Is the bubble talk just a lot of hot air? CoreLogic’s Cameron Kusher delves beyond the numbers to explore where the risks and opportunities are in the Australian residential property market.
There’s been significant commentary over the potential oversupply of apartments, particularly on the east coast capital cities. How is that currently looking and how will that shape up in the mid to long term?
At the moment, I wouldn’t say it's too much of an issue in Sydney and the reason for that is you’re not seeing this underperformance of units relative to houses. With the current price point you’re looking at for houses now, units have become the only option for people looking to buy into the market.
In Melbourne, we’re obviously seeing a really high level of unit supply coming online but we’re also seeing really strong population growth so when you compare the two, perhaps there’s not as much of an oversupply as we previously thought. What you are seeing, however, is an underperformance of units so there’s probably a mild oversupply there because I think houses are still in reach for people to buy whereas they’re not necessarily in Sydney.
Brisbane is probably the area where we’re seeing the most evident oversupply of units and there’s still a lot more in the pipeline. I live in Brisbane and as you walk around you can see a lot of units completed, a lot of the buildings have available for rent signs all over them and there’s a lot more to still come up for completion over the next couple of years.
Overall, however, I think there’s not too much oversupply in terms of total housing in Sydney and Melbourne but there is a bit of unit oversupply in Brisbane and certainly a potential for some unit oversupply in Melbourne.
Will Melbourne’s be limited to the inner city?
Yes, that’s right. Really strong population growth in Victoria is continuing to drive that market demand somewhat. I just think maybe there’s been a little bit too much unit construction and there’s still a lot more to come. We’re already seeing house prices increasing at a dramatically faster pace than units so it could lead to some softening in some suburbs but it certainly is not going to be a city-wide phenomenon.
And will that be more pronounced in Brisbane?
I think it will be because there’s less unit stock and you haven’t got the same strong migration to Queensland as what we’re seeing in Victoria.
Will that hit standalone dwellings?
I don’t necessarily think so. More and more we’re seeing that the two property types are quite distinct so I don’t think it will have too much of an impact on the housing market per se.
How are the other capital cities looking in terms of supply?
There has been too much built in Perth over the last few years but they’re starting to pull that back and you’re still seeing a lot of people migrating away from Western Australia so that will dampen the market for a little while longer.
Somewhere like Hobart hasn’t been building enough homes and if we do get this expected pickup in Tasmania, there might be potential undersupply there. Generally, elsewhere, there’s not too much risk of oversupply in any of the other markets.
Perth’s market has been in decline the last few years, can we see expect to see a bottoming out of prices there?
We’re not yet seeing a bottoming out. The market’s been falling really since the end of 2014 and what we’re seeing is a lot of people migrating away from WA. Not necessarily people who have lived there long-term but people who went there for mining jobs a few years ago are now leaving. As I said, there’s been a lot of housing construction over recent years and you’ve got a lot of supply, less demand because people are leaving, and fewer people are going there and that’s been contributing to the decline we’ve been seeing in values. More recently, sales volumes have started to stabilise which may suggest that the worst of the decline is past us but the evidence still points to values falling in Perth at the moment probably for a little bit longer.
Is that view consistent with Darwin?
It hasn’t had the massive construction boom that we’ve seen in Perth though and that’s probably the big difference. Certainly, a lot fewer people are going to Darwin. It tends to be a transient population there anyway and that’s impacted the housing market there and ultimately led to the falls we’ve seen.
In Adelaide, has a decline in manufacturing impacted prices?
Not really yet. In the car manufacturing sector, we’re seeing heightened level of properties reselling for a loss around the Salisbury and other regions but generally not across the whole city. I think the big factor in South Australia and Adelaide at the moment is just the economy is not performing anywhere near as well as Victoria’s or NSW’s, and people just aren’t moving there, while a lot of their young people are moving away.
Sydney prices have continued growing again. Is that growth sustainable?
At some point, we can’t see this growth go on forever. At the moment, we still have very low interest rates, strong population growth and that’s fuelling demand for housing. So unless it either becomes more expensive to borrow or fewer people want to go and buy property in Sydney, we’ll probably still see growth. We’re all expecting lending policies to tighten this year and that may slow things, but I still think we’re going to see growth over the next 12 months in the Sydney housing market.
When interest rates do begin rising again, what sort of pressure will that place on those hot markets?
Obviously, it’s easy to borrow when the interest component is very low. We know there’s been a lot of interest-only lending as well. The challenge is when rates rise. The lenders have been using a serviceability calculation of an interest rate of 7.25 per cent so people should be able to withstand that. I think the bigger concern is what will investors do if there’s no longer the growth in the market? Is that when they look to sell out and move to a different asset class? That’s the thing we don’t really know.
CoreLogic has previously flagged strong, and in some cases double-digit, growth in lifestyle property markets such as Byron Bay. Is that still your view?
Yeah, we’re seeing a lot of the coastal towns pick up in growth. People from Sydney have an awful lot of equity in their properties. They’ve rebuilt their wealth after the GFC and they’re probably looking to invest somewhere for a holiday home or somewhere they eventually may want to retire to so [there is] a lot of demand in places like Byron Bay, all along the Tweed Coast, places like the Gold Coast, Sunshine Coast, Surf Coast in Victoria, places like Newcastle and Wollongong and around those regions, we’re seeing pretty strong growth in some of those markets.
What should property investors be keeping an eye on this year?
The big one is obviously what the banking regulators going to do. There’s a lot of talk about tackling housing affordability, the RBA has come out and said they’re concerned about the heightened level of investment that’s rebounded and prices are growing strongly again. I think investors will very much be targeted in trying to deter the more risky investors in the housing market. I think they need to be pretty aware of the changes that are going to be proposed to investor lending.
If they bring in a policy that is more specifically aimed at investors, I think that might have a bit more of an impact.
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