After all the warnings, property stays solid while the share market collapses.
by Terry Ryder.
creator of hotspotting.com.au
After all the warnings, property stays solid while the share market collapses
In the week ending Friday 5 August, the Australian share market dived. In three days over $100 billion was wiped off the value of Australian shares.
The decline on 5 August alone was 4%, the biggest one-day decrease since the GFC impact in 2008. It was generated by events in the US, including a downgrade of its security rating.
The significance of this is that few economists or share market analysts warned us it was coming.
By contrast, the same people have been battering us with predictions of declining house prices. According to the more strident talking heads in the media, our homes are over-valued and a US-style collapse is imminent.
They’ve been telling us that for three years.
But the forecast apocalypse hasn’t happened in real estate. Instead, it’s happened in the share market, and no one told us to expect it.
Perhaps analysts should stick to their specialties. Some advice on impending trends with shares would have been handy, given that so many Australians have their retirement savings trapped in the share market via their super funds.
Economists and share market commentators should leave real estate analysis to specialists who understand the market. For the past three years, genuine real estate analysts have been forecasting steady markets and they have been proven largely correct.
For a detailed analysis of markets nationwide, click on the topics below …
|National Overview||The boom nation that thinks it’s in recession.|
|Feature topic||Ignore the scare campaigns and get on with business.|
|Adelaide||SA attracting increasing attention from national players.|
|Brisbane||Look outside South-East Queensland for growth markets.|
|Canberra||The place to be if you value low-risk solidity.|
|Darwin||More evidence that the party is over, for now.|
|Hobart||Some good news, but Tassie still looks fragile.|
|Melbourne||Melbourne has a few problems but the regions look strong.|
|Perth||Economy starting to feel the impacts of the impending resources boom.|
|Sydney||Sydney delivers solid data amid the uncertainty.|
|Conclusion||Profit from folly, rather than participate in it.|
The boom nation that thinks it’s in recession
Australia is a boom nation but doesn’t know it. Its citizens have a glass-half-empty mentality when the glass in three-quarters full.
The reason for this contradiction is clear. Australians are drowning in negativity.
I can’t remember a time in the past 30 years when the Australian people have been presented with such persistent negativity in the media.
This is not happening because negative events abound. It’s happening because there’s an absence of balance, fairness and ethical standards in the presentation of news.
The problem is exacerbated by the Federal Opposition and the business community, both of them pursuing their political objectives through scare campaigns.
The mining lobby and other business sectors are running a scare campaign on the carbon tax. The building industry continues to run scare campaigns on the state of the property market. Tony Abbott seems to have only one tactic in his bid to win the next election: tour the country talking down the country’s prospects to scare people into voting for him. Something constructive would be a welcome change.
Media, being the street mongrel that it is, laps it up. You have to wonder whether journalists ever stop and ask themselves what they are doing and why. There’s no sense of responsibility or ethics in what most of them do.
This is having a profound effect on property markets. Confidence is the single most influential factor in real estate. When confidence is high, people spend. The lack of confidence is being seen in retail spending data and in the stagnation in capital city property markets (although several of our regional markets are strong).
Australians are refusing to spend and they’re unwilling to make big decisions like taking on a mortgage.
There are multiple reasons for this. The official numbers tell us we have a strong growth economy, that unemployment is low and incomes are rising. But the average Australian is not feeling the love.
Household expenses for regular items like supermarket, petrol, water and power bills have risen.
There is an absence of strong national leadership – both the Federal Government under Julia Gillard and the Opposition under Tony Abbott are guilty here – at a time when it is greatly needed.
The series of natural disasters that occurred both within and outside Australia at the start of the year have affected confidence. The volcanic ash cloud that grounded our planes recently just added to the sense of doom.
Interest rates should not be impacting because we have had only one rise in the past year and a half, and that was in November last year. But the media has been giving us daily speculation that rises are imminent. The forecasts have been wrong but they have affected consumer confidence.
When economic data is negative, media gives us pessimistic headlines. When economic data is positive, media still gives us pessimistic headlines because it means interest rates will rise (according to the simplistic fuzzy-headed logic of the average journalist).
Given all that negativity, it’s surprising that real estate has managed to avoid the collapse that some have predicted.
