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The first part of 2008 has been a fascinating time for residential property due to the impact of the global credit crisis, a significant share market correction and more interest rate rises. However, it has not been all bad news for investors because the above 3 events have in fact influenced the residential property market in positive ways and when combined with low unemployment of 4.3% nationally and a surprisingly robust business sector have driven both capital values and rental returns higher. Data from the March quarter shows a slight easing in sales activity due to the interest rate rises but the property market remains steady with an incredibly robust rental market. It is important to note that for the past decade, a chronic imbalance between supply and demand for property has been building such that the latest ANZ Housing snapshot summarized the situation as follows: “Underlying demand for homes (which drives growth) will exceed 180,000 in 2007-2008 while supply will be restricted to 145,000 and by 2009 the shortfall in the housing market will approach an unprecedented 200,000 dwellings.” In Residex’s latest quarterly reports, CEO John Edwards states that we “have now entered a new period of house price growth” which may not see a repeat of the 20% growth figures seen in Melbourne, Adelaide and Brisbane last year but there will be a continuation of sustained growth throughout the market – and according to Residex - that even includes the Perth market which was previously treated with caution. Not all commentators agree on the future prospects for WA but providing the resource boom continues, it is likely that WA house prices will at least remain steady and any future upward moves would be moderate rather than spectacular. For many people the great Australian dream of owning your own home has slipped further out of reach. PRD Nationwide’s Quarterly Property and Economic Report to March 2008 reported that home loan affordability is now at its lowest level in 22 years. According to the REIA, NSW is still the least affordable state for homeowners, followed by Queensland. However with strong price growth in most Eastern states, affordability has worsened so that more people are now forced to stay in the rental market - which is good news for property investors as vacancy rates drop and rents increase. The largest reduction in affordability for 2007 was in South Australia which declined by 10.8% last year. Whilst the 2008 interest rate rises seem to have slowed things down a bit in the short term, these rises have had more negative impact on owner occupiers rather than investors who have offset increased rates by benefiting from the sharp rental increases which inevitably occur in periods of rising rates. As rates rise, less people tend to buy a home to live in and this puts more upward pressure on the availability and price of rental properties - driving vacancy rates to new lows such as many Australian markets are experiencing right now. One thing that most people don’t realize is that fixing a supply issue takes a period of years and not months and so the rental affordability situation is going to get much worse (and better for investors) before the availability of a significant number of new rental properties come into the market. It takes years not months to get a new development designed, approved, built and delivered to market. Now is the time for what John Edwards calls “the savvy property investor” which is an investor who understands that this is a market of opportunity. In May, Westpac reported in their Residential Property Monitor that the predicted change in construction costs for 2008 will range between 4.2% for Sydney to 9.5% in Perth with higher costs expected across all states. This is another important factor that drives prices of new properties upward and inevitably pulls the rest of the market with it. The population of all states grew in 2007 however Queensland maintains its title of the largest population growth with 90,000 people moving there in 2007. They were followed by Victoria with almost 77,000 and New South Wales with almost 72,000. According to property commentator Michael Matusik, Queensland has been losing its market share in terms of population growth to other states over the past 5 years and has gone from 39% of Australia’s population growth 5 years ago to 29% last year. It is still number one though, followed by Victoria. Australia - City by City Analysis Adelaide Adelaide was a star performer in the residential property market in 2007 with capital growth of over 20%. The South Australian capital continues to experience good growth and a major driver of this continued growth is Adelaide’s relative affordability when compared to the rest of Australia. According to Residex, it still has the second lowest median house value of $368,000 with only Hobart having a cheaper median house price. The Real Estate Institute of SA records the median price for Adelaide houses at $362,500 which is almost on par with the Residex figure. The economic outlook for the state is quite positive and with continued growth in South Australia’s resources sector and scope for further mineral exploration projects and expenditure in the near future, Adelaide is poised to consolidate its economic prospects over the medium to long term. The ANZ April Housing snapshot predicts that the additional supply of new properties to the market will be absorbed very quickly with strong population growth that has run in excess of 1% for some time. The Resource boom in SA has created significant new employment and this is expected to continue to attract new renters and purchasers to the Adelaide market. According to the REIA, vacancy rates are still low at around 