State by state: A September update on Australia’s property markets

There is no doubt about it! Our property markets have turned the corner.

Two interest rate cuts, tax cuts, reduced uncertainty about housing, more positive media and easing in the overly tight lending guidelines have combined to generate significant improvement.

Buyers are back-borrowing money and looking for a new home or investment and sellers are tentatively returning to the market.

However, our markets are fragmented. While the Sydney and Melbourne property markets are clearly bouncing back, as you can see from the chart below, the other states are still lagging.

This was the first month-on-month rise in the national index since values peaked in October 2017 and it was the largest monthly lift since April 2017.

In August 2019, dwelling values increased across all capital cities except for Adelaide, Perth and Darwin with values rising by more than 1% in Sydney and Melbourne.

Combined capital city dwelling values increased by 1.0% over the month and combined regional market values fell -0.1%.

Looking deeper into the stats, it is clear the more expensive end of the Sydney and Melbourne markets are the primary driver of rebounding capital gains.

Sydney

Since bottoming out after the election in May, Sydney housing values have recovered 1.9% in the last three months, but the market remains 13% below the July 2017 peak.

Despite concerns about structural issues in many of the new high-rise towers, the Sydney apartment market is showing a stronger performance relative to houses, with unit values up 2.5% since bottoming out compared with a 1.6% rise in house values.

The recovery trend is most concentrated across the premium end of the housing market where values were previously falling more rapidly.

In Sydney, housing values ticked slightly higher for the second consecutive month, providing further confirmation that the market has commenced what is likely to be a gradual recovery after values fell almost 15% from their July 2017 peak.

Currently, there is still a significant number of new apartments coming onto the market in Sydney — it is estimated 54,000 apartments will be completed in Sydney in 2018 and 2019 — but it’s likely both buyers and tenants will be wary of these considering the media attention structural issues in new buildings has been receiving. 

Investors are abandoning the off-the-plan apartment sector for many reasons, including concerns about construction standards, but many of those who purchased off-the-plan a few years ago are now having trouble settling with valuations coming in on completion at well below contract price at a time when banks are more reluctant to lend on these properties.

In the background, strong economic growth and jobs creation is leading to population growth and ongoing demand for property in Sydney.

At the same time, international interest from tourists and migrants continues.

This is a great countercyclical time to look at buying an investment grade property in Sydney, which is currently offering investors an opportunity to buy established apartments in the eastern suburbs, the Lower North Shore and inner west in a ‘buyer’s market‘ with little further downside and the prospect of the market continuing to move forward

Melbourne

Melbourne’s housing values posted its third month-on-month rise, ticking 1.4% higher in August.

After falling by 11.1% between November 2017 and mid-2019, the market has recovered by 1.8%.

The recovery trend is more noticeable at the expensive end of Melbourne’s housing market, with values across the top quartile increasing by 2.7% over the past three months compared with a 1.4% rise across the lower quartile.

The local unit market is still showing a stronger trend relative to houses, with values up 2.4% over the past three months compared with a 1.6% lift in house values.

But the Melbourne property market is very fragmented, with values of detached houses having fallen more than apartments.

Overall property values will be underpinned by a robust economy, jobs growth Australia’s strongest population growth and the influx of 35% of all overseas migrants.

Remember, Melbourne rates as one of the 10 fastest-growing large cities in the developed world, with its population likely to increase by about 10% in the next four years.

Brisbane

Brisbane’s property downturn has been quite shallow compared to the big two capital cities, with local values only 2.5% below their peak.

But this followed a relatively mild growth cycle where growth in housing values in Brisbane averaged only 1.4% per annum over the past five years.

But now Brisbane values have posted their second consecutive month of subtle gains.

Brisbane dwelling values tracked 0.2% higher in both July and August. Unit values have led the improving conditions, rising by 1.5% over the three months ending August, while house values remain relatively flat -0.2% lower over the same period of time.

The local unit market seems to have emerged from the supply hangover which contributed to a 13.3% overall decline in unit values between the unit market peak in early-2010 and June 2019.

