2014 02 property market overview and outlook lowres

publication 1 / 2014

FEBRUARY 2014

residential Property MARKET OVERVIEW AND OUTLOOK

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE – FEBRUARY 20142

Residential Market Update

The start of a new year has generally seen a cyclical slowdown in the property sector, as the market recovers from the pre-December surge in activity. January 2014 however has recorded continued favourable results, with RP DATA recording a 1.2% change in median dwelling values across Australia. This growth placed the national annual growth figure for the period ending last month at 9.8%, after the market showing a 2.7% expansion in the past quarter. The annual and quarterly growth rates have remained constant since the statistics at the end of December.

The RBA, after its meeting on the 5th of February, left the cash rate on hold at 2.50%, the property market can be seen extending its lead over previous peaks in dwelling value. Sydney’s housing market, having grown 13.4% in the past year, is now 11.8% over its previous median dwelling value peak. Melbourne, a market growing strongly, is now 2.6% over the previous peak after having grown almost 12% in 2013. Other areas, such as Adelaide, can be seen currently presenting value opportunities, with prices 2.3% below peak albeit a reasonable 2.5% growth in the last year. The national median house value is now $565,000 and the median unit value is $470,000.

Australian housing values can be seen reacting to a myriad of effects from the wider national economy. While inflation has now reached 2.7%, and the Australian dollar at a more moderate level of 0.9011 USD (as at Feb 18th), the unemployment rate statistics have increased. With recent news regarding cutbacks in the local manufacturing sector, a noticeable negative shift in the consumer sentiment index can also be seen, at -3% for January. New dwelling approvals were down by about 3% in January, while housing finance commitments remained stable in value.

The outlook for the new year is clearly a complex one, with contrasting factors at play and likely to influence the RBA’s decision. The property council/ANZ Property Industry Confidence index showed an 8 point increase for expectations of the first quarter of this year, but it will be interesting to see how the affordability figures for the end of last year, released early next month, will play a role in the market dynamics going forward. At present though, the Reserve Bank has seemingly adopted a neutral stance, contingent on local labour markets and the situation of Australia’s trading partners.

Future Estate would like to wish all of its clients and contacts a very happy and prosperous year ahead!

Source: RP DATA

13.4%

11.9%

3.7%

2.5%

4.6%

2.7%

-0.2%

6.9%

Adelaide( SA )

Darwin( NT )

Sydney( NSW )

Canberra( ACT )

Melbourne( VIC )

Perth( WA )

Brisbane( QLD )

Hobart( TAS )

Dwelling Trend YoY (%)

-2%

0

2%

4%

6%

8%

10%

12%

14%

Dwelling trenD year on year

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE – FEBRUARY 2014 3

RBA STATS

ECONOMIC GROWTHAUD BUYS0.9011 USD

3.1%

2.50% in 1 MONTH0%CASH RATE

in Q42.70% 0.8%INFLATION

110.2 -3.0%in JANUARY

Consumer Sentiment Index Westpac - Melbourne institute

140 pts

WORLDWIDE 2012US, EUROPE & JAPAN 2012 0.5%

2.8%

2.7%0.6%

AUSTRALIAN 2013AUSTRALIAN

3rd quarter 2013

GDP growth2012-2013

Australian Employment

0.1%

UNEMPLOYMENT

PARTICIPATION

5.9%

64.5%

$ 565,000 Median House Price

$ 470,000 Median Unit Price

$ 424 Weekly House Rent Rental Yield 3.9%

$ 425 Weekly Unit Rent Rental Yield 4.7%

New Dwelling Approvals

-2.9%

Australia wide snapshot4.

8%

Dwelling Values

9.8%

1.2%

2.7%

annu

al

mon

thly

quar

terl

y

14.7

%

New Home Sales

6.3 %

housing finance

$ 27,050

adjusted value of totaldwelling commitments

0.2%

HIA-COMMBANK HOUSINGAFFORDABILITY INDEX

75.1Property Council/ANZ Property Industry Confidence Index

* as at september 2013

annualCHANGEIN total

propertysales *

Differencefrom PeakDwelling

Value

Key statistics JanUary 2014

Source: ABS, RP DATA, HIA, RBA, Westpac - Melbourne Institute, REIA



FUtUre estate capital city rating sUmmary

STATE CAPITAL CITY

FUTURE ESTATE SCORE

OVERVIEW

NSW SYDNEY Sydney’s FE score declined this month. It demonstrated a healthy Discount Rate and days on market, but the asking price index was negative.

VIC MELBOURNE Melbourne’s score improved. It still showed excellent auction clearance rate, but neutral asking price index change.

QLD BRISBANE Brisbane showed a negative movement in its score. Auction clearance and days on market were graded “neutral” this month.

WA PERTH Perth saw a considerable negative shift in its score this month. The asking price index was poor and auction clearances were graded “neutral”.

