In our final installment of the autumn news season, the question is – where to from here? We summarise the issues affecting the property market in the following year and finish off with an overview of where there’s value and opportunities.
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WHERE TO FROM HERE? Issues affecting the property market this year
Banks and lending
Interest rates on housing loans have started to move upward, despite the Reserve Bank keeping the cash rate at a historic low of 1.5 per cent. Existing borrowers with fixed rates might not be affected, but rate rises will impact the capacity of some investors to participate in the market. Banks are also imposing tighter loan standards, further limiting buyers’ purchasing-power. Nonetheless, we usually see a ceiling on house prices when interest rates rise, because money is no longer as affordable, and some forecasters are suggesting that housing prices have peaked. In addition, investor-borrowers do have some negotiating power, and can insist on fixed rates or better deals, because lenders seek to keep clients on their mortgage books.
Politicians continue to trumpet increased job creation, but the data tells a different story. What they don’t publicise is that 1.1 million Australians are now underemployed as full-time jobs are in steep decline. Part-time and contract jobs are increasing, and 3-day weeks are predicted to become the norm for many in the next decade. Compounding this is that wages haven’t adjusted in real terms for at least seven years. These factors are creating a growing sector of precarious and under-waged workers. This will impact the rental and property-investment markets, as around a third of people’s full-time wages are spent on rent or mortgages. Further, economic forecasters estimate that 5 million of Australia’s existing jobs will be lost in the next decade, due to automation and overseas outsourcing. Although policy-makers are starting to discuss the prospect of a universal basic income (UBI) in order to prevent an underclass, it’s unlikely such measures will have political momentum in the foreseeable future, as a UBI model requires multinational corporates to stop channelling profits overseas and bypassing Australia’s tax system.
Cost of living
The cost of living is increasing with regulatory failures around power and water. Despite claims that the carbon-tax removal would dramatically lower energy bills, the cost of power has almost doubled. Politicians and energy industry figures are spinning fanciful tales of “gas shortage”, “energy crisis” and “demand spikes”, but again, the hard data tells a very different story. Australia’s gas production has now hit a record-high, and we’re about to become the biggest gas exporter in the world. Many economists are pointing out that the politics of energy — not the energy market — are broken, and pushing up local prices. The local price of gas is substantially higher than the price paid by the countries we’re selling it to, and the political discussion is turning to the prospect of buying back our gas from Asia and on-selling it to Australian households. Household spending is increasingly burdened by the cost of politicians’ regulatory failures that provide corporate welfare to energy giants and thwart the prospects of affordable and renewable local energy industries. The lack of political competency on major infrastructure policy (gas, electricity and water) will boost inflation and impact people’s capacities to buy and rent housing.
Sydney and Melbourne vacancy rates have fallen to 1.7 and 1.5 per cent respectively, and in Sydney, rents are about 20-30 per cent higher than equivalent Melbourne properties. Asking rents in Melbourne and Sydney are increasing marginally, while they’re falling in Perth and Darwin. This may change with predictions of apartment oversupply in East-coast cities. Counter-intuitively, new developments are not currently addressing issues of housing affordability or adequate supply of housing.
Governments have a growing focus on regenerating regional cities in close proximity to major cities — such as Geelong, Bendigo, Ballarat, Wollongong and Newcastle. Several large government agencies are being relocated to regional centres, and these are also areas where heavy government expenditure on transport and health services are likely to generate strong growth, as people seek employment opportunities and lifestyle improvements. Despite much media attention on anti-immigration measures, the migrant population will continue to increase.
The prospect of regulatory change is a concern for property investors; as is increasing market intervention in the banking sector. The budgets (federal and state) have seen a tightening of regulation around foreign ownership and stamp duty savings for developments; while the bank levy has elicited threats of more costs being passed on to consumers.
The concessions given to first home buyers and downsizers over 65 may provide greater purchasing power to two groups conceivably bidding for the same style of property. We’ll watch with interest.
WHERE TO FROM HERE? Away from the speculative
When times are complex and headline prices for housing are running ahead of the market, a proven strategy has been to search out opportunities in places where you least expect to find value.
There are always sound investment properties in close to the city suburbs where values make sense That is, capital growth potential supported by acceptable yields. There is usually not much stock in the market in this sector so patience is a necessity.
Art deco units and housing have been particularly attractive in this sector in suburbs such as Bondi or St Kilda. We’re currently looking in Melbourne for art deco opportunities in Armadale, Malvern and Elwood. Solid apartments in these quality suburbs can change hands for well under $1 million. Solid art decos can still be found in Rose Bay and Vaucluse in Sydney at around $1.1 million and attract ready tenancies that will return upwards of 3.5%.
These units are usually of solid brick construction, in smaller blocks of units, often have a lock up garage, present with three spacious bedrooms and are not expensive to renovate. They are invariably more spacious and with higher ceilings than modern units – providing that element of scarcity that separates them from the off the plan apartment market.
Geelong continues to provide opportunities with higher yielding properties on larger parcels of land. While there has been movement of prices over the past year, there are still opportunities out there. Our commitment to Geelong remains strong.