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What powers Australia's residential market
OVER the next few years, Australia's residential outlook is varied, both geographically and by product. Markets generally are entering a period of either more subdued price growth or price correction, with detached dwelling markets generally expected to outperform apartment markets in the short term.
To give a quick snapshot, the markets with the best relative prospects are those:
- Supported by strong or strengthening underlying economic and population growth fundamentals;
- Where price growth in this current cycle has been modest, presenting competitive price points; and
- Where there have not been significant apartment development cycles, typically the smaller capital cities.
This suggests detached dwelling markets in Brisbane will likely perform better in the short term compared with the larger Sydney and Melbourne markets, although Melbourne is likely to stabilise ahead of Sydney. Perth and Adelaide look to offer scope for upside moving forward.
For apartment markets, further price correction over the next 12 to 18 months ahead of a period of stabilisation - giving time for excess apartment supply to be absorbed - will be necessary before the next development and growth cycle can emerge.
Apartment development cycles have peaked, with inner-city apartment prices, vacancy rates and rents generally under pressure.
At the same time, detached dwelling approvals are trending at or close to record highs in most capital city markets (with Perth the notable exception). The high price growth evident in Sydney over recent years has passed with median price indicators now retreating. Melbourne is expected to follow, although not to the same extent.
Historically, price falls of 5-10 per cent are associated with cyclical housing downswings. The upward phase of the latest growth cycle saw extraordinary price growth in Sydney and Melbourne.
This factor, combined with the high volume of apartment completions in submarkets such as inner Brisbane and inner Melbourne, suggests the possibility that any correction this time around may exceed 10 per cent in some submarket locations. But overall, we interpret price falls as markets correcting rather than crashing.
Saliently, Australia consistently has population growth of around 1.5 per cent per annum, so any supply imbalance will likely prove ephemeral, limiting falls in dwelling prices.
The key driver of the changing market conditions is the tightening of credit availability for investors.
The percentage of total lending to residential property buyers in Australia (rolling annual, excluding refinancing) that went to investors, namely non-owner occupiers, rose to a peak of 53 per cent in mid-2015.
This was before the Australian Prudential Regulation Authority (APRA) instigated two rounds of macroprudential measures to help contain the build-up of risk in household balance sheets and support a relatively soft landing in overheated markets.
In New South Wales (peaking at over 60 per cent) and Victoria (peaking at over 50 per cent), the investor share of buying activity moderated after the initial round of APRA measures, recovered in the second half of 2016, but is now easing again. In Queensland and Western Australia, the peaks weren't as high but the downward trend has been evident since the first round of APRA measures.
Also impacting on investor demand has been the tighter control on capital outflows from China. Foreign investment in Australian residential property peaked in 2015-2016, further stoking the strong demand conditions in Sydney and Melbourne, but has fallen since.
Federal and state governments in Australia over the past few years have introduced higher stamp duty and other surcharges on foreign investors. In general, these have adversely impacted demand from foreign purchasers, but they remain lower than comparative foreign investor taxes in many other countries.
There is greater competition now for borrowers offering high credit quality, with a bias towards owner-occupiers. The first homebuyer share of owner-occupier loans has also risen.
By historical standards, interest rates in Australia remain at or close to record lows, and recently there have been further cuts to some owner-occupier and fixed-interest loan products. Investors, however, will continue to face tighter credit conditions for some time and banks are shying away from lending in areas considered as high risk, notably many inner-city apartment nodes. Ultimately, interest rates will rise when the Reserve Bank of Australia (RBA) lifts its official cash rate from its current 1.5 per cent (unchanged for two years), although any moves by the RBA appear unlikely until 2020.
- Sydney: The median house price rose by 75 per cent between mid-2013 and mid-2017 with the median apartment price rising by more than 50 per cent.
Such growth is unsustainable, and the market has now moved into a correction phase. Areas of high supply will be most impacted. The apartment development cycle has peaked, although unlike Melbourne and Brisbane, development has been spread out more in the metropolitan area.
Nonetheless, despite lower levels of presale activity and fewer projects being launched, supply levels will remain elevated. Ongoing high levels of net overseas migration and Sydney's position as a "global" city will provide underlying strength in demand over the medium term. Sydney still suffers from a long-term established dwelling undersupply. Current populist debate over migration levels and impacts on Australia's major urban areas, however, bears monitoring.
- Melbourne: The city is slightly behind Sydney in terms of the cycle, still benefiting from high population growth (running at about 2.3 per cent per annum for the state) and economic strength.
Again, however, recent price growth (peaking at 12.8 per cent on an annual basis for houses and 9.3 per cent for units in 2017) is unsustainable. Growth can be expected to soften in the short term, particularly for apartments adjusting from the record supply cycle. Any price correction, however, is unlikely to be as severe or last for as long as what is expected in Sydney.
- Brisbane: Supported by a recovering economy and strengthening population growth, the city is benefiting from the wide price differential from Sydney and Melbourne.
Historically, when Sydney median prices reach roughly twice the level of the rest of the country, an increased outflow of people to other states occurs. Traditionally, Queensland has been the main beneficiary of this interstate migration, although in recent times Victoria's economic strength has drawn people to Melbourne. Net interstate migration to Queensland is now at its highest level since 2008 and has been rising steadily since 2015.
This should continue to support moderate price growth in the house market, although the apartment market, now somewhat self-regulating in terms of the supply-demand balance, will still need time to absorb the high supply levels from the past few years before stabilising.
- Gold Coast: Similarly set to benefit from stronger population growth and a period of limited large-scale apartment additions.
- Perth: The city was impacted more than any other market by the end of the mining investment boom. With that drag now in the background, there are signs of stabilisation emerging in pricing while elevated vacancy levels are reducing.
The broader economy is in the early stages of recovery, although still a long way from being at a level where residential growth can become entrenched.
Like Brisbane, however, with a lower price point compared to Sydney and Melbourne, medium-term growth prospects look solid if the economy continues to improve.
Craig Godber is associate director and head of residential research, CBRE Australia.
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