In an effort to create wealth and assets, people are always on the lookout to buy property – either to live in or for real estate investment.
The dynamics of the Australian Property Market is something that can really confuse people. Unless you’ve been following it closely for some time. Australia does not represent just one market; so for people looking to buy property, it is important to look at each city based on its own individual merits to understand what’s going on there.
Leading buyer’s agent Ramon Cura from Cura Property gives us an overview of the property market in some of the major Australian cities.
Property markets in Perth, Brisbane, Sydney and Melbourne in a nutshell
Australia has many capital cities and each city has its own set of drivers for their property market.
Perth: Ten years ago the market in Perth, Western Australia, was really strong. It was an economy that was driven by the resources and commodities boom which dwindled towards the end of 2010, particularly with the GFC that really shook the property market.
Today, in Perth, there is a significant oversupply of property and the city doesn’t have the growth and employment to match that oversupply. As a result, property prices in Perth have been fairly flat. It did decline over a number of years from 2010-2016, but we are slowly starting to see signs of a market resurgence in Perth as Western Australia moves away from the resources boom and sectors such as health and government services start to come back. Is it the right time to invest in Perth? The jury’s still out at this stage. What you should do is monitor the next 12 to 18 months before deciding how you want to approach Perth as a property market.
Brisbane: This was another city strongly driven by the resources boom at the start of 2000. Brisbane too has been pretty flat for the last five years. But in the last six to eight months the gap in the median house prices between Brisbane and other East Coast cities such as Sydney and Melbourne has increased considerably.
The median house prices in Brisbane is ticking just above the $650,000 mark, while in Sydney and Melbourne, it’s almost at $950,000 to $1M. So, if you’re looking to buy a house, Brisbane has now become very attractive, given the relative ease with which you can commute to and from Brisbane.
People are now starting to look for work outside Sydney attracted by the idea of a more relaxed lifestyle and lower house prices as well. House prices have started to pick up in Brisbane, but with apartments, it’s a different story altogether. There has been a lot of construction going on in Brisbane over the last five or six years, resulting in an oversupply of apartments closer to the city. But this is probably going to be just a short-term situation. There will most likely be flat prices for apartments over the next year or two. But with the population growth and the attractiveness of Brisbane as a city, those apartments will have takers and apartment prices may rise over the next three to five years.
Melbourne and Sydney: Based on what’s happened in the last five years, both cities have had very similar situations with their property markets. Just after the GFC, both cities suffered from an acute shortage of construction. For a period of three years, there were very few properties and apartments being built.
In 2012, the Reserve Bank and lending banks lowered interest rates, encouraging people to get back into the property market, to increase demand. This is when the acute undersupply of houses and apartments came into play, resulting in the increase of housing prices in these two major cities.
In 2017, in Sydney, there’s been a gradual easing of prices in both houses and apartments, but that is no cause for alarm. That’s really due to the fact that banks have become stricter in their lending because the regulatory authority wants to maintain a certain balance in the market to avoid risks such as steep price drops.
It’s taking a little more time in Melbourne where there is still a large gap between the demand for people wanting to buy homes and the number of available homes out there, but things are slowly changing there too.
Tips to research property in different cities
When looking at different Australian cities to figure out what drives the supply and demand situation, ask yourself this fundamental question: What do you think the road is going to look like over the next 10 to 15 years.
Take Sydney as an example. Ask yourself: Is Sydney going to be a bigger city? Is it going to be a smaller city? Where would people want to live? Why would they want to live there?
It’s easier for people to imagine what the city is going to look like rather than asking the hard economic questions, which are really more for people who are professionals in that space. If you’re looking to invest in property in any Australian city, your research should cover:
Trending cities that are attracting people for employment
Cities where the government is investing money and cities where large employers
Companies are investing money and creating more job opportunities.
The answers to these will really be good indicators of where the property market may head.
