Property News

What's Happening to the Housing Market?

10 November 2006

The story of residential property in Australia depends on where you live. There is considerable variation between states and between east and west, even within cities. In the resource-based economies of Western Australia, north Queensland and the Northern Territory, booming economies have meant sharp increases in population and a corresponding rise in demand for housing. On much of the east coast, it is a very different story with prices stagnating or falling and, in Sydney, investment levels at an all-time low.

Economists and property analysts are predicting more of the same for the next few years, particularly if interest rates continue to rise. Sydney, where housing affordability has been an issue for some years, is particularly sensitive to interest rate rises.

According to the latest figures from the Australian Bureau of Statistics, median house prices fell by 0.9 percent in Sydney for the year to June 2006. At the other end of the spectrum, the median house price in Perth rose by 33.9 percent over the same period. Darwin was not far behind with a rise of 25.1 percent while in Melbourne it was 4.2 percent, Brisbane 3.5 percent, Adelaide 4.2 percent, Hobart 6.5 percent and Canberra 7.8 percent.

Prices and population migration

According to BIS Shrapnel senior consultant, Angie Zigomanis, the changes in median house prices closely follow the pattern of interstate migration.

"Melbourne and Victoria traditionally get an outflow of residents while Queensland always gets an inflow and an upturn in prices coincides. (see graph 2) Tasmania always experiences an outflow and this can also be seen in house prices. Perth had an outflow for some time but is now experiencing the opposite and prices are rising rapidly," says Zigomanis.

While interstate migration has a significant impact on house price cycles, property prices may not show the affect for 12 to 15 months after the population shift. This could be due to overbuilding in previous years.

There's also a two-way effect with population shifts being driven by prices. "Sometimes it is a bit of a chicken and egg situation," says Zigomanis. "An outflow of population can be driven by high house prices and house prices are in turn affected by interstate migration." Brisbane, for example, has historically benefited from Sydney's overpriced market through interstate migration.

What can we expect?

Sydney is the least affordable city in Australia with a median house price of $523,000, $68,000 ahead of the next most expensive city, Perth at $455,000. This is followed by Canberra at $424,000, Melbourne $352,000, Brisbane $339,000, Darwin $332,000, Adelaide $321,000 and Hobart $243,000.

And while Sydney prices fell slightly in the year to June, the city has just recorded its first quarterly rise above 1 percent in 11 quarters, rising by 1.4 percent in the last quarter. Despite this small rise, analysts are not expecting much to change in Sydney over the next few years.

According to BIS Shrapnel's Residential Property Prospects, 2006 to 2009 report, there will be further slowing in housing prices growth over the next three years with the exception of Brisbane, regional Queensland and regional NSW.

BIS Shrapnel's director of building and construction Robert Mellor says the Sydney market will experience another few years of price decreases before it begins to slowly recover in 2008/09.

"Sydney is currently the most expensive capital and will significantly lag the national recovery, placing buyers in a very strong position to bargain," says Mellor.

Meanwhile, BIS Shrapnel expects Brisbane house prices to grow by 4 percent per year over the next few years due to a shortage in housing supply. Mellor does not expect the stellar increases in Perth prices to continue at the same rate, predicting the city will fall back in line with other cities in the next financial year as "house prices are now on par with Melbourne and Brisbane and growth cannot be sustained."

BIS Shrapnel also expects the Reserve Bank of Australia to raise interest rates again over the next 12 months but to leave them static between 2007 and 2008. However, any rate increase should be offset by wages growth, says Mellor, and BIS Shrapnel is predicting an economic rebound to prompt a recovery in house prices over 2008/09.

"With vacancy rates set to tighten further to below 2 percent over 2006/07 in a number of capital cities, rental growth should accelerate over the next three years. Rental growth of 10 percent per annum could easily occur in Sydney, while Melbourne and Brisbane could also experience growth of between 6 and 8 percent per year."

The role of housing construction

According to chief economist for the Housing Industry Association (HIA), Harley Dale, there is one common denominator across the country – a severe lack of affordable housing.

"Building approvals are down substantially in Sydney, a city suffering from record low levels of housing affordability and poor land release policy. Approvals are off the boil to a smaller extent in the other resource-poor states of Australia," says Dale.

Building commencements in each state reflect the economic conditions of the region, according to Dale. These can be seen in graph 3.

"Commencements have been particularly slow in NSW and the ACT – states which have struggled to pay their way over the past couple of years," says Dale. "This situation is already turning around in the ACT, but the same can't be said for NSW."

Variations within cities

There are also variations in trends within the three largest cities of Sydney, Melbourne and Brisbane, says Dale. In Sydney and Melbourne, where there is a fairly dominant high end of the market and a larger lower end, the variation can be quite marked.

"The top end of the market has been very resilient in Sydney and Melbourne," says Dale. "At the same time these two cities have a more extensive lower end of the market because of their size and spread into outer ring suburbs. The variation in the two ends has been most conspicuous in Sydney where prices have fallen by around 20 to 25 percent in some outlying areas and in some medium to high density pockets."

Development and investment

According to head of research at Macquarie Real Estate, Rod Cornish, the downturn in residential property has particularly impacted investment and development markets in locations with previous supply issues.

"In the last few years," says Cornish, "rising construction costs, together with falling investor demand, caused development site values to fall more significantly than individual property prices. Developers found it hard to make projects work as a result. Without sufficient pre-sales it was impossible to raise project finance."

In its Real Estate Outlook 2006 report, Macquarie says medium and large developers are taking advantage of lower prices to start land banks to allow them to meet stronger future demand.

"We are also seeing owner-occupier demand starting to pick up and leading indicators are showing some signs of recovery, although the [interest] rate rise will push out the timing," says Cornish.

Figures from the HIA show that lending for residential investment slowed sharply from late 2003 and despite some strong months for lending in 2006, investment levels generally remain down significantly on those 2003 peaks, Western Australia being the clear exception. This is illustrated in graph 4.

Rental markets tighten

Macquarie expects vacancy rates to tighten in recovering residential markets, encouraging some renters to become first home owners. This would initially boost demand for established properties as construction costs are still high.

"With established properties initially more financially attractive than new property, it will be a slower road back for developers than in previous pick-ups."

And construction costs are not expected to fall any time soon. Macquarie predicts that unless there is a recession, costs will remain high, driven by strong construction in other property sectors such as office and retail.

"This is very significant – it's the first time we've had a housing downturn without construction costs falling. Now we have a tight labour market and solid wages growth along with strong non-residential and engineering demand for construction. This is impacting on developers' feasibilities," says Cornish.

Figures from the HIA (see graph 5) show that rental markets are tight in all major capital cities and there is a shortage of rental stock with Adelaide showing the lowest vacancy rate at just over 1.5 percent at June 2006, followed by Melbourne at around 1.7 percent, Perth at 1.8 percent and Sydney at 2.1 percent.

Source: The Property Council

Author: Lynne Blundell