YOU can’t blame people for being confused.
One minute we are told there is an apartment glut and house prices could crash any minute. The next, our leaders are calling for negative gearing changes that will push prices down even further. So are we headed for housing armageddon or not?
PRICES ARE TOO HIGH …
Housing prices have been rising for over a decade and warnings about a property bubble have been brewing for years.
One of the latest warnings came last month from property analyst Louis Christopher, of SQM Research, who said the national property market was overvalued by 22 per cent.
This is being driven by prices in Melbourne, which hit its highest overvaluation level of 40 per cent and Sydney, which was at its second highest level of overvaluation at 40 per cent.
Mr Christopher warned that if changes weren’t made, such as lifting interest rates or tougher restrictions on home lending, prices in Sydney and Melbourne would continue to rise by up to 16 per cent in 2017.
“However it is likely 2017 will be the last year of price falls generated by the mining downturn for these cities,’’ he said.
Mr Christopher said if interest rates were cut again, prices would rise even further, paving the way for a possible correction in 2018.
BUT THERE’S AN APARTMENT GLUT COMING …
At the opposite end of the spectrum, there are fears that construction of new apartments will lead to an oversupply in the next few years.
The construction boom already seems to be impacting Melbourne apartment prices, where there’s been record levels of building in the last two years.
On Thursday, Corelogic’s November Hedonic Home Value Index showed Melbourne dwelling prices had fallen by 1.5 per cent.
Head of research Tim Lawless attributed this to new units coming on to the market. Prices for units fell by 3.2 per cent last month.
Overall, prices for Melbourne units have only grown by 3.9 per cent this year, compared to 12.2 per cent for houses.
But this is where things get really interesting for Sydney.
While Sydney unit prices are not increasing as fast as those for houses, they are still rising.
In November, unit prices increased by 0.9 per cent, which was actually slightly higher than 0.8 increase achieved by houses.
Across the year, unit prices grew by 10.6 per cent compared to 15.3 per cent for houses.
Earlier this year BIS Shrapnel released a report that predicted Melbourne would have an oversupply of more than 20,000 homes by 2017, but managing director Robert Mellor said Sydney was still suffering from an undersupply of housing.
“It’s so severe we won’t see an oversupply in Sydney in the next four years,” Mr Mellor said at the time.
“A downturn in Sydney between 2004 and 2012 was so severe, basically only in the last 12 months we’ve started to see construction move above the level of demand.”
SYDNEY IS DIFFERENT
Prices in Sydney have outstripped those in other areas and it remains Australia’s most expensive city, with a median dwelling price of $845,000, according to the latest statistics released by Corelogic.
Since 2009 dwelling prices in Sydney have risen by a staggering 96 per cent, Corelogic head of research Tim Lawless told news.com.au.
Melbourne is not that far off, with growth of 78 per cent, but the next best performing market after that was Canberra, which has only seen growth of 33 per cent.
The difference was even more stark in Perth, which only grew by 6.5 per cent, and Hobart on 4.5 per cent.
Mr Lawless said Sydney’s astronomical growth had been achieved against the backdrop of record low wages growth of about 2 per cent.
“So the byproduct of strong capital gains (for housing) and relatively low income growth is that affordability is becoming stretched,” he said.
One way of measuring housing affordability is to look at the dwelling price to income ratio.
In Sydney this ratio is 8.4, which means it takes 8.4 times the typical household salary to buy the typical Sydney dwelling.
If you look at houses only, this ratio is closer to 10, while for apartments it is 7.1.
These figures are still higher than in other cities.
Melbourne has a ratio of 7.2 for dwellings, while Brisbane’s ratio is 5.7.
“It highlights that Sydney is becoming increasing unaffordable,” Mr Lawless said.
However, Mr Lawless said there was some confusion in the market because the measure of “serviceability”, the proportion of household income that goes towards paying a mortgage, which has been really flat because of record low interest rates.
