval. Plans for another mixed-use development at Kingston Foreshore have been lodged, bringing to 327 the number of lakeside units proposed in recent applications. A $94 million package for cultural exhibitions, new public parks and a doubling of Yarralumla’s population is the favoured option for redeveloping the old Canberra Brickworks. The Department of Defence will move 350 staff to a new call centre in Mitchell.
Potentially the largest upcoming project, if all goes according to plan, is a $1 billion data centre.
Planners have published a vision of an industrial future for land in the territory’s east. The ACT Planning and Land Authority issued a report recommending an arc of industrial districts stretching from the Majura Valley in the north to Hume in the south. If future generations of Canberrans will live in the north and the west, according to the recommendations, they will work in the east.
As Canberra grows, water supply should not be a problem, according to Actew, It says Canberra’s water supply could support a population of 600,000.
All of this activity forms the background to Canberra’s property market, which continues to be one of the steadiest in the nation. Backed by steady population growth, the highest incomes in the land and the lowest unemployment rate, Canberra real estate has steady demand. Affordability is the best among the state & territory capitals and vacancies are the lowest of the major cities.
This explains why the city’s median house price has shown double-digit growth in the 12 months to June. That’s situation normal for Canberra, which continues to be one of the nation’s steadiest markets.
Darwin and the Northern Territory:
Alice takes over as the star of the Territory market
Darwin has become accustomed to a star place in the Australian property firmament, but lately it’s been upstaged by seldom-considered Alice Springs.
Just as the Darwin market is showing signs of waning, after years of relentless rises, the Alice Springs market has taken a sharp upturn. As in Darwin, supply in Alice Springs is constrained by crown land and aboriginal land. Demand has risen strongly in recent times, partly as a result of a growing number of government programs targeted on the issue of camps on the fringe of Alice Springs.
Government services, particularly health and education, comprise a significant industry in Alice Springs and this has become more so recently. The local economy also thrives on tourism, the cattle industry, mining, transport and activity generated by the Pine Gap facility. This means a strong local economy, plenty of jobs and rising demand for homes.
Vacancies are close to zero and typical three-bedroom homes fetch $450 to $500 per week in rent. Consequently, house prices have increased by at least 20% in the past 12 months.
There’s considerable new development in the pipeline as well. It appears, all in all, that Alice Springs is a growth economy and a rising property market.
Darwin, on the other hand, seems to have exhausted its prolonged bull run. The rate of price growth has been declining quarter by quarter, finance for the purchase of homes has been trending south for over a year and the over-supply of apartments has dampened market sentiment. The continuing doubts over the $12 billion Inpex project – a factor that lured many investors to buy in Darwin earlier – are not helping.
Darwin has the highest rents among the state & territory capitals and close to highest prices for houses and apartments (pipped narrowly by Sydney, in terms of median prices) – which means affordability has become more and more of an issue.
The economic data underpinning the Darwin market is still strong, but the growing body of negatives is starting to outweigh those positives.
Hobart and Tasmania:
Desperately seeking a pick-me-up
Tasmania is a state desperately in need of some good news. Lots of it.
Independent MP for Denison Andrew Wilkie provided some when he won $340 million from the Federal Government for re-development of the Hobart Hospital during the recent horse-trading which decided who would temporarily run the country.
There’s potential for some more, with plans announced for a $1.2 billion wind farm in Tasmania’s north-west tip – but that’s not likely to happen for several years.
And apart from that, it’s all a bit gloomy for the island state. Tasmania has the most sluggish economy in Australia. The Australian Bureau of Statistics ranks Tasmania’s economy at the bottom of the pile, growing just 0.6% in the June Quarter. The national economy grew at double the Tasmanian rate.
Male job losses have pushed the unemployment rate in Tasmania to a national high of 6.4%. The ABS figures come at a time when separate surveys by MyState Ltd and the Tasmanian Chamber of Commerce and Industry record falls in consumer and business confidence. The state economy has been hurt by job losses in forestry and closure of two paper mills on the North-West Coast.