According to the House Price Indexes from the Australian Bureau of Statistics, the weighted average across our eight capital cities was a decline of 0.1% – which effectively means no change – in the June Quarter.
The year-on-year result for the capital cities was a decrease of 1.9%. Even Brisbane, whose markets have been afflicted by the January floods, has dropped only 3.6% in 12 months. The Australian share market did more than that in a single day recently (it fell 4% on Friday 5 August).
Traditionally, when the share market tanks Australians seek refuge in real estate. Whether that happens this time remains to be seen: either people will seek the solidity of bricks and mortar – or they will see the share market volatility as one more reason to be pessimistic.
If people are that way inclined, we can be certain media will give them plenty of assistance.
Ignore the scare campaigns and get on with business
In the weeks following the 10 July announcement of the carbon tax policy, mining entities made a series of significant announcements.
Xstrata, the Swiss-based miner heavily into Queensland resources, announced it was paying $22 million to buy a cattle property to create a major new coal mine.
BHP Billiton, our biggest mining company, applied to the Queensland Government for permission to operate a 100% fly-in-fly-out workforce to facilitate a new coal mine near Moranbah in the Bowen Basin.
Peabody Energy (the largest coal miner in the US), in association with ArcelorMittal (the world’s largest steel maker), announced a $5 billion takeover bid for Macarthur Coal, a significant operator in the Queensland market.
A new $1.5 billion coal mine was announced for Dubbo in New South Wales.
Boulder Steel, the proponent of a $4 billion steel mill in Gladstone, told a business function that the project was full-steam-ahead, unaffected by the carbon tax.
Origin Energy announced that the tax announcement would not affect its $15 billion CSG-to-LNG venture in Queensland, as it had factored the impact into its costings. Santos said its $16 billion LNG project remained on budget and formally launched construction.
China, which has reserves totaling around $1 trillion, announced it planned to use its reserves to invest worldwide, with Australian resources the No.1 target.
Yanzhou Coal Mining Cio, China’s four largest coal producer, revealed early in August that it had bought two Australian coal producers for $222 million.
All of this is important because these and other announcements contradict the general tone of the reaction from the mining industry to the carbon tax. The industry lobby has predicted disaster from the policy, claiming that mines will close, projects will be scrapped and tens of thousands of jobs will be lost.
Given that Australians have a major appetite for bad news, many citizens have believed the doomsday forecasts. Many people are scared for the jobs and their futures.
But people should always ignore what the miners say and watch what they do.
The actions of mining entities, described above, run counter to the rhetoric.
The negative rhetoric is nothing more than a scare campaign and we should ignore it. Not a single project has been scrapped since the tax announcement.
Similarly, we should ignore the negativity pouring out of the bodies that represent builders and developers. They’ve been talking down the industry for years to pressure governments into concessions (the wish list includes easier approvals, lower taxes and elimination of infrastructure levies).
There’s little evidence this campaign has been successful. It’s only outcome has been to scare consumers off real estate. When an industry’s rhetoric is overwhelmingly negative, people figure something serious is wrong and they stay away.
The real estate institutes that represent agents have tried to counter with occasional positive spin, but they lack the imagination and skills to be effective. And they have had little luck cutting through when the media, always happy to print a negative press release, has little interest in positive news.
I stopped buying newspapers three years ago. I don’t need all that pessimism in my life and there are better ways to access the information I need.
Anyone considering property investment should do likewise, to avoid having their minds cluttered with the myths and misconceptions that predominate.
Adelaide and South Australia:
SA attracting increasing attention from national players
I devoted one of my regular columns in The Australian newspaper recently to an apparently insignificant event: national construction contractor John Holland had decided to open an office in Adelaide.
The importance I saw was that John Holland, which has always administered its South Australian projects from its Melbourne headquarters, has decided it needs a permanent presence in Adelaide. This is because of its growing list of major SA projects.
John Holland is not alone. Other companies are setting up an administrative base in Adelaide for the first time. This results from the rising importance of South Australia as a serious economic force in Australia.
Today economists speak of the two big resources states, Western Australia and Queensland. Five years from now, they will refer to the three resources states: SA is becoming a major partner in the mining industry.
New mines are opening in SA month by month. There is vast activity in exploration. The $30 billion expansion of BHP Billiton’s OIympic Dam mine will begin soon. The decision to allow mining in the Woomera Prohibited Area has huge significance. Two new export ports are in planning for SA. The list of noteworthy events goes on and on.
