Australian Residential Property Update - McCarthy Group Australian Residential Property Update - McCarthy Group

Welcome to the McCarthy Group mid-year review of the Australian property market. This report looks at how the economy, the Intergenerational Report, the 2015/16 budget, and local factors impact the markets where McCarthy Group clients are invested.

Snapshot of the Australian economy

On the positive side:

  • 24 years without recession
  • Free Trade Agreements with major trading partners across Asia
  • Located in the growth region of the world
  • Stable government
  • Strong business environment
  • Excellent education facilities
  • Abundance of natural resources
  • Strong demand for what we grow and produce
  • Falling dollar helping manufacturing, tourism and agricultural exports
Less positive factors:

  • Below trend economic growth
  • Rising unemployment
  • Record low interest rates (this is a positive for investors)
  • Slowdown in China
  • Decline in resources boom
  • Budget deficits stretching into the future
  • Large areas affected by drought

As Australians we all face the same set of circumstances. However while some adopt a “wait and see” approach, others will see the glass as half full and take advantage of the opportunities on offer.

A Budget designed to jump-start growth

The 2015/16 Budget has been generally well received and seen as right for the times. The big winners are:

  • Small businesses with a $5.5 billion stimuluspackage.
  • Working parents with a $3.5 billion familiespackage.

The good news for investors is that record low interest rates set by the Reserve Bank make it easier to borrow and invest in property.

The intergenerational report

Key trends include:

  • Average incomes have doubled in real terms since 1975
  • Australians will enjoy one of the highest life expectanciesin the world: 95.1 years for men and 96.6 years for women
  • Almost 24% of the population – 9 million Australians –will be aged 65 and over
  • Our population is expected to grow to 40 million, fromalmost 24 million today
  • About 40,000 people will be aged 100 and over!

number_of_people_aged
The current parliament is already wrestling with how to pay for the age pension, superannuation, health care and more. The big question is…

How will it all be paid for?

We all know that those of working age contribute through taxes to support those of retirement age. The bad news is that while the numbers of older retirees steadily increases, the numbers of those aged 15-64 to support them dramatically reduces.

What does that mean for you?

There is already a political storm about government measures that sees pensions left at 15% of average weekly earnings. If that’s now, hoping that the government will find a way to support us better in retirement is wishful thinking.

What are your options?

Property investment is the key

The good news is that with a population of 40 million, we will need over 6 million additional homes. The long term performance of property is a proven means to grow wealth.

When you invest in property and let the value grow for long enough, you have a solution to the retirement problem that will affect more than 90% of all Australians.

Property market overview

In this report, we will examine some of the key market trends from the past 12-18 months, including:

Price growth slowing nationally

These two charts show one and ten year views of capital city prices. On average over the past 10 years, across all capital cities, dwelling prices have increased by 5.2% a year.

Where are the opportunities?

By the end of 2015 the median detached house price in Sydney will be close to $1 million1. This will make buying a home unaffordable for many people, and rents will follow suit. Will this trigger an exodus from Sydney with skilled workers taking their skills to country cities and towns?

The huge gap in prices makes emerging and regional markets very attractive, as simple economics will force people to consider relocating as a way to balance the budget.

These regional markets offer great opportunities for astute and patient investors including:

  • More affordable to buy
  • The opportunity to build brand new homes
  • High quality construction & long-termguarantees
  • More affordable to renters, meaning potentiallygreater rental demand
  • Prices rise to meet heightened demand
  • A sound long-term investment.

Capital City House Relative Positions as at May 20152

  • Sydney

    $929,000

  • Perth

    $524,000

  • Melbourne

    $673,000

  • Hobart

    $375,000

  • Brisbane

    $478,000

  • Darwin

    $567,000

  • Adelaide

    $421,000

  • Canberra

    $546,000

Sydney, NSW

The housing boom in Sydney has created a “wealth effect” that has consumers feeling good about their gains and is helping to drive retail spending. Greatly increased investor activity means that investment loans are now almost half of all loan approvals in NSW, according to the RBA3.

Along with the price explosion in Sydney has come a number of signals from the RBA and APRA that warn investors that what goes up can come down. And other measures are being put in place or are being considered largely to rein in Sydney, including:

  • Restrictions on overseas buyers who have been a dominant force in the market
  • Higher capital deposits for investor lending
  • Reduced bank competition for investor loans
  • Reduced discounts for investor loans
  • Tougher scrutiny on borrowers’ ability to repay their debts.
home_priceThis chart shows market prices across the country slowing, but Sydney is still going strong. The circumstances that created this bubble include:

  • Prices went sideways for almost 10 years, so we
    have seen a catch up that triggered record prices
  • The Sydney market is undersupplied
  • Strong population growth has contributed to the
    high demand for property.

