Australian Housing Market 2014

There’s a lot at stake as our property experts gaze into their crystal balls and make some predictions for the coming year.Terry Ryder, property commentator and founder of hotspotting.com.au, believes the 2014 housing market will show “a little bit more sanity” than this year.

“Sydney and Melbourne are experiencing an auction frenzy, which occurs every three or four years, but things will settle down a bit,” he said. “Next year there will be 5%-10% growth in those cities but it will be more evenly spread across the middle and outer-ring suburbs.”

Ryder predicts the big improver will be Brisbane “which is only just starting to gather momentum”. Improvements will be shared across the board. “Brisbane is behind Sydney and Melbourne after being adversely affected by the devastating floods of 2011 and the job losses experienced by 1,500 public servants after the election of the Newman government in March 2012.

“Brisbane is only just now starting to take off and I see much stronger growth there – perhaps over 10%.”

Ryder predicts Perth’s “solid year” – it was growth leader early in 2013 before being overtaken by Sydney – would ensure it carried momentum, especially into the more affordable areas, in 2014.

He said Darwin had “quietened down” after a flying start fuelled by the $34 billion Ichthys liquefied natural gas project off Western Australia. The 820 kilometres pipeline through Darwin has generated jobs and, consequently, the interest of investors and home buyers. The fact that this growth has already happened will mean a more moderate 2014 for the city.

Adelaide, he said, would show moderate growth next year of around 5%, while Hobart – “technically in recession” – will need government input to maximise its opportunities.

Ryder predicts savage job cuts of 10,000 to 15,000 by the Abbott government and an apartment oversupply will have Canberra “struggling” into the New Year.

He believes the next interest rate move will be up – but not possibly before at least the middle of next year – and that a heated Sydney property market is not reason enough to put the brakes on the economy as a whole.

He described a 7% increase in property values overall – after two years of zero growth – as “moderate” and not justifying any dampening tactic by the RBA. “Affordability is the best it’s been in 10 years so there’s no need to put on the brakes in 2014 – even though a lot can happen in six months.”

Regions should do well in 2014, he predicts, especially those with input from resources, such as Narrabrai and Dubbo in NSW, Myles and Rockhampton in Queensland, and Port Lincoln in South Australia. A regional growth leader will be Cairns in Far North Queensland which is making a comeback. Ballarat and Bendigo in Victoria will show growth, boosted by high infrastructure spending and regional rail links.

No-go areas, Ryder warns, are Melbourne’s Docklands, Southbank and CBD, where oversupply has stymied the apartment market. Likewise, oversupply will affect the Queensland coal port of Gladstone, he says. Ryder is not enamoured with regional city Mackay nor tourism hotspot, the Gold Coast. “Stay away from the speculative market,” he warns, “and buy in ‘real’ suburbs with real housing where people have jobs and buy houses to live in. Sales momentum in south-east Queensland is inland – not on the coast.”

Peter Wargent, co-founder of Allen Wargent property buyers in London and Sydney, is a best-selling author and blogger. He said: 

“Our base case sees a number of key variables which will represent headwinds for the property markets in 2014.

“With the unemployment rate still in a moderate uptrend and mining capital investment set to fall, it is likely to be a year of sub-trend economic growth for Australia, and, consequently, we are tending towards a more subdued overall view than you will see elsewhere.

“The RBA has yet to see the material uplift in dwelling construction it had hoped for, so we are expecting to see interest rates remaining historically low, and the next adjustment may yet still be down.”

Sydney is the clear standout, he said. There are likely challenges ahead for Canberra, but Brisbane could be the star.

Wargent’s property price predictions:

  • Canberra -1% to -4%
  • Hobart -1% to 2%
  • Perth 0% to 3%
  • Adelaide 0% to 3%
  • Brisbane 2% to 5%
  • Melbourne 2% to 5%
  • Sydney 6% to 9%

The Melbourne property market in 2014 is likely to maintain – and even build – on the momentum of 2013, according to Monique Sasson, founder of Wakelin Property Advisory.

“2013 was a year of recovery with the values of many properties recouping their losses since the last peak in 2010,” she said.

“We anticipate this trend to continue, and feel the momentum of the past 12 months should carry the Melbourne market upwards in the first half of 2014.

“There will be many Super Saturdays – weekends with a thousand-plus auctions – throughout the autumn of 2014. Nevertheless, robust demand should soak up this supply and see auction clearance rates remain at around 70%.

“In a typical year, the first serious auction weekends don’t occur until mid-or-late February. But the auction season may well open a little earlier than usual in 2014 and we may see a lot of deals in the private treaty market as early as January.

“The greater unknown is what will happen in the second half of 2014.  In large part, the trajectory of the property market will be determined by the Reserve Bank’s attitude to setting monetary policy.