This will translate into real estate demand in regional markets like Whyalla, Port Augusta, Ceduna and Port Lincoln, and it will filter through into demand in the state capital as well.
There appears to be a lot of discontent in SA about the State Government, such that Premier Mike Rann is being forced to step aside (apparently Labor Party heavies haven’t learned the lessons from the NSW debacle and the downturn of Labor fortunes federally since the political assassination of Kevin Rudd).
SA residents should count their blessings. SA is one of the most progressive states in the nation and Adelaide is punching above its weight in terms of infrastructure construction, which exceeds activity in Sydney by a considerable margin.
SA leads Australia in alternative energy generation, at a time when this has never been more important, and Adelaide is the leading recipient in Australia for defence spending.
SA is a state on the rise and several of its regional markets in particular have bright futures.
One regional centre that’s emerged recently is Port Augusta. I’ve been watching it for a while, awaiting signs that it has the capacity to be an out-performing real estate market. That time has arrived, with Port Augusta well-placed to participate in the growing resources sector activity, including the $30 billion expansion of the Olymic Dam mine.
Brisbane and Queensland :
Look outside South-East Queensland for growth markets
The standout feature of the Brisbane market is that values have held up as well as they have. The ABS House Price Indexes record a 0.3% decline in the June Quarter and a 3.6% fall over 12 months.
That’s surprisingly good considering the impact of the January floods and indicates the market is more resilient now than in 1974 – when, according to REIQ figures, Brisbane prices dropped 10% in the six months after the flood (but had returned to pre-flood levels within 12 months of the event).
Of course, those figures describe the average situation across the city. Behind those generalizations are local variances. The suburbs inundated in January have taken a greater hit and will take longer to recover.
Not much has changed for the Gold and Sunshine Coasts. Noosa and Surfers Paradise continue to battle for the title of “most over-rated market in Australia”. Some sections of the media have discovered recently – belatedly – that these places have falling values and have made quite a big issue of it.
The reality is that, as I have commented many times, both locations have had falling markets since 2007 – for local reasons, chief among which are over-supply, lack of affordability and decline in their tourism markets.
Both locations have been included in my No Go Zones report for five consecutive years. This has earned me a decent share of abuse from local commentators but the results show I have been right to warn investors away from these places. Over the past five years the two worst places in Queensland for capital growth have been, consistently, the Sunshine Coast and the Gold Coast.
Beyond South-East Queensland there are many places with much brighter prospects. I like the outlook for Toowoomba, an important regional city west of Brisbane. It has a solid and diversified economy and sits beside the Surat Basin which is rapidly becoming the new boom resources province in Australia, despite protests from local landowners and environmentalists.
This is all about coal seam gas – and the other end of this far-reaching industry is the coastal city of Gladstone, which has $100 billion of new industrial development in its pipeline. Rentals are rising fast in Gladstone as workers pour into the city for the early stages of the impending construction surge. And it’s only just starting – we’re only now seeing the first signs of construction of the first of the big projects which comprise that $100 billion in investment.
Canberra and the ACT:
Still the place to be, if you like low-risk solidity
Yes, I know, it’s boring because I keep saying it. But the consistency of the Canberra property market is one of most dependable things in Australian real estate.
The latest House Price Indexes from the Australian Bureau of Statistics, covering the June Quarter, show Canberra to be the most solid market among the eight state and territory capitals.
Canberra was the only city to record price growth in both the June Quarter and the year to June. The national capital grew 1.1% in the Quarter, the best result among the capital cities and compared with the weighted average for the eight cities of -0.1% (which effectively means no change).
Over the 12 months to the end of June, the House Price Index for Canberra rose 2.2%, compared with the weighted average for the eight capital cities of -1.9%.
It helps having the nation’s highest average incomes and an unemployment rate that is among the lowest. The ACT’s jobless rate in June was 4%, compared to the national average of 4.9%.
The ACT is the only state or territory with strong figures for residential building approvals, with a rise of 29% in FY2011. The next best result is Victoria with a 6% rise, while the national average is a decline of 5%.
The ACT also has the best figures in the nation for housing finance for owner-occupiers and one of the best for housing finance for investors.