We believe Sydney has peaked. As the cycle turns down prices will flatten and start to fall. Many of the measures introduced are designed to do just that coupled with the fact that better value can be found elsewhere.

Melbourne

Melbourne, VIC

Like Sydney, inner city Melbourne prices have boomed and are surging towards a peak. In the quarter to March, Melbourne’s median house price reached $672,500. According to Residex that’s an annual growth rate of 8.68%. The surge in Melbourne has been spurred on by what has happened in Sydney, and we would be similarly cautious about investing in inner city Melbourne as prices surge towards a peak. Both cities have seen strong population increases which has helped drive demand for property along with the entry of foreign buyers in greater numbers.

While house prices have grown, apartments dropped by 0.8%. Apartments account for up to 50% of residential property investment in Melbourne, leading to an anticipated oversupply of 14,300 units by July 20165.

The size of new units has also come under scrutiny. In 2014 one bedroom apartments fell to 44m2. At 59m2, two bedroom apartments weren’t much better. Pretty squishy, wouldn’t you agree?

Spotlight on Doreen

Doreen is a suburb in Northern Outer Melbourne with a population of over 11,000 residents. The June 2015 “Market Watch” in Australian Property highlights encouraging signs of growth:

  • House sales in sample – 333
  • Median price – $445,000
  • 3-month growth – 1.1%
  • 12-month growth – 6.0%
  • 5-year growth – 2.4%
  • Median weekly rental – $350
  • Average rental yield – 5.1%.

I’m glad to be holding a detached house that’s on the up in Doreen, rather than a 44m2 unit in the city! The ripple from the inner and middle ring house price growth should start spilling over to outer suburbs like Doreen.

Newsflash!

Giant oil and gas projects to create 16,500 jobs in Pilbara

While everyone is watching iron ore prices fall, the massive Gorgon and Wheatstone natural gas projects are set to generate more than $50 billion in expenditure on Australian goods, services and jobs, with tax revenue set to boost government coffers by more than $60 million. An estimated 16,500 direct and indirect jobs are expected to result from the two developments during peak construction.

We will be watching carefully as property prices fall in Perth and surrounds, and looking for the right time to invest ahead of the next property upturn.

Source: http://bit.ly/1LLxd8X http://ab.co/1ckwC1q

Snapshot – Mandurah

There are still good opportunities in WA for investors. McCarthy Group clients are currently investing in brand new homes in Mandurah so that they are ready for when the cycle turns up.

WA’s second biggest city offers a laid back coastal lifestyle and an easy commute to Perth by train or freeway. Mandurah appeals to retirees, young families and maturing independents alike, making it a city for investors to watch.

  • House sales in sample – 239
  • Median price – $360,000
  • 3-month growth – -0.4%
  • 12-month growth – 5.9%
  • 5-year growth – 0.9%
  • Median weekly rental – $340
  • Average rental yield – 4.7%.

Brisbane and SEQ

Property experts are highlighting Brisbane and Southeast Queensland as investment hot spots for 2015. Some of this is a result of overflow from Sydney’s boom, but Southeast Queensland has lots to offer in its own right.

Brisbane property has been sitting at the “rising market” position on the Property Clock for some time, and is overdue for growth. Property values in Brisbane have only risen by 7.7% since 2009, compared to the 59.1% in Sydney and 52% increase in Melbourne.

Brisbane’s median dwelling price is $452,200. The city is cheaper than Sydney, Melbourne, Perth, Darwin and Canberra. Investors in the market for apartments should tread carefully: Brisbane units look set to be oversupplied, similar to the situation in Melbourne. With too many units in the market, prices could fall along with rental yields.

http://bit.ly/1LL3CvH http://ab.co/1FhWaEu

Sunshine Coast

RP Data has named the Sunshine Coast the fastest growing property market in Queensland, with house values increasing by 6.7% in the previous 12 months. The region benefits from:

  • Superb natural environment and beachy lifestyle
  • Proximity to Brisbane – 1 to 1.5 hours depending
    on traffic
  • A longterm development strategy that is linked to
    the healthcare sector9
  • Strong population growth
  • Rental vacancy rates sitting at 1% (as at January
    2015)

Cairns, FNQ

Good news and positive trends have boosted consumer and business confidence and property prices are soaring. After years in the doldrums, patient investors are set to be rewarded as Cairns emerges as one of the brightest investment markets in the country.

