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/
Expert insight: Should investors buy Brisbane properties today?
With the Sydney and Melbourne property markets declining, the stability of the Brisbane property market has been welcomed by investors with open arms. Will the Queensland capital ultimately emerge as the next investment hotspot?
While Brisbane has yet to witness a stellar growth in its property market, the capital city has remained stable in the past few months as other major capital cities suffer continuous decline in property values.
As a result, a considerable number of investors are starting to flock into the Queensland capital, hoping to take advantage of the affordable entry points and consequently benefit from the eventual rise of its property market in the near future.
How exactly will the Brisbane property market be performing in the next five years?
Streamline Property Buying’s Melinda Jennison said that, in general, she’s optimistic about the Brisbane property market moving forward.
“We’ve certainly had a lot of headwinds as have all property markets now that the royal commission and the federal election are behind us, even though we still have tight lending – that’s going to continue into the foreseeable future, I think. With the second half of the year coming up, one or two rate cuts may provide further stimulus into the market.”
“Brisbane itself had a 38 per cent reduction in building commencements just in the last 12 months. We had an oversupply in the apartment market but that has been absorbed by the accelerating population growth. Vacancy rates are now declining in some of the inner city locations,” the buyer’s agent highlighted.
With good population growth and a decline in housing supply, the Brisbane property market only needs employment and wage growth to complete the ‘perfect recipe for upward pressure on prices’, according to Ms Jennison.
Where to invest
As there is no ‘one size fits all’ strategy for investing in property, Ms Jennison highlights the importance of understanding the investor’s personal goals before ultimately jumping into a purchase.
What type of results do they want—rental yield, capital growth, or a balance of both? How can they get their considering their personal and financial capabilities and limitations?
Moreover, investors are encouraged to study the fundamentals that will drive growth into their assets over the long-term.
Ms Jennison said: “We love trains and sub-train line locations, but Brisbane is very widespread and we don’t simply buy in all train line locations.”
“There are blue chip suburbs and the fringe suburbs just on the outer areas of those blue chip locations – the train lines there, that’s where we’re certainly looking at right now… Where there’s price disparity between one suburb and the next, there are certainly opportunities for investors there.”
Apart from train stations, investors are also advised to look out for ongoing and upcoming infrastructure projects in the area, which could ultimately spur growth for investment properties.
In Moreton Bay, for instance, the new campus of the University ofCoast is expected to improve the housing market conditions across The Mill at Moreton Bay, the new destination with the university at its core, and, ultimately, the entire Moreton Bay region.
Stage one of the campus, which will be located adjacent to the Petrie railway station, is set to be completed in time for the first semester of 2020.
“We feel that Moreton Bay will gentrify quite quickly with young university students moving in, so we’ll see the types of accommodation gradually change over time to suit their preferences. There’s lots of opportunities within the area and the region as a whole because of this gentrification.”
Finally, rezoning may also spur growth in certain property markets across Brisbane in the near future.
Local councils often rezone land to assist in the planning for future growth. Rezoning, therefore, typically occurs around growth corridors or areas where the population and infrastructure spending has been rapidly increasing.
“A lot of the land has been rezoned and we’re certainly still finding great opportunities in that region for investors that are in the $500,000-price point. If we were to categorise investors in Brisbane based on price point alone, that would definitely be our preferred location right now.”
“Were not going Logan or Ipswich for the simple reason that property investment is all about supply and demand—the availability of future supply of land in the Moreton Bay region is a lot more limited than it is when you go west towards Ipswich or when you go south towards the Gold Coast,” Ms Jennison explained.
At the moment, Brisbane is ripe with off-market opportunities, which puts investors who engage property professionals at an advantage.
Property professionals with local knowledge of the markets could serve as the perfect guide and ‘insider’ as investors try to navigate the real estate landscape, especially in changing markets such as Brisbane. Thus, investors are strongly encouraged to engage field experts, where appropriate.
“We’re certainly getting a lot of off-market opportunities presented to us as we get an influx of interstate investor activity… There’s some great buying opportunities across Brisbane, and we’re achieving yields of upwards of 5 per cent right now.. Even up to 5.5 or 6 per cent per annum,” she concluded.
Buyers in the Driver’s Seat in Current Property Market
The average number of days on market has edged upwards as the housing sector weakens, reflecting tougher finance conditions, fewer buyers and a longer period of negotiation before vendors achieve a sale.
But with the federal election now behind us, what will be interesting is seeing how the flow on effects impact on consumer sentiment.
For now, Corelogic research analyst Cameron Kusher says current conditions still see buyers’ in the driver’s seat.
“The rise in time on market is a symptom of higher supply, with advertised stock levels across the combined capitals are at their highest level for this time of the year since 2012, and lower demand reflected in capital city settled sales down 16 per cent year-on-year,” Kusher said.
Across Sydney, properties were typically taking 62 days to sell in April this year, while in regional NSW properties were taking 76 days.
“At the same time a year earlier, Sydney properties took 31 days to sell and regional NSW properties took 50 days,” Kusher said.
Over the past three months, Kusher says Melbourne dwellings have typically taken 43 days to sell compared to 27 days over the same period in 2018.
“Although days on market fell over the past month in Melbourne, properties are taking longer to sell than in recent years while in regional Victoria there has been a recent spike in days on market,” Kusher said.
Over the past three months, Brisbane dwellings are typically spending an average of 60 days on the market, in comparison to 34 days for the same period last year.
While in regional Queensland time on market has increased to 77 days, up from 47 days.
