National property update: What’s the outlook for Australian markets in 2014?

Last year was one of the best years for property in a long time.

In fact, I believe it will be one of those years where those who didn’t get into the property markets will look back with regret.

While many of us started 2014 with confidence, over the last few weeks our markets gave us a few reminders not to get too “cocky.” Overseas, the markets were more turbulent and, back home, inflation rose, unemployment crept up and consumer confidence dropped.

So what’s ahead for property in 2014?

I still see many reasons for property price growth in 2014, but the economy is putting some stumbling blocks in front of us, and it won’t be all smooth sailing – but it never is.

Today I’d like to whip around Australia, see how our property markets are performing and make some forecasts for 2014. But before I do let’s first look at…

What happened to property in 2013?

Our housing markets saw strong growth last year, with home values rising in every capital city, with Sydney (14.5%) Perth (9.9%) and Melbourne (8.5%) being the standout markets. These markets have been stimulated by strong population growth, increasing consumer confidence, low interest rates and the media beating up a little frenzy.

Source: RPData

House prices rose in part because Australia’s permanent population jumped by close to 400,000 people last year – that’s enough people to populate a city the size of Canberra. That, along with rising consumer confidence and lower interest rates, meant higher housing demand.

But despite some property pessimists suggesting the market has run its course, there is plenty of life left in our markets.

You see…

Despite these price rises, housing is at its most affordable level in a decade, according to the November HIA-Commonwealth Bank housing affordability index, which tracks the relationship between household income, mortgage costs and home prices.

The major factors behind the growth in affordability have been growth in wages, historic low interest rates and home prices, which when adjusted for inflation, are still below their previous peak.

Source: RPData

So where are we in the property cycle?

The property cycle bottomed in the middle of 2012 and since then the markets in Sydney, Melbourne and Perth have risen strongly retracing much of the losses they made in the previous 18 months, as shown in the following graph from Dr Andrew Wilson of Australian Property Monitors.

We are now entering the next phase of the property cycle – the expansionary stage – and property prices will keep increasing.

What these big picture figures don’t show is how fragmented our markets are with different states, different price points and different types of properties behaving differently, so…

Let’s look at some of our major property markets in a little more detail:

Sydney
Median house price: $775,000; 15.2% increase in last 12 months.
Median unit price: $557,000; 11.6% increase in last 12 months.
Vacancy Rate: 2.1%

Sydney was the standout property market in 2013 with house prices now at record levels, and they’re likely to continue climbing.

However, despite some experts suggesting another year of double digit capital growth for Sydney, I would count on growth in the order of 7% in selected well-located properties over 2014.

While investors have taken advantage of rising property prices, first home buyers are still sitting on the sidelines and the top end of the market is still relatively flat according to George Raptis, director of Metropole Property Strategists in Sydney.

However, gentrified suburbs, in particular Sydney’s inner west, upper north shore and west suburban regions within close proximity to transport, amenities and infrastructure are performing well.

“The high auction clearance rates we experienced over the last few months of 2013 are a sign of how strong certain segments of the market are. In particular, investors are actively chasing well-located properties attracted by high yields and the prospects of strong capital growth. With strong momentum in the market and a shortage of good quality properties with around 17% less stock on the market for sale than 12 months ago, I can see Sydney prices continuing to rise,” says Raptis.

Melbourne
Median house price: $625,000; 8.5% increase in last 12 months.
Median unit price: $481,000; 8.7% increase in last 12 months.
Vacancy Rate: 3.4%

Melbourne was the surprise performer last year but (as always) the market is fragmented with the inner eastern, south-eastern as well as the outer eastern mid-price range markets being the best performers.

While first homebuyer activity remains low, there has been increasing demand from both investors and owner occupiers upgrading their homes and in the second half of 2013 top end properties started selling well as the “big money” felt more confident.

Investor and owner-occupier demand is likely to remain solid in 2014, with overall growth in the order of 5% to 7%; however, there are some segments of the Melbourne property market to avoid.

“There is a significant oversupply of newly built house-and-land packages in Melbourne’s outer northern and western suburbs where buyers are showing a preference for two to three-year-old homes which can be bought considerably cheaper than new stock,” says Keith Franklin, of Metropole Property Strategists in Melbourne.

“There is also an oversupply of inner-city CBD apartments and there are many more apartments coming on stream in the next few years at a time when there is less demand from the tenant demographic that rents in the CBD,” adds Franklin.

