Boom over – market turns flat

Dr Andrew Wilson from Domain takes an overall view of the national market and says we have a new reality in the Australian housing market as he predicts the boom times are behind us and the market is likely to flatten.
Kevin:  As we continue to look around Australia at the different markets and what’s ahead for us – a bit of a mixed market, a bit of a mixed bag – as you’re probably already hearing, let’s get a national overview. Joining us, Dr. Andrew Wilson, Chief Economist at the Domain Group.
Andrew, thanks for your time.
Andrew:  Thank you, Kevin.
Kevin:  A little bit different in the show this time. When we talk to you, we’re going to look at a national view. Normally, when we talk, we talk about auctions and so on, but a bit of a mixed bag all around Australia is what we’re hearing. There are some cot cases, and there are some areas where it’s still ticking along quite nicely, Andrew.
Andrew:  Look. I think the big picture, Kevin, is that we have a new reality in our housing markets this year, particularly if we look at the capital city energy, and that is that we’re certainly getting a convergence of growth rates.
The great booms in Sydney and Melbourne are now behind us, and I think we’re going to generally see a flattening of house price growth this year. I think that house price growth through the cycles now will be in a range of perhaps 2% to 4%, 2% to 5%, depending on local conditions. I think we’re going to have quite a flat year this year.
A lot depends, of course, on the underlying drivers, and that particularly means interest rates, but I think that even if we did get a cut in interest rates, it wouldn’t revive markets to the extent we’ve seen in previous cycles.
Markets are a lot more predictable, a lot more certainty, and I think that buying and selling decisions will reflect individual factors rather than whether it’s a good time to buy or sell. So look, a quieter year this year for prices growth, particularly in Sydney in Melbourne, and as I said, I think the future is a future of modest price growth, and I think we’re seeing that evolve now early days in the year.
Kevin:  Some cot case markets, like Northern Territory, probably Western Australia, South Australia, maybe even the ACT. Would you categorize those as fairly tough markets right now, Andrew?
Andrew:  There’s no doubt that the down turn in the resources sector has impacted the Darwin and Perth markets, and the particular factor there was the waning of the fly-in, fly-out mobile work force. That really did create significant levels of demand for property, whether rental property or for purchasing. With the downturn in the resources sector, that’s certainly taken that demand away, and we’ve seen prices in the Perth market at their lowest levels for two years and certainly down, as well, as in Darwin.
But look, I expect those markets to start to bottom out this year. I think the rate of decline will start to actually moderate, and I think that there may be some capacity for some small prices growth towards the end of the market. I think what we’ll see in Perth and Darwin is the value buyers starting to recognize that there are good opportunities to get into the market at the bottom of the cycle.
Kevin:  Yes, if you’re willing to get in now and hold for a while, it’s obviously good buying with low interest rates, as well. How would you describe investor sentiment right now?
Andrew:  Obviously, we had higher interest rates last year, Kevin, which took the top off that investor market, which was very strong, particularly in Sydney. But investors were quite strong right across the board. Investors were activated with those low interest rates.
We have seen a slight sense of a rebound after a falling away of investor activity, and I think that investor activity will be quite solid this year continuing forward. Yields, even though they’re between 4% to 5% in most markets, are still attractive when compared to underlying yields for other asset classes in the economy, and of course, there are still significant taxation advantages for being a residential property investor. I think that we’ll continue to see quite reasonable activity levels going forward in most capital markets this year.
Kevin:  Now, you’ve just released your rent report, too. What did you learn from that? What did that tell you?
Andrew:  Very interesting results in our March Quarter Rent Report, Kevin. We’ve seen that unit rents are actually on the rise. We recorded unit rent increases in Melbourne, Sydney, Canberra, and Hobart.
It’s been a little counterintuitive because we’ve seen strong development of high-rise apartments, particularly over the last two years in those eastern seaboard markets. Most markets have seen higher levels of apartment development, but it’s certainly having no impact on demand for rental properties.
What I think we’re seeing in a lot of those eastern seaboard markets, there’s a shortage of houses for rent, and I think we’re seeing tenants starting to pick or choose as an alternative units, and that’s pushing rents up.
Kevin:  Where is the best buying right now if you look around at some of the cap cities, Andrew?
Andrew:  As I said, I think we’re looking at the bottom of the market in Perth, so opportunity is knocking there. I think sellers would be quite ready to deal in those markets. Some of the underperformers have been quite strong over the last 12 months – I’m talking Canberra and Hobart.
Hobart has been a market that has revived over the last year. Hobart offers the highest yields of any of the capital cities at the moment and still upside for capital growth. But investors tend to look sideways at that Hobart market. Perhaps, they will take a closer look this year, particularly given it remains the most affordable capital city market in the country.
Kevin:  Yes, interesting that both Hobart and Brisbane were tipped as probably some of the best investment markets, and you’re right; I think Hobart traditionally has been overlooked. Why is that do you think?
Andrew:  Perhaps it’s an off-shore market, Kevin. It has had problems with its economy. Of course, traditionally, it has had the highest unemployment in the country. It still has high unemployment. But there’s a definite chronic shortage of rental properties or houses in Hobart. Its vacancy rate is now at 0.7%, and that’s very, very low. There’s no wonder that rents are rising at the fastest rate of any of the capital cities down in Hobart.
Also, prices are rising, and I think that’s a reflection that that market was flat for a couple of years when interest rates started to fall, so it’s in catch-up mode. I think there are some good opportunities there in the Hobart market, particularly given that markets such as the other resource markets of Western Australia and the Northern Territory have been flat.
But look, I think there are still reasonable opportunities for investors in most capital city markets. I think the positive fact is that we’re not looking at any of those extreme price scenarios that we’ve had over recent years. There’s a lot more stable capital growth prospects in most capital city markets.
Kevin:  Andrew, great talking to you. Thank you very much for your time.
Andrew:  Thank you, Kevin.

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