Nobody has a crystal ball, but asking relevant questions and getting real answers is a good start. Once you’ve settled on a particular area that you think may start to do well, always try and get good advice from someone you can trust or a professional who understands the numbers and the property side of the investment.
Why Sydney and Melbourne face an undersupply in the face of pent-up demand
If you go back almost ten years when the GFC and the credit crunch hit the world globally, there was a lot of shortage in lending, primarily because a lot of banks went out of business. Most banks wanted to tighten lending and the sectors that were hit the hardest in Australia were mining, property and construction.
There were a lot of developers trying to fund the construction of houses and apartments across Australia. But in Sydney and Melbourne particularly, the banks decided to stop lending or very tightly restrict the types of loans that they would lend to small or medium developers. So, for a period of time, there was almost no construction.
Very few houses and apartments were being built, yet the population was still growing. Even during that time, the population growth was at 1% per annum. So for a city like Sydney where there is a population of around 4 million, that’s about 40,000 more people every year. And without construction and more housing, it was extremely difficult for people to try to find a property to rent. There were long queues for properties that were available, and rents during the years 2008 through to 2013 jumped about 45%.
Even when banks decided that they could lend to developers, the supply was nowhere near the demand, which was very high primarily because interest rates had dropped so low that it was as affordable to have a mortgage as it was to rent.
The Australian property market goes through different cycles
Just like businesses, the property market also goes through different cycles. Right now the property cycle in Australia is moving from decline, stagnancy and into the growth phase. We’re in that period of time where there is an increasing number of people who need housing, inevitably pushing property prices up.
Unrealistic prices are not sustainable because eventually, the general market will decide that it’s way too expensive and may opt to rent instead of buy. Rent in Sydney and Melbourne in terms of yield are probably at their lowest levels for the last six or seven years, because there are so many people out there trying to buy. Renting now is as affordable, or even more affordable, in Sydney than it has been in five years. Effectively, in the face of very high prices, more people will decide to rent a home instead of buying one.
Understanding property and these cycles is not really rocket science. It’s all about what people want and what can people afford.
Banks becoming stricter about lending to investors is another reason why there are fewer buyers out there. Fewer buyers mean that property prices aren’t going to rise so high. The rate of mortgage default has historically been very low, around the 2% mark. Australians have a real love affair with property and will do whatever they can to pay their mortgage and stay in their homes.
Negative gearing and the impact it has on property prices
Negative gearing is all about tax, and you wouldn’t really make a decision to buy an investment property purely on its tax benefits. Which means, if it’s not going to be a good investment without the tax benefit, it’s not going to be a good investment with the tax benefit. It may cost you slightly less with the negative gearing benefit. But if it’s going to be a dud property, it’s going to be that regardless of whether you’re getting tax benefits or not.
It’s important that you look at the fundamentals of why you want to buy. If it’s because you want to build your wealth over the long term by buying a good quality growth asset, then negative gearing gives you a bit of an upside in the short term. But you shouldn’t base your decision to buy on the negative gearing factor.
Focus on the best property you can buy for what you can afford, and nine times out of ten if you take negative gearing out of the picture, it’s always about the best kind of property as opposed to the best tax return.
The best time to buy is whenever you’re ready, but seek professional advice
Whenever you’re ready to buy, the important thing to do is seek the right advice from a professional who can give lending advice about whether you can afford a mortgage and also understand how your buying decision is going to fit in the long term. Having someone who can help you plan, understand what things are going to look like when life events happen, be it marriage, children etc. will put you in a position to make the best decision that you can.
It’s hard enough buying a property out there on your own, let alone trying to understand the numbers yourself. Having a good mortgage broker, a good lender and a good financial advisor working with you will give you the confidence and the understanding you need to make the best buying decision.
To check in on what’s been happening in the property market, you can get in touch with Ramon or visit his website www.curaproperty.com.au. But it’s always wiser to get numbers and figures from a personal advisor.