Is this Australia’s worst downturn ever? The answer is far from it, although if you’re in Sydney, Perth or Darwin it probably feels like it. These cities are the most challenged in the country right now—Perth and Darwin are five years into a downturn, while in Sydney it has been shorter and faster, with prices down almost 10% in only 18 months.
In other cities, the results are far more mixed. Melbourne frequently gets lumped in with Sydney when discussing the falling market, but the reality is Melbourne is holding up a lot better. Prices are down but the falls are less than half those experienced by Sydney. Elsewhere, conditions are relatively flat. Brisbane is technically in a ‘downturn’, but prices are only down 1.3%. Canberra and Adelaide are also stable. Hobart continues to grow, with a combination of low levels of supply, an overheated rental market, and strong job growth contributing to price rises.
The Big Picture
Moving forward, the outlook for the market is getting clearer. At the beginning of the year, Australia had the uncertainty of the Financial Services Royal Commission final report, which ultimately said next to nothing about housing finance (although mortgage broking did get hit hard). Once announced, banks immediately began to focus more on responsible lending. While positive for financial stability, it signaled the end of the property market boom in Melbourne and Sydney and derailed the flicker of a recovery in Perth.
Finance is set to continue to ease this year. The Royal Commission added no new restrictions on housing finance and the Australian Prudential Regulation Authority (APRA) began to roll back the restrictions they put in place to limit interest-only loans and the rate of growth of investor loans last year. The biggest challenge now is to get the banks lending again. Ideally this will put first home buyers and upgraders in a better position, particularly because for this group, buying conditions are far better than two years ago, but many are still find it difficult to get a loan.
The other factor that will ease up finance is an interest rate cut. On realestate.com.au, interest rate cuts lead to a boost in search activity. While a rate cut won’t put the market back to where it was, it will certainly flatten out conditions. It is also highly likely that banks will pass on any rate cut in full, particularly given the negative sentiment towards them at the present.
Something that is providing a floor to how far prices will fall is that the jobs situation is looking good. Generally, people are not worried that they will lose their jobs and if they are, record levels of job vacancies should mean they don’t stay unemployed for long.
Australia has become almost completely dependent on ‘mum and dad investors’ to provide rental housing, which is quite different to the rest of the world. These individual investors have become dependent on tax incentives to make owning a low yielding property viable. With no back up plan to address this fall in investor activity, rental rises could become problematic, particularly in places already dealing with rental-related issues such as Hobart. The other problem is that in regional areas with no demand for new housing, a drop in rental housing supply would be exacerbated. For major cities, renters may be pushed into inner city apartments and outer suburban estates—areas with high supply. This would create a missing middle for renters which would become the domain of owner occupiers only.
A Deeper Look
Melbourne house prices may be down, but the decline is half that of Sydney. Suburbs are getting higher views-per-listing from buyers and renters on realestate.com.au than Sydney, supported by rising rents and far more mixed price changes across the city. Overseas-based property seekers are still far more active in Melbourne and the city’s affordability and jobs growth are holding up the market.
Dropping prices have led to increased interest in premium suburbs, which now dominate the list of most in-demand suburbs. During the boom, cheaper suburbs topped the list; areas like Briar Hill, Montmorency and Montrose, where big homes on big blocks at more affordable price points are available. Now the list features places like Middle Park and Toorak—very expensive suburbs, but cheaper than what they were a couple of years ago.
The state of Victoria continues to do well. The heat is cooling in Geelong, but the recent Federal budget announcement that a fast rail would cut the commute time from Geelong to Melbourne CBD to half an hour should lead to increased buyer demand. Right now, it is the Latrobe-Gippsland region that is really powering ahead.
Brisbane was meant to be ground zero for apartment oversupply, but concerns were overstated, and Brisbane ultimately weathered the downturn well. Prices are flat, even though it is under the same finance challenges as the rest of Australia. The fundamentals of property demand continue to hold up the Brisbane market; jobs are being created and this is supporting population growth. Interestingly, offshore property seekers are increasing across Brisbane, not just from Asia but also from New Zealand and the UK. Brisbane is a beneficiary of Brexit, seeing the largest increase in property seekers from the UK ever seen in Australia.
Regional Queensland is similarly quite flat, with many areas seeing only modest declines. Gold Coast appears to be an escape for Sydney’s high prices, with very high levels of search activity from buyers and renters in Sydney looking at the area. Rental demand on the Gold Coast also continues to be strong. On the Sunshine Coast, prices have increased over the year but have fallen slightly this quarter.
Sydney was hit the worst by Australia’s current property market downturn. Its development cycle started too late, and as a result pricing moved too far, too quickly. This has seen many people priced out of Sydney to cheaper states. Rental demand is now dropping, and investors don’t want to buy housing that is hard to lease and falling in value. Owner occupiers are hesitant to buy in a market that might not have hit the bottom yet.
While falling prices impact confidence, it isn’t actually bad for most buyers. Sydney has now moved from being the second least affordable city in the world behind Hong Kong, to being third, knocked out by Vancouver. This price fall has made it easier for first home buyers who were battling investors for properties during the price boom and were hesitant to transact in a fast-moving market. Upgraders may get less for their existing homes but are also often now paying less for their new home.
The declining market has led to a change in the types of properties that buyers are interested in; there is now far more search activity in premium suburbs. In every price boom, we see people move to cheaper suburbs to get into the market. As prices fall, buyers turn their attention back to premium suburbs, either because they see good value, or prices have fallen enough to allow them to get back in. Right now, Northern Beaches and the Inner East of Sydney are seeing the highest number of views-per-listing in Australia.
In regional New South Wales, the situation is far more diverse. Over the past 12 months, Coffs Harbour-Grafton and Mid-North Coast have seen positive price growth which hasn’t changed over the quarter.
Adelaide really started to take off; this is likely in part due to higher levels of investor activity coming from these cities but, like Brisbane, the fundamentals of property demand are also good in Adelaide. Jobs are being created and demand from renters and buyers is strong.
The Adelaide market is unique in that high-end properties are doing particularly well with regards to pricing, but there are high levels of demand for cheaper rental locations. This is likely because the growth in employment is a mix of manufacturing and more highly paid white collar. Investors’ focus on prime locations is also a factor, with many ignoring Adelaide’s affordable suburbs.
The outlook for Adelaide is for a continuation of fairly flat conditions. While this doesn’t sound overwhelmingly positive, it does reflect that the market is evenly balanced. Population growth is being matched by enough development and investor activity. It may not be exciting, but it really is a utopia for property markets.
The city has struggled since the announcement of the Financial Services Royal Commission. All regions continue to see price drops, but premium suburbs are still doing well. Not only are prices rising in many suburbs, they are also seeing the highest views-per-listing on realestate.com.au. The perennial favourite, Shenton Park, tops the list for both houses and apartments.
While prices aren’t looking all that positive, rental growth continues and again, premium suburbs are doing the best. Floreat and Swanbourne have both experienced greater than 10% rental growth with many million-dollar suburbs now also in positive territory. Though access to finance and sentiment are problematic, the fundamentals of property for Perth are present and positive.
Canberra has surprisingly weathered the current downturn well, with housing prices down slightly over the quarter, but up over the past 12 months. Apartments have been a bit softer, but not surprising given relatively high levels of supply. While premium inner suburbs tend to be popular in most locations, the suburbs in Canberra are more mixed, although there is a definite north side focus. Right now, Ainslie is number one for houses while Garran tops the most in demand for apartments.
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