With the beginning of a New Year, let’s take a look at how each of the capital city residential markets performed in 2014 and what we are likely to see in 2015, particularly in the Melbourne, Brisbane and Sydney residential markets.
The Australian housing market continued its trend of growth in 2014, despite a softening resource sector and a moderate GDP performance. That demand across the country is being underpinned by “upgraders” and by high levels of residential investment.
In 2014, very few got the cash rate predictions correct. It remained unchanged at 2.50% and, with some top economists tipping at least one if not two rate cuts in 2015, that low rate is likely to continue to drive house price momentum further during the year – though more in some capital cities than others.
Latest published sources have shown mixed results across capital city residential markets throughout 2014. There was sizeable median house price growth in Sydney (13%+) and Melbourne (8+%), and strengthening price performances in Brisbane (6%+) and Hobart (5%+). However, price growth was moderate in Adelaide (2%+), Perth (1%+), Darwin (1%+) and Canberra (1%+).
Median unit price growth was sizeable in Sydney (8%+) and Brisbane (4%+), and moderate in Melbourne (3%). However, all other capital cities experienced negligible price growth of around 1%, except Darwin and Adelaide which both recorded declines in the order of 1%-2%.
After the standout performances in Melbourne and Sydney, we are expecting investor interest to migrate away from these two largest capital cities, where we are seeing affordability concerns, low rental yields and slowing capital growth expectations.
The concerns in the Melbourne and Sydney markets are continuing to fuel investor demand within the Brisbane residential market, where the growth cycle isn’t as advanced and capital values are starting to make up for their relatively weak medium term cycle.
Brisbane continues to offer the best prospects for capital growth potential after relatively subdued growth levels over the past 4 or 5 years. The initial recovery has been underpinned by rising rates of net interstate migration, employment growth and demographically-induced changes to household composition and tenure, which are likely to continue to fuel rising dwelling demand.
We are witnessing increasing demand across the inner Brisbane suburbs, particularly for well-located, blue-chip property. Estate agents throughout the city are reporting a shortage of stock as they struggle to get enough quality listings. Buyer demand is strengthening and we continue to see a shift from private sale to auction – a clear sign the market is moving in a positive direction and into a phase of growth.
There has been a fundamental shift in the marketplace over the past 6 months, with rents softening and solid price growth in the second half of this calendar year, driven by the points above. This trend is likely to continue well into 2015.
The past 12 months have exceeded most pundits’ expectations for Melbourne. Over the past five years median house price growth has outperformed the long-term (10 year) average.
However, signs are already emerging in Melbourne that buyer activity is moderating as the end of the year approaches. The market remains relatively ‘patchy’, with a mix of some bumper results and some very lacklustre ones.
Increasing willingness by vendors to sell before auction is another sign that buyer depth is not as strong as it was and that the market may be starting to taper off.
This suggests a slowing of growth may be around the corner throughout Melbourne. Having said this, it is unlikely we will witness negative growth over the coming 12 months – just more of a balanced market.
Pockets of Melbourne’s inner and middle ring suburbs, where demand remains relatively buoyant and growth is expected to remain constant, appear to represent the most solid purchasing propositions into 2015 – provided the right type of property and location is selected.
However, the inner city’s apartment market overall is in a state of oversupply and is likely to remain that way for the foreseeable future. Investors should stay away from this segment of the market.
Overall, affordability in Melbourne is becoming alarmingly challenging and is now below 2007 levels. While prices continued to grow in Melbourne during 2007, the market was eventually slowed by the interest rate rises that followed.
Buyers need to be cautious to avoid overpaying in an already overheated market. We witnessed an auction this month in Hawthorn where a basic, unrenovated 1970s two-bedroom apartment that had been advertised at $550,000+ was placed on the market at $600,000 and sold for more than $740,000 – well above justifiable market parameters. It certainly made for one very happy vendor.
The prospect for further price growth, and the likelihood of interest rates rising by 2017 as forecast by BIS Shrapnel, indicate that affordability levels are likely to worsen in Melbourne to levels last seen in 2008 and 2010. In both cases these levels were followed by significant price corrections.
When you add these conditions to dwindling investor demand (due to a decline in rental yields to the lowest levels in the country), along with a high unemployment rate, there is the potential for another price correction. This will pose the greatest risk to the Melbourne market overall throughout 2015 and into 2016.
Sydney has been the standout market for capital gains in Australia over the past 12-18 months, with outstanding growth making up for a relatively weak long-term growth cycle. This has been driven by a significant deficiency in dwelling supply, rising wages growth, low unemployment and a stimulatory interest rate environment.
Over the past two years, median house price growth has outperformed the long-term (10 year) average, with the inner city and middle ring suburbs being the standout performers.
We started to see signs the Sydney market was cooling throughout the second half of 2014. In our view, the 2015 market is unlikely to show the same level of capital gains we saw throughout 2013 and 2014. Increasing unemployment, affordability pressures and tightening rental yields (to the second lowest in the country) seem to be slowing buyer demand in Sydney.
From our research, affordability in Sydney in 2014 is getting close to 2002 levels, a period where prices were rising. In our opinion, it appears the Sydney market, particularly city fringe and middle ring dwellings, can accommodate further price growth throughout 2015, as long as interest rate levels are maintained or lowered.
However, the prospect for further price growth, and for interest rate rises by 2017 as indicated by BIS Shrapnel’s forecasts, will take affordability in Sydney to the levels seen in the early-mid 2000s that eventually led to price corrections.
What we haven’t touched on is the ‘noise’ being generated by those calling to rein in investor purchasing, including a review of the supposed great nemesis of housing affordability: Negative Gearing.
In our view, 2015 will be a multifaceted year for real estate. We may see new measures aimed at tempering the supposedly ‘insatiable’ appetite of property investors.
However, we suspect that the Murray Inquiry will be treated much the same way as the Henry Tax Review, where many of those recommendations were tucked away in the bottom of the drawer for another day.