1.7% and Residex reports that rents for units are now approaching a 5% yield again in spite of recent property value increases. Brisbane In March 2008, Queensland had the second lowest unemployment rate of all States of just 3.6%. It also grew faster than any other state, recording a 90,000 net increase in population last year (which incorporates net migration arrivals and births). And the population of Brisbane continues to grow at a faster rate than all other capital cities except Perth with Residex predicting that it will soon surpass the 2,000,000 milestone. Brisbane is still relatively affordable compared to other states with a median value still under $450,000 however prices are continuing inevitably upward although more aggressively in the lower price ranges where there is the biggest demand. Rents have also risen substantially over the 12 months to March 08, with Residex reporting an identical increase in rents for both houses and units of 14.29%. This identical statistic strengthens the assertion that there is solid demand for all types of housing across most locations. The Courier Mail recently printed a Michael Matusik warning that up to 40 per cent of Brisbane households will be forced to rent by 2011 because of the housing affordability crisis and that a tighter market meant some renters might start to negotiate leases running for several years instead of traditional six-month terms. Mr. Matusik believed simultaneous rapid price growth in the residential and rental markets meant more consumers would be forced to become long-term renters, unable to save for house deposits after forking over huge amounts in rent. Melbourne Strong population growth should continue to fuel demand for new housing in Melbourne and as affordability continues to decline, rents should increase further this year across Melbourne too. The Age recently reported that 1500 people each week are expected to move to Melbourne with experts predicting that the population will hit 6.2 million by 2020 – a decade earlier than previously forecast. In the 12 month period from the end of March 07 to the end of March 08, the median unit price rose by 19.4% to $366,000 (behind only Sydney and Perth) and the median house price increased by 20.03%. This almost identical growth for both houses and units (like Brisbane) shows the strength of the overall market and scale of demand throughout Melbourne for all types of property. Residex reported that rents went up by 18.64% for houses and 13.21% for units for the 12 month period from end of March 07 to the end of March 08. And with low vacancy rates, and first homebuyers still cautious, there is plenty of room for additional rental growth in 2008 which is good news for investors. The Australian Financial Review reported on 23rd May that the vacancy rate within 4 kilometers of the CBD (which includes suburbs like Docklands, Southbank, Carlton and South Melbourne) halved in April to 0.3%. Perth PRD Nationwide recently reported in their March 2008 Quarterly Economic & Property Report that Western Australia recently took over the “fastest growing state” title from Queensland with a population growth rate of 2.4% compared to Queensland’s 2.2% despite the fact that Queensland still had the greatest actual number of people moving there. With an unemployment rate that has dropped to an unprecedented 2.8%, it is not surprising that 49,000 people flocked to Western Australia - the epicenter of the Resource boom last year. Commentators cannot agree exactly on Perth’s housing market with the ANZ April Housing snapshot stating that “despite this stellar [economic] performance the residential market has run out of steam.” Residex however believes that the only way the Perth market will move is up and that the fundamentals of growing demand and limited supply will only become more extreme. Everyone though seems to agree that there won’t be a significant correction in prices with the strong economic situation creating a solid “floor” under the currently new and high house price levels. One fact is clear and that is that providing the Resource boom continues to drive the WA economy and the current population increase rates remain unchanged that the Perth housing market will perform strongly. If however either of these factors change, then investor beware… Rents for Perth units went up by 18.5% last year and houses by 13.8% which demonstrates the lack of adequate rental properties in the market. Rents will continue to climb due to increased demand but may move even faster due to the potentially transient nature of people moving into Western Australia for work reasons and who tend to rent after first arriving. Sydney According to Residex, rental yields for Sydney units are now at 5% and climbing. They are the strongest of all the major capital cities, and second only to Canberra and Darwin. Also the median price of Perth units have now overtaken Sydney as the most expensive in Australia at $409,500, so Sydney is starting to look extremely attractive again to the investor market – particularly when combined with excellent rental returns. According to ANZ in their April Housing snapshot, Sydney’s vacancy rate has fallen to an historic low of 0.8% in March 2008 and points strongly to sustained high rental growth. Statistics can be sometimes be confusing however ‘advertised’ rentals were up 21.6% according to ANZ, whilst Residex records the actual increase at 10%. Either way, with a chronic supply problem in NSW and interest rates remaining at their current levels it is hard to see the rental market do anything but go substantially higher in 2008 – the only question is how much? Sydney needs at least 29,000 new homes a year to meet demand from a growing population and one of the biggest issues facing the Sydney market is