“Although values have declined over the past year in Brisbane and regional Queensland it has been a much more moderate decline than in Sydney and Melbourne,” Kusher said.
“Despite this fact, there has been a sharp spike in days on market highlighting that selling conditions have become much tougher despite values having only fallen moderately.”
Adelaide properties currently take 54 days to sell, up from 45 days for the same period a year ago.
Canberra’s days on the market has risen from 31 days a year ago to 52 days. Perth properties typically take 62 days to sell, up from 48 days.
And Hobart’s hot market typically takes 32 days, up from nine days to sell this time a year ago.
While Darwin properties currently spend 77 days on the market, compared with 67 days a year ago.
What the federal election result means for the property market
A shorter, shallower property price downturn could be on the cards on the back of the Coalition’s victory at the polls, experts say.
But the long-term prospects for first-home buyers are less certain, with changes to investor tax concessions off the table for the foreseeable future.
Following months of uncertainty about the impact of those tax changes, which had led to greater wariness in the cooling market, experts are becoming slightly more bullish, revising their views on property prices, market activity and first-home buyers.
“It’s pretty clear to us that the bottom [of the market] is just around the corner,” Commonwealth Bank senior economist Gareth Aird said. “We had a 15 per cent [peak-to-trough price forecast] and we’re almost there now.”
With reforms to negative gearing and the capital gains tax off the table, a likely interest rate cut on the horizon and a scheme to encourage first-home buyer activity, Mr Aird said, it was reasonable to think prices would not fall much further.
He expected prices to bottom out late this year, but noted it would not be a sharp recovery due to tighter lending standards.
“[It’s likely] the market will bottom out earlier under a Coalition government then Labor, but with [potential] rate cuts on top, you’ll never be able to tell,” he added.
AMP Capital chief economist Shane Oliver and Domain economist Trent Wiltshire both also expected the Coalition’s victory, combined with expected rate cuts, would see the downturn bottom out earlier.
Dr Oliver, who has been predicting a peak-to-trough decline of 25 per cent for Sydney and Melbourne, said price declines were likely to be closer to 20 per cent now.
“Some of threats to property are starting to abate,” Dr Oliver said. “Affordability has improved … and the uncertainty about negative gearing and the capital gains tax has been removed. Tightening of credit conditions won’t get much worse, and at the same time we haven’t seen the panic-selling.
“The fact support is on the way for first-home buyers … along with RBA interest rate cuts, means the market could end up bottoming sooner.”
With a Labor government quite widely anticipated, Mr Wiltshire said, changes to negative gearing — and the potential price falls it could bring — had already been partly priced into the market.
“This effect will be unwound, so the peak-to-trough price falls will now be probably smaller than thought prior to the election,” Mr Wiltshire said.
“It’s more likely that prices will bottom out in 2019, [earlier] than if Labor had won,” he added. “But prices still probably have a bit further to fall and the market remains pretty weak.”
Regardless of the outcome, Mr Wiltshire said market activity was always likely to pick up post-election as buyers and sellers would have more certainty on housing policy.
“If Labor [had] won, we might have seen a bigger spike in market activity in 2019 as investors would have tried to buy before the negative gearing change, but then there might have been a weaker 2020,” he said.
He is now expecting a more gradual pick-up in prices, with both first-home buyers and investors to drive market activity on the back of the Coalition’s policies.
“Sellers will then respond to buyer interest, there might be a few people who were thinking about selling who have held off [until now],” Mr Wiltshire added.
Ray White chairman Brian White said buyers and sellers would be relieved to know where they stood now the election was over.
“[In the lead-up] people were saying ‘let’s sit on our hands and just wait and see what’s happens’,” Mr White said. “That waiting is finished and I think there’s a big chance that confidence will get a nice boost, as we’ve seen already in the stock markets.”
While he is not expecting to see a rush to market, he believes there will be a boost from buyers and sellers who had been waiting on the sidelines.
“I’m confident the market will now improve, because of the stronger [market] curiosity exhibited by the community, which has been reflected by increased auction attendances,” Mr White said.
“People are all wanting to know what’s coming … I believe we’ll look back and sees this period as the bottom of the market.”
McGrath chief executive Geoff Lucas agreed the government’s win would inject confidence and clarity back into the market.
“Conversely, if Labor [had] won and the negative gearing and capital gains tax reforms had passed, it is possible that the current downturn would have been exacerbated,” Mr Lucas said. “At the least, it would have created confusion, concern and uncertainty. “
Labor’s proposed changes to negative gearing and the capital gains tax discount would have removed concessions for investors, creating a more level playing field for first-home buyers.
The changes aimed at improving housing affordability will not go ahead under the Morrison government. Instead, first-home buyers will have access to a loan scheme — also backed by Labor — enabling them to purchase property with a 5 per cent deposit.
Dr Oliver expects the policy will bring forward some first-home buyer activity, but that its impact will be limited as it is capped at 10,000 loans a year and requires a higher debt-to-income ratio.
He expects the government will morph the scheme into a grant, which could provide more of a stimulus to the lower end of the market.
While he would not advocate for grants in a booming market as they could further drive up prices, Dr Oliver said it could help in a cooling market when there was concern about the wider impact a downturn could have on the economy.
Mr Wiltshire expected the scheme would have a small but not-insignificant impact and encourage some first-home buyers to get into the market earlier.
However, he noted a Coalition government also meant first-home buyers would not benefit from improved affordability off the back of cuts to negative gearing and the capital gains tax discount.
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