Where to buy: A state-by-state property market roundup

Where are we in the property cycle and what’s ahead for our real estate markets? That’s one of the most common question I’ve been asked lately.

My many years as a property investor have taught me not to try too hard to predict our markets year by year, but instead to take a long-term view, then allow for cycles around this long-term trend and be prepared for uncertainty, surprises and the unexpected.

However, today I’ll share with you where I see some of our major property markets sitting on the proverbial “property clock”.

Firstly some context

Of course there’s not one property market in Australia. Each state is at its own stage of the property cycle, and each has multiple markets segmented geographically, by type of property and by price point.

Apartments are performing better than houses, luxury homes are not performing as well as median-priced properties, and regional properties are in general underperforming capital city dwellings.

However, there are opportunities in every market.

Remember, you are not buying “the market.” As a strategic investor you would be buying an individual property in that market that you would be happy to hold in your portfolio in the long term and one that was bought sufficiently below intrinsic value so that even if the market fell a bit further, you would still have bought well.

So let’s look at what’s happening around the Australian property markets.

Sydney

While the overall market in Sydney has been flat over the last year, with median house prices down by around 1%, there’s growing confidence in the harbour city.

After languishing for some years, the top end of the market is showing early signs of increasing demand, especially in the eastern and lower north shore suburbs.

While there is also increasing demand for houses in the middle and lower end of the market, over the last few years Sydney’s apartment market has outperformed the housing market, with stronger rental and capital growth.

A good example of this is the strong demand from owner-occupiers for units in Sydney’s inner west. A shortage of available “good” stock relative to demand is pushing up prices in these suburbs, which are going through gentrification.

Apartments in Sydney’s eastern, beachside suburbs and lower north shore suburbs are also performing well. However, buyers are being very selective and avoiding properties that are overpriced or apartments in secondary locations.

Strong rental demand, a shortage of rental properties, tightening vacancies and rising rents means investors will vie for the same apartments as owner-occupiers, underpinning prices.

The market for well-located apartments is likely to remain strong throughout spring, and this will be helped if interest rates fall once more as expected.

Melbourne

After falling in value over the first quarter of the year, the Melbourne housing market has been a bit of a surprise, performing better than many expected, with prices rising around 3% over the last quarter, clawing back half of their losses.

Again different segments of the market are at different stages of the property cycle.

Builders and developers have gotten ahead of themselves, and there is a substantial oversupply of newly built house-and-land packages in the outer suburbs, especially in the west and the north. This will create downward pressure on property values in these locations and for properties in the first-home buyer category in general.

The top end of Melbourne’s property market is still quiet with an oversupply of property relative to the reduced demand for luxury property. However, there is more demand for properties priced between $500,000 and $900,000 in the inner and middle-ring suburbs of Melbourne.

With too many new apartment projects under construction there is an oversupply of CBD and near-city apartments at a time when there is less demand. This will put downward pressure on prices and rentals for apartments yet, interestingly, Residex reports that house rents in Melbourne increased by 10.53% in the past year.

Many of the apartments that have been sold off the plan are coming on stream over the next few years and have been purchased by investors. Some will have difficulty getting finance and settling their purchases. Others will be disappointed to see the end value of their properties is less than their purchase price.

This oversupply of apartments will overhang the Melbourne market for a few years, causing prices to fall slightly.

However established apartments with an element of scarcity, for example Art Deco features, are still selling well, as there is limited supply in relation to the current demand for these types of properties in Melbourne’s bayside, eastern and south-eastern suburbs.

On the whole though, I expect the Melbourne market to remain subdued for a while but, as in every market, there are some great buying opportunities, especially for properties to which you can add value through renovations and manufacture capital growth.

Brisbane

After a number of tough years, Brisbane median house prices fell 0.60 % and unit prices fell 0.61% over the last year, according to Residex. The Brisbane market is now hovering near the bottom of its cycle.

Buyers are lacking confidence to re-enter the market and are sitting on the sidelines waiting for signs that the market has bottomed before they make a purchase. Many were waiting for the resources boom to reignite their property market, but recent negative media has dampened their confidence.

However we’re seeing more strategic investors getting a foothold in the Brisbane market, recognising that it’s a “buyers’ market” and taking advantage of countercyclical opportunities.

There is an oversupply of apartments in the Brisbane CBD and surrounding suburbs, with over 40 projects currently being marketed. Many of these apartments will remain unsold, and this oversupply of properties will put downward pressure on prices and rentals.

The Brisbane detached house market is still languishing but on the way to bottoming out. House prices have dropped for the last few years in Brisbane, but there are signs that the inner and middle-ring Brisbane home market is picking up with more buyers returning and many properties now selling under multi-offer scenarios.

All this means that Brisbane is entering the stabilisation phase of its property cycle, but prices are unlikely to start rising until 2013.

The good news for property investors is that house rents in Brisbane increased by 14.47% in the past year.

Perth

The Perth property market, which has been in a slump for the last five years, appears to be moving again, with median house prices increasing by 3.17% and apartments by 10.05% over the last year, according to Residex.

All the fundamentals are positive – Western Australia has Australia’s strongest economy, lowest unemployment rate and highest wages. Rents for both units and houses are rising, and there is an increasing shortage of accommodation for the increasing number of buyers and tenants.

It’s the old supply and demand ratio at play. Population growth is strong and and levels of construction have been low for the last few years, so the cycle is moving on. And so are rentals. According to Residex, house rents in Perth increased by 16.46% in the past year.

Adelaide

The Adelaide property markets are flat at present. Median house prices fell 2.45 % and unit prices fell 2.1% over the last year and median rents remained steady, according to Residex.

Since the announcement of postponing any additions to the Olympic Dam project, confidence is waning, as many locals were hoping this project would turn South Australia into the next big mining state. Unfortunately there is nothing in the wings to suggest this market will change in the near future.

Darwin

Darwin’s property markets have performed well, with median house prices increasing by 3.37% and unit prices by 5.95% over the last year, according to Residex.
Darwin’s market tends to be volatile and seasonal but is underpinned by increased activity in the resources sector, especially offshore resources.

Canberra

Median house prices in the ACT fell 0.26 % and unit prices fell 5.47% over the last year, according to Residex.

But the market may be turning as Canberra has low unemployment, relatively high public service incomes and a shortage of accommodation, especially at the cheaper end of the market.

Hobart

Residex reports that median house prices in the Hobart fell 6.36 % and unit prices fell 6.68% over the last year and that median house rents did not increase.

While the Hobart property market has performed relatively well over the longer term, a weaker economy that lacks exposure to the mainland’s resources boom and its relative isolation suggest there are better places to invest in property.

In summary

Looking at the Australian property markets I see the glass being half full, while I know a lot of people see it half empty.

There are some excellent property investment opportunities for long-term investors. If you have a secure job and the ability to service a loan, and that’s become much easier recently, now is the time to consider buying a well located residential investment property.

Does that mean the markets have bottomed?

My honest response is I have no idea, but the answer is probably not in some areas.

But my question to you is – “are we buying ‘the market’?” Clearly the answer is no!

What I recommend is that you consider investing in a property that you would be happy to hold in your portfolio in the long term and one that was bought sufficiently below intrinsic value so that even if the market fell a bit further, you would still have bought well.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael, visit www.metropole.com.au or read his Property Investment Update blog.