not only the lack of stock but the lack of quality apartment stock available in the market, as many developers are cautious about launching new projects right now. And as is proven every property cycle – not all properties are equal when it comes to performance and therefore profit. Sydney is coming back into favor for investors now that other previously substantially cheaper cities have now increased their median values to not that far behind Sydney, and with Perth now just behind Sydney’s house price and with the country’s most expensive median apartment price. New Zealand – Quarterly Residential Property Market (April 2008) The national median NZ house price surprisingly rose in March by $11,500 to take it to $349,500 whilst the number of days it takes for a property to sell (after listing on the market) went from 40 to 42 days. It is important to note though that ANZ Bank reported in its recent Economic Review of the New Zealand property market that “considerable caution must be taken in interpreting the results considering the timing of Easter, and changes in the mix of properties sold.” The latter comment is a reflection of the sharp drop in “cheaper” properties listed for sale during this period. It is always difficult to interpret statistics and particularly when they are quoted and reported differently from different sources. And this is particularly so with the current market where it seems that some areas are doing well whilst others are really struggling. In spite of the above result, it is widely acknowledged that the New Zealand residential property market is still in the process of correcting itself as a result of the last of four interest rate rises late last year started to bite. Deutsche Bank chief economist Darren Gibbs recently stated that he still expected official cuts in interest rates in late 2008. He was positive that despite scheduled tax cuts and other economic factors that there would still be justification for an official cut in interest rates later this year. Once this happens the housing market should respond quite quickly – the only question is when? There are positives for long term property investors though because official interest rates are put up to slow down a booming economy. And what inevitably happens is that less people buy their own home to live in and then are forced to stay in the rental market because it is “cheaper”. Demand for rental property therefore grows, supply diminishes and vacancy rates decline to the point that rents are finally forced up – which is great news for property investors. These rental increases have not yet been widely reported but we can expect more reports of these surfacing throughout 2008 and particularly into 2009. Figures published in March 2008 by Statistics New Zealand showed that total NZ construction figures were up to December 2007. Residential building figures slipped slightly however as a strong sign for the NZ economy,
It is important to note that for the past decade, a chronic imbalance between supply and demand for property has been building such that the latest ANZ Housing snapshot summarized the situation as follows:
“Underlying demand for homes (which drives growth) will exceed 180,000 in 2007-2008 while supply will be restricted to 145,000 and by 2009 the shortfall in the housing market will approach an unprecedented 200,000 dwellings.”
In Residex’s latest quarterly reports, CEO John Edwards states that we “have now entered a new period of house price growth” which may not see a repeat of the 20% growth figures seen in Melbourne, Adelaide and Brisbane last year but there will be a continuation of sustained growth throughout the market – and according to Residex - that even includes the Perth market which was previously treated with caution. Not all commentators agree on the future prospects for WA but providing the resource boom continues, it is likely that WA house prices will at least remain steady and any future upward moves would be moderate rather than spectacular.
For many people the great Australian dream of owning your own home has slipped further out of reach. PRD Nationwide’s Quarterly Property and Economic Report to March 2008 reported that home loan affordability is now at its lowest level in 22 years. According to the REIA, NSW is still the least affordable state for homeowners, followed by Queensland. However with strong price growth in most Eastern states, affordability has worsened so that more people are now forced to stay in the rental market - which is good news for property investors as vacancy rates drop and rents increase. The largest reduction in affordability for 2007 was in South Australia which declined by 10.8% last year.
Whilst the 2008 interest rate rises seem to have slowed things down a bit in the short term, these rises have had more negative impact on owner occupiers rather than investors who have offset increased rates by benefiting from the sharp rental increases which inevitably occur in periods of rising rates. As rates rise, less people tend to buy a home to live in and this puts more upward pressure on the availability and price of rental properties - driving vacancy rates to new lows such as many Australian markets are experiencing right now. One thing that most people don’t realize is that fixing a supply issue takes a period of years and not months and so the rental affordability situation is going to get much worse (and better for investors) before the availability of a significant number of new rental properties come into the market. It takes years not months to get a new development designed, approved, built and delivered to market. Now is the time for what John Edwards calls “the savvy property investor” which is an investor who understands that this is a market of opportunity.