The long-proposed and much-opposed Gunns pulp mill looks increasingly unlikely to go ahead, particularly with the considerable political power the Greens now have in both Tasmania and nationally.
The biggest infrastructure project in the state, the Brighton Bypass road development, is stalled over cultural issues – and the biggest property development, the Ralphs Bay canal residential development, has been scrapped because of environmental concerns.
The one place that seems to have some positive action is Kingston, on the southern fringe of Hobart. There’s a road bypass project happening and a major new shopping centre in prospect. Kingston is a population growth area (Tasmania doesn’t have many) and is about to get a Coles supermarket, a Kmart department store and various specialty outlets, complete with 320 retail jobs and 200 construction jobs.
That’s the kind of economic pick-me-up Tasmania could use a lot more of.
Melbourne and Victoria:
Over the top and down the other side
Recent experiences in Melbourne serve as a warning for investors who believe the hype about the so-called prime inner-city suburbs. There is a formidable propaganda machine which claims that the upmarket near-city locations are the best for capital growth, but I have warned against this fallacy, because:
- The record shows the cheaper outlying suburbs have superior long-term growth rates; and
- The record also shows that Melbourne’s upmarket inner-city suburbs are highly volatile, with growth periods often followed by periods of price decline.
The 2010 experience has again repeated that familiar pattern for the suburbs of inner south-east. Earlier in the year, these areas underwent the kind of auction frenzy that happens every three to four years. Median prices rose sharply in the millionaire suburbs.
But the uptick in prices was short-lived. The heat in the market evaporated quickly and in many of the high-priced suburbs’ median prices have fallen more recently.
According to data from the Real Estate Institute of Victoria, median prices in some suburbs fell by up to 26% between March and June. South Yarra has recorded the biggest drop – with its median house price falling from $1.75 million in the March Quarter, to $1.28 million in the June Quarter.
Armadale dropped from $1.9 million in March to $1.6 million in June, Toorak fell from $2.7 million to $2.1 million, Brighton from $1.9 million to $1.7 million and Prahran from $1.1 million to $970,000.
At the other end of the scale, lower-end suburbs including Dandenong (median price $345,000), Broadmeadows ($330,000), Glenroy ($410,000) and Croydon ($390,000) have continued to grow their median prices.
All this relates to short-term outcomes. Investors should be more interested in long-term trends and these show that outlying areas such as the Mornington Peninsula and the City of Greater Geelong dominate the list of suburbs with 12%-plus growth rates.
I think Geelong has good prospects, as the State Government pursues at diversification policy in an effort to redirect growth and resources to regional cities like Geelong. Improved road and rail connections are part of the mix likely to make Geelong’s future one with rising property values.
Perth and Western Australia:
It’s only a matter of time before WA property takes off
Economic events impact on real estate markets but often there’s a time lag before home prices feel the force of business spending, population growth and/or improvements in infrastructure. This is particularly so if the key economic events are multi-billion-dollar enterprises that takes years to crank up to full stream.
This is the story of Western Australian real estate at the moment. Perth prices in particular have shown little inclination to respond to strong economic indicators, including the highest population growth rate in the land, the lowest unemployment among the states (though not as low as the two territories) and strong economic growth.
But reaction shouldn’t be far off. Housing loans to investors rose 16.2% in the past 12 months while new home approvals grew 30%.
Waiting in the background is the mother of all economic impacts: a series of resources developments unprecedented in the nation’s history. Ten projects – the Gorgon, Pluto, Wheatstone, James Price Point, Oakajee, Karara, Collie Urea, Brockman 4, Roy Hill and Hope Downs 4 projects – represent capital spending of about $120 billion. And that’s just a small part of the state’s total list.
If I had a lazy $3 million lying around without a purpose, I’d turn it into real estate in Bunbury, Karratha, Geraldton, Broome and Perth. Five years from now I would expect it to be worth considerably more than current values.