As long as Canberra remains the national capital, with a town full of highly-paid government employees, it will rank as the nearest thing Australia has to a recession-proof property market.
Darwin and the Northern Territory:
More evidence that the Darwin party is over, for now
The statistics continue to show how much the Darwin market has come off the boil. It had to happen sooner or later (it was later, in terms of what I expected).
The House Price Indexes for the June Quarter from the Australian Bureau of Statistics show that Darwin prices declined, on average, 1.6% in the June Quarter, the worst result among the eight state and territory capitals. Year-on-year Darwin prices have dropped 3%.
Rental growth, which had been nation-leading in recent years, has stopped also. The June Quarter report from Australian Property Monitors shows there has been no growth in rents for either houses or apartments in the past 12 months. Darwin, however, still has the highest average rents among the eight state and territory capital cities.
Darwin has also lost its status as the city with the highest net yields for residential property.
These figures are far from disastrous, but they do illustrate that the long bull run for Darwin has ended.
When it re-ignites depends on key industrial projects – like the $12 billion Inpex gas development – which will create jobs and generate demand for housing.
There are also some significant infrastructure projects in the pipeline, including a new prison and a facility for asylum-seekers. The detention camp being built on the outskirts of Darwin is expected to boost the Territory economy – hundreds of millions of dollars will be spent on maintaining and servicing the 1,500-bed camp at Wickham Point.
The Northern Territory still has the lowest unemployment rate in the nation and residential building approvals have held up against a national trend of decline, but housing finance both for owner-occupation and for investors has shown the worst decline in the nation – which underlines the evaporation of price growth.
Beyond Darwin, I see Tennant Creek as a market worth considering.
Tennant Creek is expecting a significant boost from a phosphate mine in its region, which will involve construction of a pipeline and rail link from the mine site to the town. There are other mining ventures in prospect for this region, boosting the local economy which is already steady with elements of agriculture, tourism and resources.
The concern about Tennant Creek is that it is a small town, with a population below 4,000. But its economic and strategic importance goes well beyond its size, as it is the key regional centre for a wide region, encompassing the Barkly Tablelands which includes some of the premier cattle properties in Australia.
The other great attraction is affordability, with a median house price below $200,000.
Hobart and Tasmania:
Some good news, but Tassie still looks fragile
There’s good news and bad news for Tasmania. First the good news, because the island state has generated mostly bad news this year.
Prime Minister Julia Gillard and Premier Lara Giddings signed a landmark forestry peace pact on 7 August. The $276 million agreement, which aims to help the forest industry adapt to market changes, will place 430,000ha of native forest into reserves. The agreement provides $85 million to support contractors and families affected by the industry downturn, $43 million to protect high conservation value forests; $120 million to fund regional development projects; and $25 million for employment and training support for redundant forestry workers.
Time will tell whether the government package is enough to avert economic decline from the measures to protect native forests.
Tasmania’s health sector will receive $350 million from the Federal Government’s $16.4 billion health reform package. About $88 million of Tasmania’s funding – to be allocated between 2014-15 and 2019-20 – is directed towards improving elective surgery rates and waiting times in hospital emergency departments.
Myer has announced a $100 million retail and hotel development for Hobart’s CBD with the first stage to be completed by Christmas 2013. The five-storey re-development will include a roof-top bar overlooking the city, a hotel, 40 specialty stores and a ground-floor food court. Construction will begin early in 2012 and the entire project is expected to be completed by December 2015.
Major developments of this scale are rare in Tasmania, so the boost will be welcome – but, frankly, the state needs half a dozen such projects to energise the economy.
Some of the property market statistics suggest Hobart is holding up well in tough times. Hobart’s House Price Index for the June Quarter showed a 2.8% annual rise, the best result in the nation. Hobart also has some of the best residential rental data among the eight state and territory capital cities, with house rents up 6.7% over 12 months and apartment rents up 4.2%.
Generally, however, Tassie continues to be the struggle state and it’s price and rent data is unlikely to hold up in the near future.
Tasmania still has the nation’s highest unemployment, at 5.6%, compared with the national average of 4.9%. Job advertisements are down 9%, the second worst result in the country.
Population growth is the lowest – and half the national average.
Housing finance for investors has dropped 10% while housing finance for owner-occupiers has declined 15% and building approvals are down 6%. All these statistics are worse than the national averages.