In May, Westpac reported in their Residential Property Monitor that the predicted change in construction costs for 2008 will range between 4.2% for Sydney to 9.5% in Perth with higher costs expected across all states. This is another important factor that drives prices of new properties upward and inevitably pulls the rest of the market with it.
The population of all states grew in 2007 however Queensland maintains its title of the largest population growth with 90,000 people moving there in 2007. They were followed by Victoria with almost 77,000 and New South Wales with almost 72,000. According to property commentator Michael Matusik, Queensland has been losing its market share in terms of population growth to other states over the past 5 years and has gone from 39% of Australia’s population growth 5 years ago to 29% last year. It is still number one though, followed by Victoria.
Australia - City by City Analysis
Adelaide
Adelaide was a star performer in the residential property market in 2007 with capital growth of over 20%. The South Australian capital continues to experience good growth and a major driver of this continued growth is Adelaide’s relative affordability when compared to the rest of Australia. According to Residex, it still has the second lowest median house value of $368,000 with only Hobart having a cheaper median house price. The Real Estate Institute of SA records the median price for Adelaide houses at $362,500 which is almost on par with the Residex figure.
The economic outlook for the state is quite positive and with continued growth in South Australia’s resources sector and scope for further mineral exploration projects and expenditure in the near future, Adelaide is poised to consolidate its economic prospects over the medium to long term.
The ANZ April Housing snapshot predicts that the additional supply of new properties to the market will be absorbed very quickly with strong population growth that has run in excess of 1% for some time. The Resource boom in SA has created significant new employment and this is expected to continue to attract new renters and purchasers to the Adelaide market. According to the REIA, vacancy rates are still low at around 1.7% and Residex reports that rents for units are now approaching a 5% yield again in spite of recent property value increases.
Brisbane
In March 2008, Queensland had the second lowest unemployment rate of all States of just 3.6%. It also grew faster than any other state, recording a 90,000 net increase in population last year (which incorporates net migration arrivals and births). And the population of Brisbane continues to grow at a faster rate than all other capital cities except Perth with Residex predicting that it will soon surpass the 2,000,000 milestone. Brisbane is still relatively affordable compared to other states with a median value still under $450,000 however prices are continuing inevitably upward although more aggressively in the lower price ranges where there is the biggest demand.
Rents have also risen substantially over the 12 months to March 08, with Residex reporting an identical increase in rents for both houses and units of 14.29%. This identical statistic strengthens the assertion that there is solid demand for all types of housing across most locations. The Courier Mail recently printed a Michael Matusik warning that up to 40 per cent of Brisbane households will be forced to rent by 2011 because of the housing affordability crisis and that a tighter market meant some renters might start to negotiate leases running for several years instead of traditional six-month terms. Mr. Matusik believed simultaneous rapid price growth in the residential and rental markets meant more consumers would be forced to become long-term renters, unable to save for house deposits after forking over huge amounts in rent.
Melbourne
Strong population growth should continue to fuel demand for new housing in Melbourne and as affordability continues to decline, rents should increase further this year across Melbourne too. The Age recently reported that 1500 people each week are expected to move to Melbourne with experts predicting that the population will hit 6.2 million by 2020 – a decade earlier than previously forecast. In the 12 month period from the end of March 07 to the end of March 08, the median unit price rose by 19.4% to $366,000 (behind only Sydney and Perth) and the median house price increased by 20.03%. This almost identical growth for both houses and units (like Brisbane) shows the strength of the overall market and scale of demand throughout Melbourne for all types of property.
Residex reported that rents went up by 18.64% for houses and 13.21% for units for the 12 month period from end of March 07 to the end of March 08. And with low vacancy rates, and first homebuyers still cautious, there is plenty of room for additional rental growth in 2008 which is good news for investors. The Australian Financial Review reported on 23rd May that the vacancy rate within 4 kilometers of the CBD (which includes suburbs like Docklands, Southbank, Carlton and South Melbourne) halved in April to 0.3%.