“It may well be the case that the RBA decides to leave interest rates steady throughout most of 2014. If that scenario eventuates, then expect to see Melbourne price growth in 2014 to be strong, and potentially reaching double-digits.

“I doubt the Reserve Bank will be entirely comfortable with this potential outcome – especially if there is a similar result in Sydney.

“Consequently, there is a reasonable likelihood of a modest tightening in monetary policy – perhaps 25 or 50 basis points – from around the middle 2014, or even earlier. This would dampen capital growth in the second half of the year and possibly see a retracting back of some of the earlier 2014 growth.

“Should the Reserve Bank cut rates again, then I expect this will accelerate capital growth in 2014. However, in our view, another rate cut seems unlikely and unwise. As well as fuelling price inflation, cutting rates to 2.25% or lower leaves the Reserve Bank with little in the way of monetary ammunition to respond to any unexpected shocks: such as the banking crisis of 2008.”

This (and the below) article first appeared on Property Observer.REPUBLISHED WITH PERMISSION

 

The strugglers, performers and signs to watch out for in 2014

 By Pete Wargent

Thursday, 30 January 2014

Almost all market analysts appear to believe that Australian property prices will rise in 2014, and looking at the most recent housing finance data I can’t disagree, broadly speaking. In the true spirit of a market cycle, it follows that analysts have suggested that there are likely to be price corrections in 2015.

Despite being a preternaturally optimistic property spruiker, that to me sounds like a reasonable base case scenario. The corrections will, of course, likely be more severe in ‘looser’ markets than those where appropriate stock is tight. However, as always, the 2014 picture will no doubt be fragmented.

Strugglers

I find it hard to picture much in the way of growth in Canberra/ACT, for example, given the likely impact of public sector cutbacks. Asking rents in the city have been plummeting with houses -8.4% year on year and units -5.3% year on year per SQM Research, which suggests that in 2014 prices will follow a downward trajectory. Alan Kohler recently predicted 10% plus growth for Canberra in 2014 – I don’t know what he’s on, but I want some of it! I’ll take a bet that growth is lower than double digits, though, and wouldn’t be surprised if there’s a minus sign or two somewhere in this year’s data.

The optimistic Kohler also predicted 10%+ growth for Darwin! Now, despite having lived in Darwin, I don’t pretend to understand too much about the property markets up there except that the supply always seems to be outrageously tight and rents bordering on the extortionate. In spite of that, after a confounding run over the last decade and more, I’ve heard a number of analysts suggest that 2014 won’t be a great year for property in the city.

I’ll take their word for it, as my track record on working out what goes down in Darwin is mostly balderdash, but I do note that Darwin has been a massive outperformer in terms of 2013 asking rents growth (houses +5.9% year on year for houses and +7.7% year on year units per SQM again). It’s always seasonal in the tropical north, remember. I’m a little ambivalent, so let’s wait and see on the NT capital – Darwin has proved people wrong before and it might again.As I’ve detailed in previous posts, Adelaide has ongoing problems of an economic nature, which is one of the likely reasons why the city’s property market has been the weakest of the major capitals. It’s hard to see that changing too much in 2014 given recent adverse news on the automotive industry, although in certain sectors of the market vacancies appear to be reasonably tight.

On a recent visit to the city, it did appear to me that land release, if it were to be or could be facilitated, could actually bring dwelling prices down (always a big ‘if’ in Australia’s capitals). Recent dwelling price data for Adelaide has yet to show any meaningful pick-up and investor interest, relatively speaking, appears to be quite substantially lower.

Hobart’s economy is fundamentally rather weak, with unemployment in Tasmania comfortably, and for some time, the highest of any state. Yet there are rumours that, with attempts to stimulate the market via grants, the property market may finally turn or have turned the corner. Keep a close eye on SQM’s vendor sentiment index for our best leading indicator on likely changes, though there doesn’t seem to have been a material improvement to date.Regions

As for regional markets, I certainly don’t pretend to follow them all, but note that in my home state of New South Wales any pick-up has been pretty subdued. Asking prices on the NSW south coast, for example, have been flatter than the England cricket team morale for some years (and that’s pretty flat).

Also, as Louis Christopher of SQM Research has been warning lately, watch out for the impact of steepening vacancy rates in certain Queensland towns and mining towns (follow his Twitter account for more details). Bowen(seasonal), MackayGladstoneTownsvilleKarratha and Port Hedland each face challenges of varying magnitudes. Read more about this concerning trend.

Performers

Perhaps unsurprisingly, given the tight nature of our capital city planning regulations, the strongest 2014 capital growth seems likely to be in Sydney’s inner and middle ring suburbs, with Melbourne, Perth and Brisbane vying for second place.