“This hides the fact that dwelling prices have risen at a substantially higher rate than incomes in Sydney and to a lesser extent, in Melbourne.”
A TARGET FOR INVESTORS
All the analysts seem to agree on one thing — the Sydney real estate market is different and property prices in other areas are not growing as strongly.
This may be why NSW Planning Minister Rob Stokes, called for reform of negative gearing this week.
His comments were later backed by NSW Premier Mike Baird, who said changes should be considered. But this is in direct conflict with Liberal Party policy.
During the election Prime Minister Malcolm Turnbull said the coalition would not change the measures, and warned Labor’s policy to reform negative gearing and the capital gains tax discount would lead to price falls. Estimates have ranged from between two per cent to as high as six per cent.
Mr Turnbull pointed to the need to increase housing supply to improve affordability.
But in his speech, Mr Stokes said supply alone wouldn’t solve Sydney’s housing affordability problem.
The state is currently building 185,000 homes over the next five years to try and address an undersupply of close to 100,000 homes in NSW.
But with interest rates at record lows and generous federal tax incentives, Mr Stokes said Sydney had become a prime target for investors.
Property investors can use negative gearing to reduce the tax they pay if they make a loss, for example if the rent they collect is less than their mortgage repayments.
Once they sell the property, they only pay tax on half of the profit because of the capital gains tax discount.
Mr Lawless said statistics showed investors currently made up more than half the demand for mortgages in NSW.
States are now trying to wind back incentives for investors.
This year NSW introduced higher taxes on foreign investors buying residential property, following in the footsteps of Victoria and Queensland.
HOUSING MARKET IS STILL HOT
AMP chief economist Shane Oliver said NSW must think there’s still some extra capacity in the property market as the state planning minister probably wouldn’t be talking about negative gearing if the market was weaker.
“They are probably thinking there is still room in the market as it’s not altogether clear that the market has peaked,” he told news.com.au. “They are probably thinking there’s a long way to go.
“I would be more cautious, I think a supply glut could hit next year,” he said.
However, if prices did fall, Mr Oliver said the market could still be propped up by two types of buyers.
Firstly, first home buyers may re-enter the market, especially if prices fell by 20 per cent and interest rates remained low.
Ironically foreign investors could also be lured by lower prices and move to snap up a bargain. Prices in Sydney are still reasonable compared to those overseas, especially because the Australian dollar is quite low at the moment.
Population growth in Sydney also remains strong and this would also cushion the market against a big fall. Mr Oliver said he didn’t think any price falls would go beyond 15-20 per cent.
“You wouldn’t be looking at a fall like what happened in the US or eurozone.”
SO SHOULD THEY CHANGE NEGATIVE GEARING?
By restarting the debate on negative gearing, NSW is basically trying to push some of the responsibility for fixing housing affordability back on the Federal Government.
While Mr Oliver believes supply is more connected to affordability, this doesn’t mean some changes shouldn’t be looked at — especially the capital gains tax discount.
“This is a bit of a distortion and that’s what makes negative gearing so profitable,” Mr Oliver said.
But Treasurer Scott Morrison did not seem to be taking the bait, and said on Friday that abolishing negative gearing would hit mum-and-dad investors in rental properties, pushing rents up and putting immense pressure on the market.
Another tricky thing about changing negative gearing and the capital gains tax discount, is that the measures would impact property markets around Australia, not just Sydney.
Meanwhile, Housing Industry Association chief executive Graham Wolfe pointed to the state taxes and levies charged on the sale of every new home.
“State-based stamp duty on the purchase of a typical new home alone adds a $91 per month burden on household mortgage repayments,” Mr Wolfe said.
Stamp duty is something the NSW Government could change to help first homebuyers but has left untouched.
In his speech, Mr Stokes said if states were to consider getting rid of inefficient state taxes, the Federal Government needed to outline how it would help states raise money for schools and hospitals to cater to a booming population.