Perth
PRD Nationwide recently reported in their March 2008 Quarterly Economic & Property Report that Western Australia recently took over the “fastest growing state” title from Queensland with a population growth rate of 2.4% compared to Queensland’s 2.2% despite the fact that Queensland still had the greatest actual number of people moving there. With an unemployment rate that has dropped to an unprecedented 2.8%, it is not surprising that 49,000 people flocked to Western Australia - the epicenter of the Resource boom last year.
Commentators cannot agree exactly on Perth’s housing market with the ANZ April Housing snapshot stating that “despite this stellar [economic] performance the residential market has run out of steam.” Residex however believes that the only way the Perth market will move is up and that the fundamentals of growing demand and limited supply will only become more extreme. Everyone though seems to agree that there won’t be a significant correction in prices with the strong economic situation creating a solid “floor” under the currently new and high house price levels. One fact is clear and that is that providing the Resource boom continues to drive the WA economy and the current population increase rates remain unchanged that the Perth housing market will perform strongly. If however either of these factors change, then investor beware…
Rents for Perth units went up by 18.5% last year and houses by 13.8% which demonstrates the lack of adequate rental properties in the market. Rents will continue to climb due to increased demand but may move even faster due to the potentially transient nature of people moving into Western Australia for work reasons and who tend to rent after first arriving.
Sydney
According to Residex, rental yields for Sydney units are now at 5% and climbing. They are the strongest of all the major capital cities, and second only to Canberra and Darwin. Also the median price of Perth units have now overtaken Sydney as the most expensive in Australia at $409,500, so Sydney is starting to look extremely attractive again to the investor market – particularly when combined with excellent rental returns.
According to ANZ in their April Housing snapshot, Sydney’s vacancy rate has fallen to an historic low of 0.8% in March 2008 and points strongly to sustained high rental growth. Statistics can be sometimes be confusing however ‘advertised’ rentals were up 21.6% according to ANZ, whilst Residex records the actual increase at 10%. Either way, with a chronic supply problem in NSW and interest rates remaining at their current levels it is hard to see the rental market do anything but go substantially higher in 2008 – the only question is how much?
Sydney needs at least 29,000 new homes a year to meet demand from a growing population and one of the biggest issues facing the Sydney market is not only the lack of stock but the lack of quality apartment stock available in the market, as many developers are cautious about launching new projects right now. And as is proven every property cycle – not all properties are equal when it comes to performance and therefore profit.
Sydney is coming back into favor for investors now that other previously substantially cheaper cities have now increased their median values to not that far behind Sydney, and with Perth now just behind Sydney’s house price and with the country’s most expensive median apartment price.
New Zealand – Quarterly Residential Property Market (April 2008)
The national median NZ house price surprisingly rose in March by $11,500 to take it to $349,500 whilst the number of days it takes for a property to sell (after listing on the market) went from 40 to 42 days. It is important to note though that ANZ Bank reported in its recent Economic Review of the New Zealand property market that “considerable caution must be taken in interpreting the results considering the timing of Easter, and changes in the mix of properties sold.” The latter comment is a reflection of the sharp drop in “cheaper” properties listed for sale during this period. It is always difficult to interpret statistics and particularly when they are quoted and reported differently from different sources. And this is particularly so with the current market where it seems that some areas are doing well whilst others are really struggling.
In spite of the above result, it is widely acknowledged that the New Zealand residential property market is still in the process of correcting itself as a result of the last of four interest rate rises late last year started to bite. Deutsche Bank chief economist Darren Gibbs recently stated that he still expected official cuts in interest rates in late 2008. He was positive that despite scheduled tax cuts and other economic factors that there would still be justification for an official cut in interest rates later this year. Once this happens the housing market should respond quite quickly – the only question is when?
There are positives for long term property investors though because official interest rates are put up to slow down a booming economy. And what inevitably happens is that less people buy their own home to live in and then are forced to stay in the rental market because it is “cheaper”. Demand for rental property therefore grows, supply diminishes and vacancy rates decline to the point that rents are finally forced up – which is great news for property investors. These rental increases have not yet been widely reported but we can expect more reports of these surfacing throughout 2008 and particularly into 2009.
Figures published in March 2008 by Statistics New Zealand showed that total NZ construction figures were up to December 2007. Residential building figures slipped slightly however as a strong sign for the NZ economy,