2008 REAL ESTATE MARKET OUTLOOK
Home owners, particularly those who own their homes outright or have sizeable equity in their homes, have enjoyed a vintage year in 2007, with prices increasing in most parts of Australia. Investors have also benefited from improved yields as tight vacancy rates pushed rents up. For those not yet in the market, for new entrants, and for those who may have overcapitalised or drawn down much of their equity, particularly in Sydney, 2007 was a less fortunate time. Access and affordability issues, and the spectre of rising interest rates, have been significant concerns. These are unlikely to be allayed in the short term, with 2008 likely to bring further affordability pressures. Residential Property Prices There was steady growth in residential property prices during the year to September 2007, with increases in the median house price ranging from 3.4% in Sydney and Perth to 16.2% in Brisbane. Increases in the median price for other dwellings (flats, units and townhouses) ranged from 8.8% in Perth to 28.3% in Darwin. The median price for other dwellings was unchanged in Sydney over the year to September 2007. The Australian weighted average median house price was $442,758 in the September quarter 2007, up 7.5% compared with the September quarter 2006. The weighted average median other dwelling price was $350,059, which was 8.9% higher than in September 2006. The REIA expects price rises to continue in 2008 in all states except NSW where the market is more subdued, and WA where prices are settling after a period of large increases. Well-located property, close to employment opportunities and infrastructure, will continue to perform well. The upward movement in prices for other dwellings suggests that many home buyers are considering medium and higher density housing as more affordable options in a market where affordability is very low. It is likely that this sector will experience ongoing price growth during 2008. Price rises are being driven by population growth, demand for newer and more environmentally sustainable housing in areas close to employment and essential services, a shortfall in the supply of new dwellings, and the transfer of infrastructure costs into the pricing of new homes, therefore also pushing up prices of established homes.
Australia’s population reached 21 million in June 2007 and the highest growth in population for over 20 years was recorded. This is due to both overseas migration and a higher fertility rate. At the same time, the size of households is diminishing, resulting in an increased rate of household formation. Dwelling approvals are not keeping pace with the demand for additional housing stock. Approvals fell by 2.8% in October 2007, and the November interest rate rise is likely to have a further negative effect on approvals. The much-needed upturn in building approvals will not occur while there is uncertainty around interest rate rises, reducing the demand for housing finance, as occurred during the second half of 2007, and while the construction sector is constrained by skills and labour shortages. Real Estate Sales Activity Real estate sales activity has fallen steadily for the past five years. The total number of dwelling sales in Australia during 2006-07 was 467,737. This was a 15.8% reduction in volume compared with 2002-03. The falls in volume have not been consistent across the country, however. Over the past five years, as the market came off a very high position, there was a marked decline in sales volume in New South Wales. Turnover improved in the latter part of 2007, although the recovery was patchy. In some mortgage stress areas, for example, in the outer areas of Sydney, the volume of sales is picking up as bargain hunters and first home buyers enter the market. Sales volume also declined considerably in Western Australia and the Northern Territory during 2006 – 07, following the booming market conditions of the previous year. Queensland, South Australia and Tasmania were the only States to report an increase in the volume of sales over the year, although volume was still lower than five years ago. With a reduction in sales activity and declining affordability, many home owners are re-investing in their own properties. Finance for alterations and additions rose steadily during 2007, driving much of the investment in housing nationwide. The prospect of higher interest rates will potentially see this continue into 2008, with an accompanying tightening of sales volume, as people become more resistant to selling. Home Loan Affordability Australian families required 36.6% of family income to pay an average home loan in September 2007, which is the worst affordability result since REIA started this measure 22 years ago. The two interest rate rises during 2007 are partly to blame for the significant deterioration in home loan affordability, however, the situation has been exacerbated by significant increases in house prices in Melbourne, Brisbane, Adelaide, Canberra and to a lesser extent, Hobart, during 2007. Prices in these capitals rose between 8.1% and 16.7% over the year.
