John E Edwards
27 April, 2012
Our national housing market is improving (see ‘Monthly Trend – Australia’) however without some form of stimulus we are likely to continue seeing housing values decrease across much of Australia.
Fortunately, it is likely that the stimulus will come in the form of an interest rate cut and I would not be surprised to see the RBA cut rates by 0.5% at its May Board Meeting. In any event, a 0.25% reduction looks all but certain.
There has been comment that the unemployment rate (5.2%) could affect the likelihood of a rate reduction given that it has not been increasing. However, there are some worrying trends in the employment data and I believe the RBA will not be blind to these issues.
What appears to be happening is that the unemployment rate may only be remaining steady as a consequence of people taking up part-time employment and this won’t be delivering quality levels of income. There was an increase of 15,800 people in full-time employment in March and around 28,200 people began part-time employment. In total, the ABS suggests that there are around 626,600 people unemployed. The ‘State Employment’ table presented below points to this issue.
In addition to the inherent weakness in the total full-time numbers, we should also recognise that the figures are developed from a sampling process. What constitutes a person as being unemployed is also important and it should be noted that anyone who has worked as little as a few hours in the last week is considered to be employed.
The remaining indicator, which for our money sealed the fate of the RBA’s rate adjustment, was the CPI rate. In the latest release (24 April, 2012), CPI came in at 0.1% for the March quarter, unchanged from the December 2011 quarter. It rose 1.6% through the year-ending March 2012, compared with a rise of 3.1% to the year-ending December 2011.
Clearly, CPI is now at the lower end of the RBA’s target range and, given its objective of achieving a 2-3%CPI outcome, a rate cut is looking certain.
The pending rate cut begs the question, what will be the impact? I believe most markets across Australia will move into moderate growth over the next three to four months. In saying this however, I do not expect any dramatic upward pressure on housing values once the rate cut takes place. In many capital cities, even with a 0.5% cut in home loan rates (provided the banks pass it on in full), affordability will still be too difficult. Also, there is significant over supply in places like Melbourne and Adelaide, and in cities like Sydney there is a stock shortage which is reducing by the week. An interest rate reduction will improve affordability but the median house for the median income family in Sydney will still be out of reach, requiring about 60% of after tax income to make repayments. Consumers will still find home purchase difficult.
The impact of the continuing difficulties in Europe and the press that the UK has now moved into technical recession again adds to the above disheartening situation and consumer sentiment will be undermined.
Cities that have moved out of the correction phase or are moving to a positive outcome, and where the stock overhang is lower, the position will be better and encouraging. It will be units and the lower cost properties in the house and land market that will benefit most. Construction is slowing, as are approvals, so stock positions will become more difficult and we will see supply issues developing over the next two years.
Looking at the outcomes to 31 March, 2012, it is clear that a number of capital cities have moved beyond the correction phase or are in the process of exiting it. In the table ‘Houses’, we present a summary of Australia’s housing markets for capital city and country areas.
You can see that Brisbane is at last presenting growth for the quarter, due to a significant growth improvement in March alone (1.49%). It is too early to definitely say that the correction phase is over however we can be encouraged that it is from the trend shown in the graph below. Clearly this is a city that will benefit from rate cuts.
The position in Melbourne looks to be improving however I suspect there are more corrections to come, particularly the unit market where there appears to be a significant number of newly constructed properties to be brought to the market over the balance of this year. We are expecting, over the medium term, for Melbourne to be the worst performing capital city in Australia.
In the graph ‘Monthly Trend Houses and Units – Melbourne’ the current position is presented. The trend data for units is significantly better than that of houses and given supply issues, I believe the housing trend is the better indicator of where this market is headed.
Perth is now clearly out of its correction phase as the impact of the resources boom has started to cause housing need imbalances. The graph ‘Monthly Trend Houses and Units – Perth’ presents the current position.
The growth now being exhibited in this market is very respectable and we should expect the rate to slow a little. The growth in weekly rentals of $40 per week in the last quarter is further evidence of a housing stock imbalance.
The table ‘Units’ presents the current position for units across Australia.
It is clear from the tables that housing stock levels in all states are starting to normalise and more markets are achieving a stock balance. Raising dollar weekly rentals support a stock balance situation. The highest increase in weekly rent was in the Perth house market, where prices jumped $40 per week in the last quarter. The highest jump in the unit market was found in Sydney, at $25 per week, where supply has been tight for a number of years.
Our forecast growth outcomes are increasing as our statistical models recognise that the corrections are shallower than what was previously expected. Predictions for Brisbane, Sydney and Perth are now respectable for over the next eight years, having a better than 6% per annum outcome, while Melbourne predictions remain low. The poorest outcome is expected in Adelaide however this city retains a wildcard as its outcome is dependant on the decisions of BHP Billiton with respect to the development of Roxby Downs.
Overall, the position has improved.
Much of the above statistics and data has been extracted from our Residex Reports, which are now available for the March 2012 quarter. For a more in-depth analysis, sales volumes and predictions, please obtain a copy of the state Report to get a better idea and understanding of the suburbs that are likely to offer the best investment opportunities.
As we all move forward, please remember that while the overall position looks better, not all suburbs will perform at the same rate. For example, in the short term, our predicted rates of growth may look overly optimistic. For some suburbs however in the longer term, the rates of growth may be much higher and hence the end result over the total prediction period should be around our predicted outcome.
As we move out of the correction phase, the speed of this change will be helped by rate cuts and the market will offer opportunities and lower levels of downside. The areas that are yet to move into growth in places like Sydney and Brisbane are where the best short term opportunities for capital gains will be found. Perth will also be presenting similar opportunities but the “bargain hunt” will be more difficult.
Notwithstanding all of my commentary, make sure rental returns are front of mind and that property purchases have the location and price to attract tenants in the future, as markets in some cities will become competitive with respect to rental.
As always happy investing,
John E Edwards.
Chief Executive Officer and Founder, Residex Pty Limited.
Loading ...