“Currently there are some great investment opportunities buying established apartments in Melbourne’s southern or eastern suburbs and adding value through renovations,” he says.

Brisbane
Median house price: $470,000; 5.3% increase in last 12 months.
Median unit price: $383,000; 3.5% increase in last 12 months.
Vacancy Rate: 2.8%

The Brisbane property market finally turned the corner in 2013 buoyed by falling unemployment, population growth from southern job seekers and more property investors back in the market with the perception of good buying opportunities compared to the other big capital cities.

This comes at a time when the number of properties for sale remains low. An increasing number of property transactions and a tightening market are typical signs of the beginning of the upturn stage of the property cycle.

“There has been a resurgence of property investor activity over the last six months, with interest being particularly strong in the mid price range, inner and middle ring suburbs of Brisbane. With property prices still below their peaks of 2010, a there is still a lot of upside for Brisbane properties” said Shannon Davis, of Metropole Property Strategists in Brisbane.

Brisbane house prices are likely to increase by 5% to 7% over 2014.

Perth
Median house price: $537,250; 10.2% increase in last 12 months.
Median unit price: $439,000; 6.3% increase in last 12 months.}
Vacancy Rate: 2.1%

I believe housing demand will soften in Perth because of flattening mining investment and profits dampening confidence and slowing migration. 

There were already signs of flattening buyer activity over the latter part of 2013 and Perth prices are likely to only increase by between 5% and 7% in 2014.

Adelaide
Median house price: $405,000; 3.0% increase in last 12 months.
Median unit price: $325,000; 0.6% increase in last 12 months.
Vacancy Rate: 1.6%

Adelaide’s housing market has consistently underperformed since the beginning of 2008, in line with its underperforming economy.

With the highest capital city unemployment rate and a weakening economy, capital growth is likely to be similar to this year – in the order of 2% to 3%.

Darwin
Median house price: $595,000; 5.1% increase in last 12 months.
Median unit price: $449,500; -3.9% decrease in last 12 months.
Vacancy Rate: 1.9%

The Darwin property market has been hit by the slowdown in the mining sector. While it has been a strong performer over the last decade, fuelled strong investor sentiment, the excitement seems to be over.

I’ve always found investor driven markets more volatile than our big capital cities and that’s why I avoid them. Darwin property prices are likely to only increase between three and five percent this year.

Hobart
Median house price: $350,000; 2.9% increase in last 12 months.
Median unit price: $255,000; -5.1% decrease in last 12 months.
Vacancy Rate: 1.6%

Hobart’s housing market finally picked up in late 2013 after a prolonged period of subdued activity. However a relatively weak economy will limit property price growth to around 3 to 5 percent this year.

Canberra
Median house price: $570,000; 3.7% increase in last 12 months.
Median unit price: $432,0000; 1.5% increase in last 12 months.
Vacancy Rate: 2.4%

The outlook for the Canberra housing market is cloudy with the Federal government warning us of significant budgetary cuts. Job insecurity, especially in the public sector, is likely to translate into subdued demand for housing and minimal capital growth in the Canberra property market in 2014.

Source of Data: RPData, SQM Research

What next?

Interestingly no one is really talking doom and gloom about property as they were a year ago, and even though there are some speed bumps ahead, there are many reasons to feel positive about property in 2014.

• The world’s large economies are improving, particularly our major trading partners the USA and China
• Our economy is also performing well
• Our population is growing and all the young Gen Y migrants will boost our economy by working hard, paying taxes, forming households and buying properties.
• Interest rates are low and housing affordability is high.
• Construction costs are increasing
• There is strong demand for property from overseas investors and a growing demographic of baby boomers investing through there self managed super funds.
• The market momentum will continue as more and more Australians want to take part in the property market as the media keeps reminding us that some properties are increasing in value by $600 – $1000 a week.

But you can’t just buy any property.

Home buyers and investors will have to do careful due diligence – they won’t have booming property prices to cover up their mistakes this year.

This means they will need to buy the right type of property…

One that has a level of scarcity, meaning it will be in continuous strong demand by owner occupiers (to keep pushing up its value) and tenants (to help subsidise the mortgage); in the right location (one that will outperformed the long term averages because of the demographics of the people living there), at the right time in the property cycle (that would be now in some states) and for the right price.

Then hold it as a long-term investment and reap the rewards.

Michael Yardney is a director of Metropole Property Strategists, a company which creates wealth for its clients through independent, unbiased property advice and advocacy.