Providing investors with generous tax breaks such as the capital gains tax discount, costs the Federal Government billions. In 2014/15, the CGT alone was estimated to have cost the federal Budget more than $6 billion.
And despite all the talk of housing bubbles, apartment gluts and falling rental prices, this hasn’t deterred investors.
ABS housing finance data has shown a consistent rise in finance commitments for investment purposes since May this year.
“Clearly investors are continuing to see housing as the preferred investment option, despite low yields and a mature growth cycle,” Mr Lawless said.
Mr Stokes believes it’s time for a real debate about policies and for the Federal Government to partner with states to address housing affordability.
“Why should you get a tax deduction on the ownership of a multi-million dollar holiday home that does nothing to improve supply where it’s needed?” he said.
“We should not be content to live in a society where it’s easy for one person to reduce their taxable contribution to schools, hospitals and other critical government services — through generous federal tax exemptions and the ownership of multiple properties — while a generation of working Australians find it increasingly difficult to buy one property to call home.”
Originally Published: http://www.goldcoastbulletin.com.au/
How good an investment is south-east Queensland
Why do we believe we’ll see increasing investor interest in this market? Strong population growth, a diversified and growing economy, and substantial investment in infrastructure should combine to boost demand.
We expect that these factors will swell the number of white-collar jobs – increasing demand for office space, which in turn will push down vacancy rates and raise rental incomes. This should be good news for office property investors – especially those like Centuria Metropolitan REIT (CMA) that are already well-positioned in the market.
A significant and growing population
South East Queensland (SEQ) stretches from the Gold Coast up to the Sunshine Coast and across to Toowoomba in the west. As Australia’s third-largest population zone, the region has been growing significantly, particularly Brisbane and the Gold Coast. Interstate migration figures show a pattern of steady net migration, with Queensland the only Australian state with consistent net inflows of people from other states. In the five years prior to the 2016 Census, over 220,000 people moved to the Sunshine State – mainly to SEQ where nearly 90% of population growth occurred. This is important for property investors because of its implications for demand, but the trend is interconnected with other favourable factors.
A diversified economy poised for growth
Queensland’s economy is diversified across a range of industries including agriculture, resources, construction, tourism, manufacturing, and services. Over the past two decades, its economic growth has consistently exceeded the national average – and in our view this is likely to continue.
The resources sector is gaining momentum, and a significant pipeline of major infrastructure and development projects is helping propel economic and jobs growth, in turn increasing interstate migration and driving demand for both residential and commercial property.
Investment in infrastructure
A strong infrastructure program delivers more than business and consumer amenity – it generates jobs, drives investment, and facilitates population growth. The pipeline of infrastructure and development projects announced in the past few years is likely to have a material impact on the region – substantially improving its accessibility and amenity – most notably, Brisbane’s Queen’s Wharf precinct and the Cross River Rail.
Queen’s Wharf, touted as a “world-class entertainment precinct”, is an integrated resort development costing $3.6 billion and covering over 26 hectares with retail, dining, hotel and entertainment spaces. As Queensland’s biggest ever tourism project it will be a game-changer for Brisbane, attracting overseas as well as local visitors. Estimated to contribute $1.69 billion annually to the economy, it will employ more than 2,000 people during construction and an estimated 10,000 once operational.
The Queensland Government’s number one infrastructure project, the $5.4 billion Cross River Rail, comprises a new 10.2km rail line between Dutton Park and Bowen Hills, which includes a 5.9km tunnel under the Brisbane River and CBD. It’s the first major rail infrastructure investment in the inner city since 1986 and is set to generate urban renewal, economic development and the revitalisation of inner-city precincts.
Outlook for commercial office property investment
These factors indicate a region poised for growth – and for growing commercial property demand. CMA’s portfolio has a significant exposure to the area in general (six SEQ assets with a combined book value of over $480 million), with many of the individual assets located in those parts of Brisbane set to benefit most from these developments.