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In the first home buyer market, declining affordability, now at its lowest point in 22 years, is having a major impact. Buyer numbers have fallen, with first home buyer loans only representing 17.7% of total loans in September 2007, compared with the longer term average of 20%. With the possibility of lenders increasing interest rates in response to sub-prime exposure, and the Reserve Bank likely to push the official cash rate beyond its current level of 6.75% in 2008, the outlook for affordability does not look positive. The Federal Government’s proposed policy solutions may offer some relief in the medium to long term, but in 2008, first home buyers can expect more of the same – challenges to secure a deposit to buy a home, and challenges in meeting monthly loan repayments. Rental Market The REIA anticipates that the rental markets across Australia will experience further tightening in 2008, because investors have shied away from the housing market as interest rates have risen, and in order to take advantage of other investment opportunities which have more favourable taxation treatment. This, combined with an increased number of renters due to increasing population and household formation, and the slower transition from renting to buying, suggests that rental vacancy rates, currently averaging 1.7%, are unlikely to improve significantly during 2008. Increases in median rents can be expected across Australia. Rental affordability is already a significant issue in several cities, notably in Darwin where the median rent for houses is $440 per week, and for other dwellings is $340 per week. Darwin is now the most expensive rental location in Australia, although Sydney and Canberra renters also pay $340 median weekly rent for two bedroom other dwellings. The increasing urbanization of Darwin is adding pressure to this market, although seasonal adjustments can be quite marked. The cheapest rental location is Adelaide at $255 per week for a three bedroom house, and $205 per week for a two bedroom other dwelling, although this represented annual growth of 8.5% and 7.9% respectively. Across the country, rents for three bedroom houses increased by an average of 12.6% over the year to September 2007, while rents for two bedroom other dwellings increased by an average of 17.7% over the same period. Residential Property Investment Established home owners and investors who are able to leverage equity and higher incomes to cope with the increasing median prices for both houses and other dwellings have not been as hard hit by affordability problems as renters, first home buyers and low income earners. However, September quarter housing finance data showed some market caution, both by investors and owner-occupiers, in an environment where an interest rate rise was anticipated.
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A tight rental market is an attractive proposition for property investors who intend to make quality long-term investments and are not seeking short-term capital growth. The 2008 property market is likely to continue to offer significant opportunities for long-term investors, particularly for affordable rental properties in areas which may also offer the promise of longer-term capital growth. The proposed Rental Affordability Fund may offer additional incentives for investors to consider purchasing properties which meet affordable rental objectives. REIA data shows that the average ten year return on property investment has ranged between 10.2% and 18.9% for other dwellings, and 11.4% and 16.9% for houses. Average five year returns have been even higher in all capitals except for Sydney and Melbourne, suggesting that returns have improved significantly over the last half of the decade. Over the medium term, as improved yields make it more attractive for investors to place their funds in the property market, there should be an improvement in vacancy rates, and a slowdown in rent increases, thus improving rental affordability. Commercial Property1 During 2006-07, the industrial sector showed a decline nationally in total return over the year, in contrast with the better performing office and retail sectors. Tightening vacancy rates were a feature of the office market across the country. The Sydney CBD office market vacancy rate experienced its largest fall over ten years, putting pressure on rents. In contrast, rents in the Sydney industrial market were flat. An influx of new supply will keep industrial rents contained in the short to medium term. There was strong leasing activity in the Melbourne CBD office market, driven by business expansion and consolidation. The Melbourne office market is widely regarded as undervalued compared with other capital cities. Superior logistics and distribution networks for users of industrial space place Melbourne at the forefront of Australia's industrial sector. Infrastructure development in Melbourne will continue to drive this in 2008. Strong investor demand for industrial property is expected to continue through the year ahead. Brisbane's CBD experienced its tightest office leasing market on record in 2006-07. This is set to continue into 2008, setting new investment and leasing benchmarks. Investors have made significant returns on their acquisition prices as a result. The industrial market also performed strongly during 2007, and with Queensland's strong economic growth, this is likely to continue into 2008. The huge level of demand generated by WA’s resources boom has seen the Perth CBD office market labelled the tightest in the world, with vacancy falling below 1% to a rate of just 0.7% as of July 2007. The high level of pent-up demand together with a lack of new space coming onto the market over the next two years will result in continued strong rental growth, with the vacancy rate expected to stay below 1.0%. However, 2009-10 will see vacancy rates return to normalcy (between 8 and 10%) as new supply and refurbishments are completed. The strong economic growth being
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experienced in WA has also resulted in an unprecedented surge in the Perth industrial property market, with impressive growth continuing unabated. With continuing economic growth and strong employment figures, Adelaide is consolidating recent gains in the commercial and industrial property markets. South Australia is yet to feel the full impact of the resources and mining boom, which is expected to encourage a further surge in demand for industrial property. Conclusion In 2008, the main challenges facing the residential real estate market will be low home loan affordability, the possibility of more interest rate rises, the ongoing fallout from the US subprime problems, and an extremely tight rental market driving rents up. Balancing this are positive signals for the market, including the resources boom continuing to drive prosperity in some States, and solid consumer and business confidence. These factors will also contribute to ongoing strong demand and increasing returns for investors in the office and retail property markets.
For more information, please call: Noel Dyett Chris Fitzpatrick REIA President REIA Deputy President 0418 532 145 0412 574 401
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Based on research provided by Colliers International
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