Melbourne and Victoria:
Melbourne has a few problems but the regions are looking strong
Melbourne had an overdue big year in 2010 and, generally, has been pretty flat this year.
Behind the statistics which describe the average situation, there is significant price decline in the millionaire suburbs (as we predicted a year ago after the auction frenzy in the early months of 2010). The cheaper areas have held up pretty well, as they usually do, because the weight of mass demand goes to the more affordable areas. In Frankston, for example, the median house price continues to rise (moderately), as it does in Dromana on the Mornington Peninsula and Newtown on the Bellarine Peninsula.
The areas of concern are the inner-city apartment market, possibly heading for an over-supply, and the south-western housing market, which is already over-supplied, with 10% vacancies in the Wyndham City market.
The real action is outside of the capital city. Regional centres are doing well, not that you would know it because media tends to ignore life outside the big cities.
Geelong continues to be a regional city with big prospects. It has a lot to offer as a genuine alternative to Melbourne: a bayside lifestyle with surf beaches, a strong and diversified economy, improving infrastructure and houses which are (on average) $150,000 cheaper than Melbourne.
Events that will further lift Geelong’s prospects include the Ring Road, the $4 billion Regional Rail Link, the upgrade of Avalon Airport to international status, and major expansion of the Geelong Port.
The Goldfields cities of Bendigo and Ballarat also have plenty to offer. The Regional Rail Link will help them, increasing the viability of living there while working in Melbourne. Both cities have plenty of money being spent on community infrastructure and property development, with real estate at a fraction of the Melbourne prices.
The South-West region of Victoria has particularly strong prospects. This area is challenging the Latrobe Valley as the energy generation capital of Victoria, with a series of alternative energy projects, including three gas-fired power stations, eight or nine wind farms, and proposals for both geo-thermal and wave energy plants.
The carbon tax policy includes a $10 billion fund to support renewable energy facilities, so that helps the South-West region.
Warrnambool is a growth centre, with expansions happening in its medical, education and business infrastructure. It is deriving plenty of benefits from the jobs being created in the alternative energy sector.
Portland is well-placed to benefit also. It already has a couple of wind farms, it has a major business than manufactures wind towers and it has the port through which the blades are imported from overseas.
The port of Portland is growing strongly, lifting exports from 2.9 million tonnes to 4 million tonnes in FY2011 – with projections of 7 million within three years. Portland also provides 40% of Victoria’s fresh fish catch and is now considered Australia’s No.1 location for recreational fishing.
Perth and Western Australia:
State economy starting to feel the impact of the impending resources boom
I’ve noted in previous editions of this report what Western Australia was heading into the greatest resources boom in its history, but this had not yet boosted other parts of the state economy or Perth’s property market.
It was however, inevitable that it would eventually – and we are seeing the first signs of that happening. An early beneficiary is the Perth CBD’s office market, which is filling vacant space faster than any other capital city. The Property Council of Australia forecasts that office rents will rise 20% by the end of the year.
Meanwhile, the big announcements continue to roll in. Here are some of events from the past month:-
- Tokyo Electric Power Company has agreed to buy up to $54 billion worth of LNG from Chevron’s Wheatstone project.
- Gindalbie Metals has signed a rail access agreement that allows WestNet rail to undertake a $450 million upgrade of the 200km rail line from Morowa to Geraldton.
- A $100 million mine that will tap into the richest known deposit of rare earths in the world has been officially opened in the northern Goldfields by Premier Colin Barnett.
- Chevron has handed a $2.3 billion contract for its $44 billion Gorgon gas project to a joint venture between engineers Kentz Corporation and New York-based CB&I.
- BHP Billiton and partners will spend $3 billion to expand Worsley Alumina refinery.
- Mineral Resources has won a $1 billion contract to design-build-operate Fortescue Metals’ second processing facility at the Christmas Creek iron ore project.
- Contractor Macmahon has won three Rio Tinto contracts worth $129 million, covering work at Hope Downs 4, Cape Lambert Port B and Cape Lambert Port A.
- Energy company ATCO Group has announced a conditional agreement to acquire WA’s major gas utility, WA Gas Networks, in two deals worth $1 billion.
