REA, or as it is better known realestate.com.au, has been tracking demand for Australian property since about 2013. They have been looking at the number of people wanting to buy a property and contrast that to the supply of properties and they are starting to get some really interesting results. We discuss that with Nerida Connisbee who is that group’s Chief Economist.
Kevin: I’m joined now by Nerida Connisbee who is from the REA group, Chief Economist, of course, with RealEstate.com.au.
Nerida, thanks again for your time.
Nerida: Thanks for having me.
Kevin: Tell me about the Group Property Demand Index. What’s that about?
Nerida: What we’ve been doing is tracking demand for property in the Australian market since about 2013. Basically, how we track it is we look at the number of people looking to buy a property and contrast that to the supply of properties. We’re starting to get some really interesting results, and probably the most interesting is Sydney and Melbourne are now at record levels in terms of demand.
Kevin: That, of course, begs me to ask the question about supply and demand. There’s a lot of talk about an oversupply or a lack of demand for some of the inner-city areas around Brisbane as an example. Does the index show that?
Nerida: It does. It’s interesting; Queensland sits on about the Australian average for apartment demand and also for housing demand. I think what’s happening is that although Queensland is sitting in that position, it’s really places like the Gold Coast and Sunshine Coast that are really propping up that apartment demand. I think most people would be pretty nervous at the moment with Brisbane CBD, and I think the strength of other markets is really offsetting that.
Kevin: What was the number one most-in-demand suburb around Australia?
Nerida: The number one most-in-demand suburb is a suburb called Warrandyte in the northeast of Melbourne. It’s an outer-suburban area, a pretty leafy area. It’s an area that has a fairly large diversity of homes from fairly low-cost homes to high-cost luxury homes. That was the number one for housing.
For apartments, it was Manly in Sydney – beachside, very popular not just with people from Australia but also globally, as well.
Kevin: I see that the South Australian market made the top ten list. Did that surprise you?
Nerida: It did surprise me. On average, South Australia sits between Queensland and WA, so it’s not a high-demand market. But certainly, there was a suburb, the suburb of Norwood, that came in in the top ten for houses. I think the fact that Adelaide is pretty affordable from a national perspective was part of it, but also, that’s a really great suburb in Adelaide, as well, so I think you’d have a lot of local people wanting to buy there as well.
Kevin: Fair enough. You mentioned earlier about Sydney and Melbourne and how they’re still high in demand. Do you see them remaining hot for some time to come?
Nerida: The Index certainly shows that they will remain hot. We’re seeing rapid increase in interest. What was interesting, though, was apartment demand in Melbourne was on the Australian average, so the fact that there have been so many apartments built in Melbourne is really moderating those demand levels. But if we look at houses, we’re seeing a very different situation.
Kevin: There’s a report out – that we’ll be talking about in the show, too – from one particular commentator who says that unit prices around Australia are going to drop by anything up to 15% to 20% over the next couple of years. What’s your take on that?
Nerida: I think it’s simplistic to look at the apartment market in Australia as one market. If we have a look at places like Brisbane CBD or Melbourne CBD, the reality is that we’re seeing a large amount of development, and it’s quite possible that we will see a drop in prices.
If we look at Sydney, though, Sydney is still seeing very high demand for apartments. We’re seeing relatively little development from a national perspective and also a historical perspective, so I think the situation in Sydney will be quite different.
Overall, I’d be surprised if we saw as high a drop nationally of 15% in apartments, but I do think that perhaps we may see some apartment types in some locations dropping.
Kevin: Nerida Connisbee is my guest, Chief Economist at the REA group. Let’s move to affordability for a moment, because I’m keen to know from you whether affordability is the big driver. What makes properties popular?
Nerida: Affordability does seem to be a big driver at the moment. We have a look at suburbs that are moving up in popularity. They do seem to be those that are more affordable. Particularly Tasmania featured quite strongly in those suburbs. Places like Bellerive, Hobart move quite quickly up our list of popularity. So affordability is a huge driver.
Not so much in Sydney. Sydney is a little bit different at the moment. The suburbs that are getting more popular aren’t necessarily affordable, but we are seeing a bit of a movement to the central coast in Sydney because of how expensive Sydney is.
Kevin: How much of this is driven by monetary policy? Is that actually what’s distorting the market – rate cuts leading to an acceleration in prices? Is this what’s making the problem of affordability even worse?
Nerida: Yes, definitely. I think if you look at what is happening with monetary policy, the Reserve Bank felt comfortable cutting rates – the two rate cuts that we saw this year – because they thought prices are moderating – and look, at that time, data suggested that prices were moderating, so they made the two cuts. But certainly, when we look at our Index, demand really surged following those two cuts.
Our Index surged in terms of demand, but we also saw quite strong price growth, particularly in Sydney and Melbourne. It’s a really difficult one, because historically, we have been reliant on monetary policy to drive the economy, but at the moment, it does seem to be messing around with the housing market.
Kevin: Jobs, too, are also a big driver of where people can live, aren’t they? I know affordability is important. If affordability is that important, are we seeing a loss of people out of Sydney because it is so unaffordable?
Nerida: Yes, we are. Sydney does attract the most overseas migrants in Australia, but it’s been losing quite a lot of people over the past decade. Part of that would have been jobs during the mining boom, so Sydney would have lost quite a few people to WA and Queensland as a result of that. But certainly at the moment, they’re still losing people, and I think affordability has a lot to do with that.
The fact that Sydney is so unaffordable is going to be a brake on economic growth. If you can’t get the right sort of people, if you can’t get a diversity of different types of people living in your city, then it does really lead to problems with economic growth.
Kevin: Bernard Salt, of course, wrote an article a couple of weekends ago, and we spoke to him on the show last week about the cost of avocado on toast. Is it that simple?
Nerida: No, it’s not. If you have a look at the rate of growth in house prices, particularly in places like Sydney and Melbourne, cutting a few breakfasts isn’t going to cut it in terms of keeping up with price growth. If you have a look at how the ratio of household income to prices changed, particularly since the time when baby boomers were in the market, that ratio has really, really increased.
Sydney is the second most unaffordable city in the world, after Hong Kong, and unlike Hong Kong, we don’t have the huge social housing backup that Hong Kong does. It’s quite simplistic to say that if younger people just stopped spending on fun stuff, they’d be able to afford a home, when the reality is no, they wouldn’t be. It’s not that simple.
But the other thing is that people will have to become more used to living in higher density. I think that is definitely case. As our cities grow, as more people want to live in inner areas, we do have to get used to living in higher-density apartments or housing.
Kevin: Land supply is, of course, a big problem. We saw the federal Treasurer come out and encourage state governments and local councils to release more land. Would that help?
Nerida: It would help. There are lots of things that governments can do, things like streamlining the planning process, making it easier for developers to do what they do best is a key factor, releasing land. There are lots of things local government can do, and I think one of the things being done in Sydney at the moment is the amalgamation of councils. That is a key thing. If you can get bigger councils, they can start to put in better planning procedures and make them far more streamlined.
Changes to planning, release of land, better infrastructure, all these things lead to greater affordability.
Kevin: Nerida, great talking to you. Nerida Connisbee, Chief Economist at the REA group. Thank you for your time.
Nerida: Thanks for having me on.