Economic impetus like the iron ore, gas, infrastructure and other projects listed above cannot fail to boost real estate markets, particularly ones that have been dormant for three years. I think by now everyone realizes that none of mining magnates who threatened to scrap their projects actually meant it and that it’s full steam ahead, regardless of plans for a resources tax and/or a carbon pricing scheme.
The kind of growth springing off the back of these projects is seen in the recently approved Alkimos development, the largest coastal development north of Perth in 50 years. The agreement between Delfin Lend Lease and LandCorp will progress the first stage and master planning of Alkimos, 40km north of Perth’s CBD.
The Alkimos Eglinton area will ultimately provide land and homes for a new community of 50,000 people. Development of the initial 224 hectares at Alkimos is expected to start in 2011 and will include 2,500 homes. The first stage will take up to seven years to complete and up to 20 years to develop the entire 710 hectare community.
Sydney and New South Wales:
As in Melbourne, the Sydney “boom” was short and narrow
The national real estate market experienced an all-encompassing boom in the first half of the year – if you believe newspaper reports. But the research shows the surge in prices was confined to a small number of very specific markets. Essentially, it happened in the top-end suburbs of Sydney and Melbourne.
I researched the Sydney market and found that a small number of the locations with median prices above $1 million experienced an annual rise in median prices of 20%-plus in median prices (to be followed by price decline, as this is the usual volatile pattern of the auction-frenzy areas). Most of the millionaire suburbs saw a rise of about 15%.
In the next tier of the market, the mid-range suburbs with medians around $700,000 to $900,000, a few had 15% rises but most experienced a 10-12% lift in median prices. The bottom end of the market experienced moderate growth only, with typical increases of 5-6% over 12 months.
Our Sydney-centric media interpreted the short, sharp surge in values in a small number of suburbs as a city-wide boom and a national phenomenon. In reality, it was very localised and very short-term. Normal transmission has now resumed.
Meanwhile, NSW continues to perform better as an economy. The days of the state lagging behind national economic trends appear to have passed. Although NSW continues to have one of the slowest population growth rates in the nation, other economic indicators are mostly positive.
The unemployment rate is now 5.2%, a considerable improvement on earlier in the year and in line with the national average. Jobs ads in NSW rose 0.7% in August, against the national trend of a slight decrease.
NSW’s retail trade in July, $6.34 billion, represented an annual rise of 5.6%, the highest in Australia and compared with the national average of 3.6%. State Final Demand rose 4.3% in FY2010, above the national average of 3.3%.
Approvals for new homes in NSW rose 42% in the 12 months to July, the highest growth in the nation, while finance commitments by investors in NSW grew 16.3% in the 12 months to July, in line with the national average.
All of that tends to bode well for the state’s property market. But perhaps the biggest factor underpinning its future is the new arrangement at the top of federal politics. The deal that allows Labor to govern with the support of independents includes a substantial reallocation of infrastructure spending towards the regions. This adds further emphasis to my belief that key regional centres are major areas of opportunity for property investors to buy affordably with prospects of good capital growth.
Cheaper prices, better rental returns and strong growth in the regions
In a typical year, around 40% of home sales in Australia occur outside the capital cities.
Mostly they’re owner-occupier sales because investors give little thought to buying in the regions – other than speculator interest in mining towns (which is the one area of the regional markets which investors should ignore).
Take a look at the price growth in regional towns and cities in Queensland to get an idea of the potential gains: Gladstone up 68% over the past five years, Rockhampton up 90%, Townsville up 58%, Dalby up 78% and Charters Towers up 105%.
By comparison, Brisbane’s median house price has risen 47% and the Gold Coast just 28%.
Many city-based real estate professionals will tell you that you’re unwise to buy in regional areas. As I often say, the loudest noise in real estate is the voice of vested interests.
They’ve been wrong in the recent past and they will be even more mistaken in the future.