Our view is that Brisbane office markets, where five of CMA’s assets sit, are continuing to improve, with vacancies hitting a five-year low – indicating increasing tenant demand – and continued yield compression, demonstrating strong investment demand. Office sales hit the highest level in a decade during 2018 (at $2.35 billion), increasing 60% from 2017.
With the strong outlook for SEQ, we expect the region will continue to attract tenants and investors alike.
Brisbane apartment market to outperform nation: Moody’s
BRISBANE’S apartment market is predicted to outperform the rest of the nation over the next two years as it bounces back from a supply glut.
BRISBANE’S apartment market is predicted to outperform the rest of the nation over the next two years as it bounces back from a supply glut.
In good news for property investors, apartment values in the city are forecast to grow nearly 1 per cent this year before jumping 5.8 per cent in 2020 and climbing a further 5.3 per cent in 2021, according to Moody’s Analytics.
Areas like Ipswich, Moreton Bay and Logan are expected to see the biggest gains in apartment values in the next two years.
The latest quarterly CoreLogic-Moody’s Analytics Australia Home Value Index Forecasts report predicts a modest 0.6 per cent correction for house values in greater Brisbane in 2019.
But that’s much better than the 9.3 per cent fall in house values forecast for Sydney this year and the 11.4 per cent drop expected for Melbourne.
The report by the ratings agency sees Brisbane’s housing market recovering in 2020, with a 1.9 per cent increase in house values forecast, followed by a further 2.3 per cent growth the following year.
But not all of Queensland’s housing markets are expected to soften this year.
Moody’s Analytics is predicting home values in the Mackay and Whitsunday region to grow 2.3 per cent in 2019, followed by stunning growth of 8.2 per cent and 9.1 per cent in 2020 and 2021, respectively.
The report’s authors write that the “recent uptick in commodity prices and tourism has sparked recoveries in areas such as Mackay”.
Cairns home values are also set to rise modestly this year, while Ipswich house values are expected to increase 1.5 per cent in 2019.
Houses in East Brisbane are also set to buck the trend, with a 0.4 per cent rise in values predicted this year.
MORE: Size matters for buyers
The Moody’s Analytics report revises down its predictions for the nation’s property market.
In January, the agency forecast a 3 per cent fall for house prices across the country through 2019, but it now believes they could drop as much as 7.7 per cent — led predominantly by falls in Sydney and Melbourne.
It expects a more modest correction for apartment values, which are forecast to take a 4.3 per cent hit to growth.
Universal Buyers Agents director Darren Piper said the forecast recovery in Brisbane’s apartment market presented “great buying” opportunities for investors who knew what to look for.
“The apartment market has been more sluggish in the face of excessive supply levels,” Mr Piper said.
“However, unit values have started to pick up recently, perhaps hinting that the rough patch for the Brisbane apartment market is likely over now.
“Since the unit construction peaked back in 2016, supply concerns are not a pressing point now.”
It comes as CoreLogic’s quarterly rent review released this week revealed rental yields are rising in Brisbane and rents increased 0.8 per cent in the first three months of the year to a median of $436 a week.
Originally published as Brisbane units are safe as houses
Property downturn spells the death of the ‘dog box’
As the property downturn picks up steam, apartment developers are going to the wall — and our cities could soon look a lot more like Paris.
The property downturn may finally spell the end of the “dog box”.
As local and overseas investors flee en masse, property developers are struggling to get funding from banks, with a growing number of apartment buildings being delayed or abandoned altogether.
Non-bank lenders are increasingly stepping in to fill the gap — and the focus is turning away from the 20-storey high-rises and tiny one-bedroom apartments favoured by investors to larger units in smaller-scale developments targeted at owner-occupiers.
“There is a tailwind in terms of the demographics, especially the baby boomers who have more capital, as they make that transition to apartments for lifestyle reasons,” said David Chin, founder of investment advisory firm Basis Point.
