Australia | Jul 11 2016
– Investor demand for housing declining
– New dwelling completions still rising
– Market to enter oversupply
By Greg Peel
“Get set for weaker conditions across the board in residential property markets.”
So opens a press release from industry analyst and economic forecaster BIS Shrapnel on the publication of its latest report, Residential Property Prospects, 2016 to 2019.
It is well understood that in the last several years, demand for property as an investment in Australia has surged. Drivers include a low interest rate environment, providing for cheap financing, low bank deposit rates, forcing a search for alternative yield investments, and a general hangover from a GFC which scared many longer term investors away from the stock market.
Clearly another reason is “FOMO” – fear of missing out. The investment property market has witnessed a classic stampede of the herd. This is no more evident than in Sydney and Melbourne, which aside from being the country’s biggest two cities are benefitting from New South Wales and Victoria enjoying more robust economic growth than the mining states, which have been faltering.
Indeed, recent price growth has been concentrated in Sydney and Melbourne, with other capital cities showing either modest growth or declines. Investors have been elbowing out genuine owner-occupiers, while first home buyers have been left in the dust. In response to the boom in investor demand, dwelling construction has also accelerated. But whereas detached housing has always been the Australian dream, apartments have seen an unprecedented surge in construction. Apartments offer developers more profit per square metre.
In response to RBA fears of an investment housing bubble, last year APRA tightened restrictions on bank lending books, forcing up the cost of borrowing for investment. Investors were quick to respond, and demand has been easing over the course of 2016. Easing bubble fears allowed the RBA to respond to issues in the wider economy and further cut interest rates. This played into the hands of owner-occupiers, who began to find less competition for dwellings and as such, to some extent have offset the decline in investor demand.
Under normal circumstances, population growth is the underlying driver of housing demand. In 2014-15 national population growth fell to its second lowest level since 2005-06, BIS Shrapnel notes. Overseas migration fell to 176,500 in 2014-15 from 229,400 in 2011-12. The majority of these migrants are classified as “long term overseas visitors”, suggesting they might be here for a while but will not actually stay.
Nationally, BIS Shrapnel anticipates 220,000 new dwellings will have commenced in 2015-16, translating into a peak in dwelling completions in 2016-17. Apartment blocks may be more profitable on the same footprint but they also take a lot longer to build, meaning there will be a lag of new dwelling completions into 2017-18. Underlying demand for new dwellings is expected to run at an average 159,200 over annum over the next five years. Thus as the aforementioned new dwellings move to completion, all states bar New South Wales will move into dwelling oversupply, or increase existing oversupply.
BIS Shrapnel expects all markets to steadily weaken and bottom out over 2017-18 and 2018-19, with house prices largely flat or in decline over this period. Aside from population growth, economic growth and subsequent employment growth is a major driver of housing demand. As Australia’s economy transitions away from mining investment, economic growth nationally is expected to be muted. Even in the economically stronger New South Wales and Victoria, there is limited further upside to prices, BIS Shrapnel believes.
APRA’s tougher rules have led to a fall in investor demand and falling investor demand is putting the brake on rising prices. As investors look to lower capital gain or even capital loss potential, demand will fall further, putting more pressure on prices.
The good news stems from the aforementioned rise in owner-occupier demand thanks to falling interest rates and less aggressive buyer competition. This is acting as a dampener on price falls. But lower rates also take the pressure off existing investors and the possibility of being forced to sell into a falling market, thus triggering a property crash. Investors may have to reduce rents to attract tenants but have a much better chance of riding out the downturn while loan repayments remain manageable, BIS Shrapnel notes.
The fact that Sydney and Melbourne have experienced the biggest rise in prices will be a key underlying factor behind the progressive weakening of prices over the next three years, BIS Shrapnel asserts. Price rises have fuelled further construction, and a record 49% of new completions across the country involve apartments. Victoria is forecast to tip into oversupply in 2016-17. Sydney will just hold on to undersupply.
The Perth and Darwin markets will continue to suffer from excess supply meeting the mining downturn. Adelaide faces the strongest economic headwinds, with the close of car manufacturing ensuring South Australia has the highest rate of unemployment in the country. Having already seen a solid drop in prices up to now, Brisbane offers the greatest prospect of rising house prices, BIS Shrapnel suggests, followed by Hobart and Canberra.
Nevertheless, all markets are forecast by BIS Shrapnel to experience falls in prices in real terms by June 2019. Real declines of 1% are forecast for Brisbane and Hobart, through to a 12% decline forecast for Adelaide. All capital cities are expected to see falls in apartment prices ranging from 8% to 15%.
Much has been made of foreign buyers forcing up the prices of new apartments. Foreign buyers are only allowed to purchase new dwellings, thus those looking to sell will only do so into a market of local buyers, BIS Shrapnel notes.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
