Market insights from Ironfish Director, Property & Research, Grant Ryan
As we begin a new year, many investors are wanting to know what 2019 may hold for the market and how this may impact their portfolio and potential investment decisions over the next 12 months.
At Ironfish, we see three main challenges within the current market which property investors will face. These include: access to finance, general market uncertainty and the influence of mainstream media.
From our experience as investors and working in this industry for nearly 20 years, we can also identify the opportunities that will emerge from these challenges. This article aims to explore these challenges and opportunities in greater detail as well as showcase some key aspects to watch out for in each of our major capital cities.
1. ACCESSS TO FINANCE
The biggest challenge which has impacted property investors have been the restrictions placed on purchaser finance. The nation’s prudential regulator, APRA, actively drove the recent market slowdown, especially in Sydney and Melbourne. This was achieved by limiting investment housing loan growth. This trend is expected to continue in the short term, with the Royal Commission prompting further public scrutiny on lending practice thereby heightening speculation on further restrictions to purchaser finance.
Investors continue to benefit from a low-interest rate environment with the RBA choosing to keep rates on hold at 1.5% for the 28th consecutive month. As a result, the current mortgage rates on offer are trending at historic-lows. Major banks continue to compete aggressively for market share, particularly for borrowers with strong financial profiles, offering attractive terms and discounted rates for new loans. With less investors in the market, today’s tightened finance environment favourably means less buying competition for those who are able secure finance at an attractive rate and surround themselves with the right team of professionals.
2. GENERAL UNCERTAINTY
General uncertainty in the market has been driven by several factors. At a global level, the world continues to watch what is happening with China’s economy as well as US and China trade relations and movements to US interest rates. Domestically, the general feeling of uncertainty has been underpinned by recent price adjustments in Sydney and Melbourne, limited access to finance and news of potential oversupply in certain areas. Furthermore, with the upcoming federal election just around the corner, debate about the actual impact and benefits to changing negative gearing and capital gains rules at this point in the current market cycle, has intensified.
In recent history, we have had several events which have heightened market uncertainty such as the GFC and the end of the mining boom. Irrespective, property as an asset class has continued to perform with solid capital and rental growth recorded over the long-term. According to SQM, the national residential vacancy rate improved to only 2% for October 2018 – the lowest rate since early 2014. All major capital city markets continue to have a tightening vacancy rate trend over the past 12 months except for Sydney. Additionally, the October 2018 national trend unemployment rate improved to 5.1% – the lowest unemployment rate since early 2012. Solid economic growth continues to be driven by the nation’s major infrastructure investment pipeline. With more buyers sitting on the sideline feeling uncertain about the market, many markets around the country now have a lack of buyer competition, and hence there is greater opportunity to secure a quality property in these markets.
3. THE MAINSTREAM MEDIA
The mainstream media has continued to hype a doom-and-gloom narrative, with much of the focus being around the recent pullbacks in Sydney and Melbourne. However, when looking back at the data, it is evident that investors who purchased early in the cycle would have done well. Sydney increased by 85% between early 2012 and early 2017; and Melbourne increased by 74% between mid-2013 and mid-2018. Had investors relied on media headlines back in the early 2010s, they would have missed out on the growth that Sydney and Melbourne generously offered. The same would have been the case for the respective strong periods of growth experienced in Adelaide, Brisbane and Perth.
With underlying fundamentals such as population growth, economic performance and jobs creation remaining sound, the negative sentiment in the market presents a great opportunity for long-term investors. In effect, the media has played a key role in creating buyers markets in areas where fundamentals continue to remain solid. Cyclically of the five major capital cities, Brisbane and Perth are best positioned for growth in the next 5 years – not surprisingly, these are also the 2 markets where the media has been most negative over the past few years.
Now let’s review what is happening in each of the major capital cities.
- Defence Investment: The South Australian capital is preparing for a $90 billion defence investment with upcoming ship-building programs expected to generate 25,000 jobs and increase the state population by up to 50,000 people, according to the Defence Industry Minister, Christopher Pyne.
- Innovation Economy: Adelaide continues to invest heavily across a number of industries including technology, tourism and renewable energy. Major public-private initiatives such as the development of the world’s largest lithium-ion battery with Tesla and subsequent developments in delivering the world’s largest virtual power plant have placed Adelaide at the forefront of energy policy, with many now billing the city as Australia’s unequivocal leader in ‘green infrastructure’
- Population Growth: More and more interstate investors are tipping Adelaide to be the next investment hotspot in the coming cycle. In addition to strong affordability and lifestyle drivers, Adelaide is set to benefit from stronger population growth off the back of major infrastructure projects and a state government that has placed population growth as a key priority.