“The larger two- and three-bedroom apartments still have a market. In Europe and (places like) Paris, it is quite common for apartments to be very large, three bedrooms, almost like homes. It sets the higher density living in three- four-, five-storey buildings, not high rises. It works and I think that will be more common in Australia.”
Mr Chin hosted a Deloitte seminar this week titled “Preparing for Pain and Gain in Western Sydney”, which discussed the coming “fast and furious times” amid the property downturn, slowing Chinese capital flows and US-China tensions.
Speaking on a panel discussing the role of non-bank lenders — both Australian “old money” and new “Chinese money” — Dorado Property co-founder Peter Packer highlighted the role of the sector in cushioning the falls in Brisbane.
“We were reading headlines about how that was going to crash and burn,” he said.
A number of major banks had funded construction projects without being covered by sales, which “meant you had expiring bank debt at completion of projects”.
“But us and a number of private lenders jumped into that market and refinanced that debt, usually with 18- to 24-month terms, putting requirements on the developers to slowly sell down their stock,” Mr Packer said.
“What it meant was that market never had the crash that (people) were talking about. That’s where non-bank lenders can help.”
Dorado Property is currently funding a number of projects in Perth and Brisbane. Mr Packer said successful developers were turning to “smaller projects, more boutique, higher-density areas, good locations”.
“They’ve generally moved away from investor focus (which meant) internal bedrooms, small floor plans,” he said.
“You’re getting more light, bright, airy apartments, they’re getting larger. Well designed, good apartments that owner-occupiers want to live in, but smaller-scale projects where you don’t have to go out and get a huge number of presales. That’s typically what needs to happen in a down market.”
REA Group chief economist Nerida Conisbee said the flood of investors and offshore buyers had “led to a lot of projects starting that would have otherwise not been able to start”.
“In many cases, particularly in Melbourne, developers selling to Asia were able to get projects up and running from that buyer group which from there have been sold more broadly into the market,” she said.
Concerns about apartment quality, amenity and overdevelopment have led to a number of states implementing minimum size requirements in the past few years to clamp down on so-called “dog boxes”.
Ms Conisbee said the changing environment meant developers were now having to set their sights on the three owner-occupier groups — first homebuyers, downsizers and upsizers.
“Downsizers are a key market, what they’re looking for is often quite bespoke apartments. They want greater choice in the layout, bigger apartments, they’re a bit more fussy about the type of fit-out,” she said.
First homebuyers, while more price driven, are also more discerning. “The better developers at the moment are looking at more communal areas, more places to hang out,” she said.
“They’re trying to create places that people want to live in as opposed to small apartments that don’t offer the best sense of community.”
David Mao, executive director with real estate investment firm White & Partners, told the Deloitte conference he still saw plenty of opportunities in the falling market.
“We see value everywhere — western Sydney, the north, the south,” he said. “We’re maintaining our discipline as long as we find the right asset at the right price.”
White & Partners sees the market as “not so much a down market but more of a moderating market”. “The run-up particularly in the last five years has been quite tremendous because of the low interest rate environment,” Mr Mao said.
“You saw asset prices reach historical highs. What we’re seeing currently is not so much that it’s down but it’s moderating such that the long-term average is reached.”
Paul Zahara, executive director of Austar Fund Management, was optimistic about the outlook for the market.
“I think we’re in a fortunate position where if you look at previous downturns there’s been grave imbalances between the supply and demand situation,” he said.
“We’ve got generally a balance between supply and demand at the moment. Even though we’ve got affordability issues, the supply and demand situation isn’t bent out of shape. That’s a dramatic contrast to previous downturns, 1991, 1974.”
A property cycle can come off a peak in one of two ways. “It’s like a balloon, you can either pop the balloon or you can let the air out,” Mr Zahara said.
“This time we’ve done a pretty good job of letting the air out of the balloon, we haven’t seen the major pop. For me 1991 was a major, major crisis. We’ve done a very good job this time of managing that decrease in the property market.
“The banks pulled back, the government’s gotten involved, developers have realised what’s going on.”
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