Autumn News Season – The Market

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Welcome to our first autumn news season. Over the next few weeks, we’ll be putting out a series of articles that consider some of the more macro forces that are influencing the property market and the economy in general.

We hope you’ll find these articles insightful and thought provoking. Please feel free to contact us on 03 9621 1044 if you would like to discuss these perspectives any further.

 

Driving the Melbourne and Sydney housing markets

The median price of residential housing sold during the 12 months to the end of February rose 15.5 per cent in Sydney and 13.7 per cent in Melbourne. That growth rate was accentuated by demand for close to the CBD properties in the two big capitals. Governments and banks are both moving to dampen this focussed surge which reflects a number of driving forces coming at the same time, namely:

 

-the lowest interest rates for 60 years

-high offshore migration

-the emergence of affluent middle classes in Asia with material investible funds to place

-domestic migration to Melbourne and Sydney

-record numbers entering retirement (for the first time this demographic controls substantial assets partly from the introduction of national superannuation, largely from the appreciation of residential housing values in the past decade)

-the revitalisation of the rural sector

-the relatively sustained strength of the Australian economy and its growing exports opportunities and sales to Asia.

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A two paced market

Median growth in housing prices in the rest of Australia has lagged and is generally below five per cent. Regional population centres underperformed in many instances despite the record rural exports.

Adelaide has self created problems that are inhibiting business investment there and will curb any near term population growth.

Brisbane housing prices rose 5.3 per cent in the 12 months to February, but there is a large supply of new apartments overhanging the market. The lull in the Brisbane market will not be long term, though, with housing frequently changing hands below replacement cost. Population growth is continuing on the back of climatic attraction – and the lower cost of housing compared with the two major capitals. Queensland will also gain impetus from the recurring influx of tourists already evident in announced new accommodation investment.

Demand for thermal coal rose as the year progressed. The first real impact of the massive investment in coal seam gas is starting to emerge, as distributors struggle to source adequate volumes of domestic electricity. The shortages now emerging have been foreshadowed for almost a decade.

They will have significant repercussions in domestic housing patterns in terms of location, materials and amenity. Ultimately, gas exports will provide the stimulus for great wealth generation. Nearly all our gas exports go to Asia.

Perth median prices were well down in the past 12 months. The focus for the mining and energy sectors became production rather than new plant construction which is much more labour intensive. Perth will recover its momentum when capital expenditure resumes in the resources sector. Australia is exporting record volumes of iron ore but, importantly, the capex of recent years also lead to a marked lift in productivity through automation.

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The Melbourne Sydney surge

Melbourne’s population has risen by more than 90,000 in each of the past three years and Sydney’s population has tracked similarly. Despite official efforts to encourage decentralisation, people live where the work is. The service industries, which are the key growth sector for labour, are generally based within five kilometres of the city. Asian migrants are also attracted to big cities because of the employment opportunities.

The momentum in Melbourne and Sydney partly reflects flow through of ever increasing numbers from the baby boomer era with justified expectations of a prolonged period of retirement and unprecedented funds for investment. These retirees often want to downsize and move closer to the action that occurs close to the CBD. We have no previous experience in Australia of a housing and property investment market in which people over 65 – largely retired- have such presence and influence.