- Interstate Migration: Brisbane continues to enjoy solid population growth. This has come off the back of strong net interstate migration levels which are currently trending at 10-year highs, making Queensland the number one destination for interstate migrants.
- Infrastructure Boom: Brisbane is in the middle of a major $15 billion infrastructure boom, supported by a Government that is focussed on delivering the long-term infrastructure support necessary for Brisbane’s growing population.
- Affordability: More and more people are moving towards the Sunshine State capital due to affordability. The most recent CoreLogic data showed that Sydney’s median house price was $973,920 whereas Brisbane was only $563,754; effectively representing a 73% premium for Sydney. However, incomes remained comparable between the two cities with Sydney’s income only at a 10% premium to Brisbane. This difference has translated to more and more people moving north to take advantage of Brisbane’s affordability.
- Top Performing State Economy: Melbourne’s economy continues to perform at record-levels with Victoria recently ranking first for economic performance in the July 2018 Commbank State of the States report. This achievement marked the first time ever in the report’s 9-year quarterly history that Victoria would take top spot. This was largely driven by construction work undertaken to accommodate the state’s booming population. Victoria again won top spot in the latest release of the report in October 2018.
- Population Growth: The Victorian capital continues to experience surging demand off the back of record-level population growth. Melbourne added over 125,000 people in the 2017 financial year, leading all cities. The ABS estimated that Melbourne will surpass Sydney as the most populous city in the country by 2029.
- Need to Be Selective: The Melbourne housing market has pulled back and is moving towards a buyers’ market. However, affordable property continues to be in high demand as evidenced by recent data showing that property under $851,000 has grown at 2.7% over the past 12 months, whilst property valued over $851,000 has pulled back by 2.85%.
- Counter-cyclical Opportunity: With steady signs of positive change, Perth represents a counter-cyclical opportunity for investors looking to secure a quality property prior to the market’s next growth phase. One of the most promising signs signalling a recovery has been Perth’s vacancy rate which has tracked down to 3.3% for October 2018, a significant improvement from the December 2016 high of 5.5%.
- Infrastructure: According to analysis by CBRE, $13 billion worth of infrastructure investment outside of the resources industry has been earmarked for the Western Australian capital over the next five years. Major projects such as the Perth METRONET program’s Yanchep rail extension project and the Thornlie-Cockburn Link project are slated to commence construction next year. Combined, these two projects represent $1.1 billion worth of investment and are expected to deliver 15,000 jobs.
- Improved Mining Outlook and Economic Growth: The Perth economy is expected to benefit from multi-billion-dollar tailwinds offered by lithium mining prospects. Global demand for the metal is set to rise due to its application in renewable energy storage, next-generation batteries and electric vehicle production. Further, according to SGS Economics and Planning, the Perth economy grew at its fastest rate in five years over the 2018 financial year; another welcomed sign for the market.
- Population Growth: Sydney continues to be the leading destination of choice for international migration. Sydney added over 100,000 people over the 2017 financial year and the population continues to grow at strong rates, particularly in up and coming pockets such as South West Sydney and North West Sydney which are set to benefit from projects such as the $5.3 billion Western Sydney Airport, which is due to open in 2026, and the $8.3 billion Sydney Metro North West rail, which is due to open in the second quarter of 2019 and come in $500 million under budget.
- Infrastructure Boom: Sydney will continue to benefit from the once-in-a-generation infrastructure boom which has provided strong jobs growth and improved employment fundamentals. For example, the most recent data released by the ABS, indicated that Sydney’s October 2018 unemployment rate was the lowest it had been in 11 years.
- Need to Be Selective: As has been publicly reported, the Sydney market has softened. However, certain pockets have maintained their values better than others. With Sydney prices continuing to adjust after a period of rapid growth, buyers need to more discerning. One of the upsides of the recent pullback is that Sydney is now a buyers’ market meaning buyers have choice. This is a welcomed change to the market as it has been a strong sellers’ market since early 2011.
Overall, the underlying long term fundamentals for property in our capital city markets remains sound, largely driven by population growth, strengthening economic growth, jobs creation and infrastructure investment. However, the challenges of finance, market uncertainty and the media continue to be felt in the market nationally, not just in Sydney and Melbourne.
The upside for investors is that this has created buyers markets in areas where localised market fundamentals remain solid. Consequently, today’s property market provides opportunity for investors to add quality properties to their portfolios – providing they are actively researching and assessing opportunities.