With migration rates lifting, supply under control and generally healthy levels of housing affordability, the Brisbane housing market fundamentals are looking healthier compared to most other capital cities.

At the same time the underlying strong demand from home buyers and investors from the southern states at a time when yields are attractive and housing affordability is relatively healthy and putting a floor under property prices.

Adelaide

Adelaide housing values have trended lower across six of the past eight months, recording a 0.2% fall in August.

Adelaide is the most affordable capital city but its property values peaked in December 2018, and since then, dwelling values have fallen a modest 1.5%.

The downward trend is evident across both houses and units, although houses have recorded a slightly larger decline relative to units over the past three months, down 1.1% for houses compared with a 0.9% fall in unit values.

On an annual basis, Adelaide unit values have recorded a mild capital gain, rising half a per cent while house values are 1.4% lower.

While things look good for Adelaide property in the short term, with sales activity starting to trend higher, based on improving buyer demand, over the next few decades the bulk of Australia’s long-term jobs growth, economic growth and population growth will occur in our four big capital cities meaning there are better locations for long term wealth creation that Adelaide.

Perth

Perth has recorded a further reduction in dwelling values, down 0.5% over the last month and 8.8% lower over the past 12 months taking values 20.6% lower since peaking in June 2014.

The ongoing weakness in the Western Australian housing market can be attributed to a mix of weak economic and demographic conditions overlaid with a tight credit environment.

Perth values are now amongst the most affordable amongst the capital cities, but it’s much too early for a countercyclical investment in the west. I can’t see prices rising significantly for a number of years.

Hobart

Hobart has been the best performing property market in the last three years, but its boom is now over.

CoreLogic figures show prices are stabilising and now 0.3% below their peak in March this year. It’s likely the Hobart market will continue to lose its momentum over the year.

Over the last few years, too many investors chased the Hobart ‘hot spot’ at a time when there was a lack of employment drivers, insufficient population growth and not enough infrastructure spending.

Remember home buyers create a property market (they make up 70% of buyers) and investors create property booms — which is what’s happened in Hobart.

And Hobart is too small a market to be a long-term ‘investment-grade’ proposition.

Darwin

The Darwin property market peaked in August 2010 is still suffering from the effects of the end of our mining boom with a very soft employment market and lack of migration and infrastructure spending.

Currently values are 30.7% below their historic peak and it is unlikely we’ll see these types of house prices again in the next decade.

The small size of the Darwin market makes it more susceptible to local events and Darwin typically has a higher and more variable vacancy rate, a product of a large transient working population.

Darwin does not have significant growth drivers on the horizon and would be best avoided by investors.

Canberra Housing Market

Canberra’s property market has been a ‘quiet achiever’ with dwelling values having grown 1.2% over the last year, but they seem to have peaked in April this year.

What’s ahead? 

Overall, our property markets are slowly improving.

Vendor metrics have generally improved over recent months, but are weaker than a year ago. The number of days to sell a property and vendor discounting rates much higher than they were a year ago, while auction clearance rates are now higher than they were a year ago, although volumes are much lower.

We’re at an interesting stage of our property cycle, with signs the Melbourne and Sydney markets have bottomed.

Remember, it’s normal to have mixed signals at the turning points of cycles — not all the news will be good and not all segments of the market will rise at the same time.

While there may be a little more downside in our big two capital city markets it looks like the best time to buy counter-cyclically in Sydney and Melbourne for over a decade and to ride the Brisbane property cycle.

Canberra property should continue to perform well and Adelaide should hold its own, but it’s likely Hobart will now slowly move to the slump phase of its own property cycle and there is still more downside for Perth and Darwin.

Of course, property will remain a sound asset for long-term wealth creation, but now more than ever correct asset selection will be critical, so only buy in areas where there are multiple long-term growth drivers such as employment growth, population growth or major infrastructure changes.

Similarly, suburbs undergoing gentrification are likely to outperform.

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