Markets across Far North Queensland are showing signs of recovery following the GFC.

Nowhere is this more evident than in Cairns, which benefits from:

  • Increased international tourism as the Aussie
    dollar weakens
  • An influx of visitors from China
  • Increased domestic tourism
  • Major investments including: The $8.15 billion
  • Aquis hotel and casino complex
  • The $550 million C3 three towers project that will
    transform the CBD10
  • The $400 million Seven Towers project.

Townsville, FNQ

Townsville sits at “Start of Recovery” on the Property Clock. This is encouraging for investors who have had to wait out a very challenging period of falling house prices and rentals.

What has made this easier has been the drop in interest rates, meaning that when refinanced, the investment homes are still viable to hold as we all waited for better times to return.

Better times seem close at hand:

  • The declaration of the Townsville City Waterfront
    Priority
  • Development Area (PDA), a 97 hectare precinct in the
    CBD to drive growth
  • The $7 billion Adani coalmine, which will create 4,000
    jobs
  • The $30 million revamp of Jupiter’s Casino11
  • The $40 million Townsville Airport redevelopment
    (passenger numbers are forecast to triple by 2030)12
  • The recovery in the median house price in 2015 to
    $355.000

Investors like John McGrath and Terry Ryder have already picked Townsville as a market to watch. In our view Townsville is looking really good, and is ready for a return to growth after a tough time post-GFC. Don’t say we didn’t alert you to it first!

Mackay, FNQ

With a greater exposure to the mining sector than its neighbours, Mackay was always going to do it tough once the resources cycle turned down.

The positive news is the Real Estate Institute of Queensland Mackay zone Chairman, Peter McFarlane, has called the bottom and doesn’t expect prices to drop further

If the market has stabilised, Mackay offers excellent investment opportunities due to:

  • Overall housing affordability
  • Excellent value for money
  • First time buyer opportunities (will increased
    demand)
  • The record low interest rates

Being central to the Bowen Basin coalmine activities has meant that the drop in demand and prices has had an impact on employment in the area and the need for accommodation.

A major opportunity on the drawing board is the mega-coalmine in the Galilee Basin. Should this project go ahead it will create 4,000 jobs and could turn the region around.

The economic effects of the $7 billion Adani investment will be felt throughout the region, and create demand for accommodation for the fly-in, fly-out workers who will build the mine, railway line and the harbour extension at Abbott’s Point.

Darwin, NT

“Trees don’t grow to the sky” is an investment term that warns prices don’t continue to increase forever. This is the best way to describe Darwin right now: After a decade of standout performance, the city is going through a period of consolidation as the resources cycle slows.

In our view the slowdown should not cause investors concern. Darwin’s median house price of $567,000 places the city third behind Sydney and Melbourne. There are good investments underway into the Marine Supply Base, Palmerston Hospital and roads and transport infrastructure. These are positive signs indicating that prices will improve over the long term.

Property is cyclical so after such a strong run

we are not surprised when prices slow and even decrease. This is normal. We also know that at some point down the track, they will turn up again.

Offshore oil & gas production

  • Darwin remains well placed with major gas and oil projects in the pipeline:
  • The Ichthys LNG project 820 km off Darwin’s coast (due for completion in 2016)
  • Massive potential from the $13 billion Greater
  • Sunrise LNG project off the coast of Darwin

In conclusion

The expectation for 2015-2016 is for slower growth than we have seen over the past decade. Investors should not be too concerned: over the long term, prices will grow again.

A 25-year view at least is a realistic time frame for investment decisions. This stops us from making irrational decisions such as:

  • Selling investments when prices rise, paying
    capital gains tax, and losing future growth
    and income
  • Selling investments when prices fall, locking
    in bottom-of-the-market prices and locking
    out financial recovery.

The McCarthy Group approach to investment property is to set and forget. Instead of reacting to the ongoing ups and downs in the market, we recommend investors put aside short-term impacts and take the long term view.

Many home owners and investors have an increased amount of equity from the past few years of growth. This equity could be left dormant. Alternatively, astute investors could access their equity and borrow against it to buy more investment property, as part of a strategy to build wealth.

One thing the 2015 Budget made clear is that the cost of Superannuation and the age pension is eating up a large slice of the budget. This is not sustainable and those wanting a comfortable retirement will have to provide for themselves.

Investment property, including in an SMSF, is a proven method of wealth creation that has the potential to help you achieve financial independence and freedom in retirement.

Stay in touch

  • Request an obligation-free appointment mccarthygroup.com.au/contact-us
  • Got any questions?
    1300 850 318

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