For years now, property pundits have been warning of a coming Armageddon in the Australian property market. In 2004, The Economist magazine described Australia as “America’s ugly sister” with the OECD warning the Australian housing market was more than 50% over valued.
Fast forward to 2019 and we have seen the same sorts of dire predictions in the mainstream press. Headlines like, “Let the bloodbath begin” (1) and, “House prices could fall by half in Sydney and Melbourne” (2). Yet, whilst the market in certain areas has declined on a number of occasions in the past 30 years, it has not ‘crashed’ 40% or 50%.
During its 30 years in Australia, Deposit Power has seen a number of property cycles come and go. Given they issue hundreds of guarantees every month through their aggregator partners, they need to have a good grasp on what is happening in the property market and where it is heading as part of their risk mitigation strategy.
“What we have seen over the past two years is a market correction that happens in all markets from time to time,” says Grant Bailey, General Manager of Deposit Power. “Prior to that, for five years we saw property prices in each Sydney and Melbourne grow by around 10% per annum, largely driven by population growth of at least 100,000 new residents in each city, each year. At some point, various market forces impact the current state of play,” he says.
“What makes this downturn unique is that it has been caused solely by a restriction in the availability of credit. This has not only impacted mum and dad investors but also property developers who struggled to get finance for their projects.”
JLL’s Apartment Market Report published in October, 2018, noted that the Melbourne unit pipeline had fallen by one third for the September quarter compared to the same quarter in 2017.
“Whilst there have been predictions over the past few years of an oversupply of property, the reality is that the impact of APRA lending restrictions for investment purposes, has had the effect of limiting this oversupply. Indeed in recent years, the apartment pipeline of projects approved but not yet built, has contracted over 30% in both Melbourne and Brisbane compared to the 2016 construction pipeline,” Grant continues.
However, the tide has now turned following the recent relaxing of credit after the RBA warned of the negative impacts of a tightening in the availability of credit.
If the current property market decline has been caused by a tightening in credit, then it makes sense that its recovery will be greatly assisted by an improvement in the availability of credit. In recent months we have seen ABS housing finance data record an increase in the number of valuations. suggesting lenders have eased credit.
“Now that the market correction is largely behind us and lenders have started to ease borrowing requirements, we will soon see an end to the month-on-month property price declines followed by the market recovering in the second half of 2020,” predicts Grant.
So where is a good place to buy? “Certain areas of Brisbane represent good value relative to Sydney and Melbourne,” says Grant. “When compared to similar stock, there is definitely a significant price gap. Brisbane also has a lot of infrastructure work going on for the next five years or more. However, you need to do your research. My tip is always look at smaller boutique properties which have a 60% or more owner-occupied mix, that are close to schools, shops and transport. Historically, the Brisbane market has performed well in the periods post a Sydney growth cycle such as we have seen up until the end of 2017. Relative affordability in the Brisbane market compared to Sydney and Melbourne has usually resulted in an increase in interstate migration to Queensland.
Head of Research and Acquisition at Binnari Property, Dominic Cavagnino says, “In each of the periods where interstate migration has exceeded 30,000 per annum, we’ve seen the annual compounding growth rate between 9.42% and 15.83%. The figure above indicates that Queensland’s interstate migration has risen from a low of around 7,000 per annum and is re-approaching the 30,000 people mark. This, coupled with slowing supply of new stock and a significant infrastructure pipeline, will drive the Brisbane market performance in the next five years.”
In saying this, understanding the market is critical. There are certainly areas of Brisbane which should be avoided. Identifying tightly held, blue chip areas without a high level of exposure to increased supply are key to investing successfully.
Despite Melbourne’s market also experiencing a correction, its performance has been different to Sydney’s, leaving pockets of opportunity. Over the growth cycle, Melbourne’s housing market significantly outperformed the apartment market. As a result, the correction has occurred disproportionately in the housing market, prices peaked at $750,000 in December 2017 and have since fallen to $680,000 as recorded in June 2019. Median apartment prices have remained more stable, falling from $560,000 to $535,000 over the period.
Melbourne’s market is underpinned by the strongest population growth in the country, achieving annual growth in excess of 100,000 people for almost five consecutive years. The strong apartment investment opportunities in Melbourne are scarce but do exist in some suburbs where supply has been limited and demand remains high.
“These factors are all combining to making it an ideal time to invest in some areas of the Brisbane and Melbourne markets,” Grant concludes.
Sources: 1. Report by LF Economics founder Lindsay David. 2. Ninemsn.com.au.
This editorial was first published in the FBAA broker magazine October 2019 issue. Pages 50-53