Housing Market Update: 2015 With A Bang

Backdrop

Australia's economic transition is having profound impacts upon the property market, and precipitous falls in key commodities are accelerating these influences.  Consequently, the economy is operating at multiple speeds, with growth in the service sectors (health, education and tourism) not making up declines in the mining and mining service sectors.  Hence, housing markets face a fast changing backdrop in terms of vacancy rates, rental growth and interstate migration.

The non-mining sectors of the economy are currently experiencing improved conditions resulting from a lower $A and record low interest rates.  Whilst this is expected to boost activity and employment, it takes time to filter through to confidence and change behaviours.  A slowing resources sector is allowing for greater growth in the Business & Household Services, Public Administration and Construction sectors.  Having said this, the mining and energy sector is a big gap to fill!

The RBA's recent rate cut and the market's widely held expectation for more to come are positive signals for the housing and construction sectors.  Cash futures are currently pricing a cash rate of 1.75% as early a September.  Auction clearance rates are leaping higher in response, but this is a typical seasonal rebound in property listings as the summer hiatus fades.

Australia's housing sector is predominantly being driven by both investors (at the expense of owner-occupiers) and construction of units/apartments (over and above existing houses).  The interesting point to acknowledge here is that rental growth has fallen to the slowest rate in a decade and the RBA back in September warned, "additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later".  The salient risks being investors are buying purely for capital growth and unit buyers face an abundance of stock coming to market with little to no product differentiation.  Offsetting this risk is the fact that much of this type of product is being marketed direct to overseas buyers.  The government's recent announcement of a min. $5,000 fee for foreign buyers (existing dwellings) may slow activity, at least in the short term.

In 2014, mortgage debt grew at a rate of 9% to reach an all-time high of $1.28 trillion.  Of this, $839.8 billion was owner-occupier debt, but the fastest growing sector was investment debt which climbed 12.2% to $439.8 billion.  Interest only debt grew a staggering 15.1% to $463.8 billion.

Sydney

Without doubt, Sydney has been the dominant force behind Australia's housing market, with "boom" like conditions overstating the national averages.  According to Residex data, the median Sydney house price sits at an astounding $911,500 (units $612,500) for an annual rise of 20% and a yield of 3.7% (against a national average yield of 4.6%).  Unit rental yields grew at a slower rate than houses, but still pip housing at a yield of 4.6%.

Housing affordability is now the key concern for the region, with house prices climbing to a lofty 11.8 times annual earnings for the state.

Population growth and foreign investment are features of the Sydney market.  Stamp duty revenues have risen in the order of half-a-billion dollars to see the NSW budget back into the black.

NSW is one of the key beneficiaries of a shift away from mining and toward the services sector.  Sydney is the only capital city to reach a new price peak in real (inflation adjusted) terms.

Melbourne

House transfers and mortgage lodgements climbed strongly in Victoria in 2014 and benefited from rate cut speculation.  Melbourne house sales climbed 15.6% over the year to January, and managed to pip Sydney for sales numbers.  This is a positive for state government revenue receipts and the budget.  Melbourne's median house price rose 7.7% (a slowing rate of growth) to $661,500 for a rental yield of 3.6%.

The unit/apartment market has been a significant driver of the Melbourne market for some years now, but sales volumes slipped to fourth in the country due to high construction rates.  Unit prices climbed 4.4% to $472,000 for a rental yield of 4.4%.

ABS data revealed Victoria topped the interstate migration table last year, and overall population growth came in a close second to New South Wales.  This trend is likely to remain positive for Victoria and New South Wales as the mining slowdown continues.

Queensland

The Queensland economy has underperformed more recently, as the mortgage-belt regions of Sydney and Melbourne gain the most from lower interest rates and a falling $A.  Much of this underperformance is attributable to the coal sector, and further pain is expected in the gas sector as a result of declines in the oil price.  Whilst oil prices may have further to fall, coal prices have stabilised and remain the cheapest and widely accessible source of energy.

House prices in Brisbane climbed 4.8% to $484,000 for a rental yield of 4.8%.  Queensland housing is a classic tale of two cities, with capital city prospects bright due to higher affordability and attractive rental yields, whilst mining towns look shaky. Construction is a typically strong contributor to the Queensland economy and carries with it strong multiplier benefits.  Unit sales volumes accelerated to 27.5%, a significantly faster rate than the rest of the nation.  The median unit price rose 3.3% to $371,000 for a rental yield of 5.3%.

Tailwinds:

• Rate cut and expectations for more
• Lower fuel costs lift disposable incomes
• Credit growth is expanding again
• Strong building approvals data
• Rising Household wealth

Headwinds:

• Crackdown on foreign investors ($5,000 fee)
• APRA crackdown on investor lending
• Rising supply dampens house prices
• Population growth rate slowing
• Household debt at record highs
• Rising unemployment, notably mining related

Summary

The Australian economy is enduring enormous change as the economy transitions away from mining toward non-mining, which is generating migration shifts back to the big capital cities.

The property market commences the 2015 year with a decent head of steam, and expectations of further rate cuts to come should propel price growth for longer and beyond the confines of the Sydney market.

However, a word of warning from the archives of Hyman Minsky, suggests we have entered the speculative phase of investment.  That is, a proliferation of interest only debt that chases (speculative) capital growth comes with risks, as growing debts are susceptible to market shocks.
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