At the same time, two reports have ranked the WA economy the strongest in the nation. One report from Deloitte Access Economics says WA’s economic growth is set to go from “comfortable” to “stellar”. Deloitte’s quarterly Business Outlook highlights WA and Queensland as the superchargers of the Australian economy and forecasts that WA will increase its international exports to $165 billion by 2015-16, with the unemployment rate to hold steady below 4% from 2012-13 onwards.
The latest CommSec State of the States report says WA has leapfrogged the ACT to become the best-performing state or territory, buoyed by continued strength in the mining and engineering sectors.
Rio Tinto’s iron ore mining operations in the Pilbara were the key driver behind a 30% increase in first-half net earnings to a record $7.1 billion. The company reported that underlying earnings for the six months to 30 June were up 35%, with the iron ore group increasing underlying earnings 45% to $5.9 billion.
Premier Colin Barnett claims WA will be the world’s largest or second-largest producer of LNG by 2020. He says WA produces 21% of the world’s iron ore and accounts for 37% of international trade in the metal. It also accounts for 9% of the world’s LNG and production is predicted to triple within 10 years from the current level of about 17 million tonnes a year.
“Given projects that are committed, under production or likely to proceed, I’m confident this state will be producing around 60 million tonnes of LNG by 2020,” Barnett says. “That will put this state second only to the Gulf state of Qatar and in fact may even exceed Qatar.”
The state’s biggest problem in coming years is likely to be a skills shortage.
Sydney and New South Wales:
Sydney delivers solid data amid the uncertainty
Sydney’s market is generally hanging solid amid all the economic uncertainty and low consumer confidence. Sydney was one of only two capital cities to deliver a rise in its House Price Index in the June Quarter, albeit a minor 0.4% increase (the only other city to rise was Canberra).
Over the past 12 months, Sydney’s House Price Index has dropped less than 1%, which is the third best result among the eight capitals, according to data from the Australian Bureau of Statistics.
Sydney has also delivered some growth in residential rentals. The Rental Report for the June Quarter from Australian Property Monitors shows a 2.1% annual rise for house rents and an increase of 3.4% for apartment rents.
None of that is earth-shattering stuff, but it does represent a steady performance in the current economic climate.
The key for growth in Sydney’s markets is the new State Government, which needs to deliver on promises to facilitate infrastructure construction.
Some real estate analysts, including Dr Andrew Wilson from Australian Property Monitors, have a fairly bullish forecast for Sydney real estate. If they’re right it will long overdue, because Sydney has been the under-performer among the major cities over the past ten years.
The real bright lights in the New South Wales property market continue to be found outside of the metropolitan area.
The Hunter region has one of the nation’s strongest economies, with plenty of infrastructure being built, including the $1.5 billion Hunter Expressway and upgrades of rail links. Part of the Hunter’s economy is based on coal mining and power generation, but there’s little indication from the industry that it will be greatly affected by the carbon tax policy.
The north-western region including Gunnedah, Narrabri and Moree is moving into boom times, with existing economic strengths like agriculture and tourism being supplemented by new resources activity, particularly coal seam gas. A Chinese mining company spending over $200 million buying up farms near Gunnedah to explore for coal is a sign of changing times in this region (I’m not saying it’s a good thing, I’m just telling you that it’s happening).
Goulburn in the growth corridor between Sydney and Canberra is the kind of regional centre I like because there’s diversity to its economy, including a police training college and a major prison. And its economy is acquiring an additional strand of significance: at least eight wind farm are in planning for this region and the $10 billion renewable energy package that comes with the carbon tax means that this is likely to be an industry of some significance for Goulburn.
Profit from folly, rather than participate in it
Perhaps the most quoted businessman alive on the planet today is US billionaire Warren Buffett. I often refer to Buffett when I speak at conferences and seminars.
Buffett has made himself one of the world’s wealthiest people by acting counter-cyclically. Like many successful people, he buys when everyone is selling.
Buffett says: “Profit from folly, rather than participate in it.”
You can be sure that amid all the panic selling on share markets recently, Buffett was out there buying strategically.
Anyone wishing to profit in the Australian property market should be thinking and acting with a similar philosophy.
Those with the nous to ignore the background static (price bubble fears, interest rates speculation, carbon tax scares, etc) and act independently of the herd can profit from the current circumstances in the property market.
There are many opportunities to buy well in a down market and be set up for future gains.