Certainly, the first inspections I’ve been to in 2014 had ‘seemingly interested’ buyers crawling all over them – four dozen people virtually queueing out the door in one instance – and that was midweek! I’m not sure I’d buy the line that the market is going to show slowing growth in the early part of the year just yet.

Impact of low rates

If you hark back a year or so before the market took off there was plenty of reverse-spruiking (if that’s even a thing) which claimed that falling interest rate cuts would not impact the property markets favourably. I have some sympathy with the viewpoint because historically dwelling prices have at times moved in concert with the interest rate cycle (i.e. rate cuts being reflective of a weakening economy and deteriorating confidence and thus prices falling…and vice-versa), and not only in Australia.

However, what looking too much in the rear view mirror fails to observe – and why I disagreed vehemently with that view – is that, certainly in capital city markets such as Sydney where I live, the market is largely now being driven by yield-seeking investors. Perhaps around 50% of mortgages are being written for that sector of the market rather than for home buyers in recent months. And, for that reason, the inner/middle ring capital city markets are interest rate sensitive, whatever anyone tries to claim to the contrary.

What this means, naturally, is that these investor-led markets will likely be sensitive on the way back up as well as on the way down, at least as much in terms of future expectations as actual interest rate hikes. Therefore, much interest will be shown towards the Reserve Bank’s monetary policy in the first half of 2014.For my cautious money, interest rates are going nowhere for some time yet, and with the cash rate stuck at a generational low of just 2.50%, any moderate hikes back towards a neutral cash rate won’t be enough to stall the property markets until at least 2015. That’s my best guess anyway, and, let’s face it, it is a guess.

Lowest rung problems

The downside to all this is that in those four major capital city markets which look set for capital growth, and particularly properties at the bottom end of the market, is that the goalposts are likely to move unfavourably away from them. Typically, one and two bedroom units are also often the dwelling types which appeal to investors.

I have a great deal of sympathy for those genuine home buyers who are stampeded or beaten to the mark by return-seeking investors, and it’s a problem with seemingly few easy answers. I note that there are answers, just not easy ones to implement.

The more heartening news is that the most recent data from Rate City showed that well over four-fifths of today’s mortgage products are now offering 95% LVR products – at least, to those who are able to qualify for them. This presumably helps to bring down the required deposit for those who can obtain such a loan, even in the most expensive metropolis of Sydney, to a more manageable level, with the added bonus that mortgage repayments are at the cheapest levels we’ve seen in a generation right now.

Remember that first timers who are being realistic shouldn’t be looking at buying median-priced property. If, collectively, they are looking at the middle sector rather than the lower rungs of the ladders, then essentially our market dynamics are truly stuffed beyond repair.

I’d caution, though, that if you aren’t in a position to save such a deposit comfortably, it’s probably not a great time to buy, for interest rates close to the zero bound only realistically have room to move significantly in one direction over the medium term, and that’s not down. If saving a deposit is not a manageable task at this point, taking on a 25 year mortgage is probably too risky a financial decision and in the absence of wage increases would leave the potential buyer massively exposed to default as and when the official cash rate reverts to the mean and borrowing rates follow.

Clearly, in today’s markets, the dice are firmly loaded in favour of the dual income household, which is one of the reasons I expect that first home buyers in the future are likely to be in their early 30s rather than 20s.

In a generation we’ve seen a tremendous shift in the labour force towards both young men and women earning salaries, which most people agree is a great thing and representative of progress. The clear downside has been that, in trying to ‘keep up with the Joneses’, we’ve collectively lifted the deposit hurdle by using two incomes instead of one to ‘get ahead’ and to lift dwelling values higher. Unfortunately, with two incomes now as much the norm as the exception, those of us in dual income households really aren’t all that much ahead. Ah, the fallibility of it all.

All of the above said, I do believe that ultimately the market will speak, and as and when property prices cannot be afforded they will not be, and dwelling prices will correct themselves. Presently, our major bank data shows that non-performing loans are running at low levels in Australia. If that changes, I believe, so will market prices.

Monetary policy

Watch out for any changes in the wording in the next policy statement from the Reserve Bank, and expect to see the first meaningful references towards noting a shift in real estate speculative investment activity. The December 2013 statement appeared remarkably flippant towards the sector, seemingly implying that an uplift in prices should encourage more investment (i.e. dwelling construction, rather than speculation) with little in the way of caution expressed.

Here’s what RP Data reckons has happened to dwelling values over the past 12 months. Not much cop in Adelaide, but prices recovering in most other cities to either close to or above previous nominal highs.

In inflation-adjusted terms RP Data’s Cameron Kusher has prices at about 5% below previous respective peaks. I’d probably normally say that an adjustment for household incomes rather than a basket of CPI goodies would be a superior measurement criterion, but given that wages growth has been subdued, the results would probably be fairly similar in any case.

Pete Wargent is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.



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