SA ADELAIDE Adelaide’s score saw a positive change. It’s state discount rate and auction clearance rates improved and the vacancy rate was graded “good”.

ACT CANBERRA Canberra saw a decline in its score. All its statistics were consistently in the “healthy” grade this month.

NT DARWIN Darwin FE score saw a contraction. While auction clearances were excellent, asking price change was negative and thus rated “poor”.

TAS HOBART Hobart’s rating further declined, with poor auction clearances and generally “neutral” graded statisics.

Source: Future Estate Research* Score is out of 5 as indicated by out of 5: Higher score indicates a stronger property market with positive outlook, whereas a lower score indicates a softer market with lower growth prospects.

The seasonal January slow down resulted in slightly softer scores in most markets, whilst Melbourne and Adelaide improved.


property marKet in the new year

The property market in 2014 is poised to grow at near or above trend levels, subject to low/stable interest rates continuing.

The Australian property market in 2014 has been tipped by several experts to exceed the growth of the past year. Seeing the consistently high auction clearance rates above 70% in the major capital cities and median house value growth rates, as recorded by Residex, up to 30% in some Sydney suburbs, there has been speculation of continued increase in the price. Improved affordability, coming from access to cheaper finance rates, along with the added support of the population growth of the capital cities have been the obvious drivers of this trend that has resulted in new median value peaks in several cities.

Looking through the statement, it is important to analyse the underlying conditions that have allowed the RBA to adopt such a strategy. The following is a brief rundown on the factors presenting upward and downward pressures on the cash rate.

Factors Creating Downward Pressures:

¾ economic growth: The Australian economy is expected to expand at a below trend growth rate in 2014. This may present a key reason for the RBA to deliberate on possible rate declines.

¾ Unemployment rate: With the unemployment rate at 5.9% now and expected to see an increasing trend as certain mainstream sectors experience international pressures, the labour market presents a significant argument for a potential decline in the rate.

¾ Declining terms of trade (australian Dollar, Ftas, wages): Australia being a large exporter of natural resources, agriculture and specialised goods, the value of the currency on an international stage has an important affect on competitiveness and subsequently on revenues by the local industries.

In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.

The market direction in the New Year, however, cannot completely be predicted simply by looking at past price movements. With a different set of local and international economic conditions now capturing headlines, this year’s affordability of credit, as dictated by the RBA’s overnight cash rate, is likely to be influenced by a complex mix of factors and thus influence the median values accordingly.

The RBA, after its most recent meeting, has released a statement indicating towards a neutral stance in the near term:

A decline in the rates, leading to a further fall in the AUD is desirable at this stage, given the recent resurgence to 0.90 USD.

¾ mining investment Drop: One of the driving forces behind the local economy’s resilience in the past decade, the sector is now evidently in need of stimulus to sustain further dividends to the GDP. It is one reason the RBA may consider another drop in the rates.

¾ global emerging markets risk: The Bloomberg USD Emerging Market Composite Bond Index was at an 8-week low at the end of January. The economic scenario in many of these emerging markets is relatively frail at this point and has a potential to influence the global macroeconomic stability.

¾ wage growth: Due to a combination of the above factors and increasing uncertainty pertaining to the international economic climate, experts such as Deloitte Access Economics are forecasting wage price index growth below the 10-year average of 3.4% in Australia during 2014. This may play an impact in the rate determination.

“ “



Factors creating Upward Pressures:

¾ Inflation: The main driver of the monetary policy setting, the RBA is becoming wary of the consumer price inflation now approaching the upper end of the target range monitored by it. At 2.7%, the current cash rate may be starting to present an important reason for a potential rate hike.

¾ property market: With property prices having grown an average of about 10% in 2013, the market has started to post new record prices in many of the leading capital cities. Although similar trends are present in several other Asian and European major cities, the local conditions may well warrant the RBA to consider an increase in the cash rate.

¾ international investors: Becoming a key factor more recently, the international investors interest in the local market has become a growing factor. With improved affordability given the weaker Australian dollar and new restrictions placed on local property investors in some Asian nations, there has been a growing overseas buyer interest in the local luxury and affordable property markets alike.

It is clear that there are several conflicting factors at play in the current economic scenario. How these factors interact and eventually translate into median value changes will be critical in determining investment trends in this year.

-16

-12

-8

-4

18

10

2

6

14

0

Change from Previous Trough (%)Change from Previous Peak (%)

Cha

nge

(%)

Change from Previous Peak and Trough (%)

11.8

2.5

-10.2

-2.3

2.6

-8.7

-0.1

-5.9

17.6

14.1 13.714.6

7.14.9

6.45.4

Sydney(NSW)

Melbourne(VIC)

Brisbane(QLD)

Adelaide(SA)

Perth(WA)

Hobart(TAS)

Darwin(NT)

Canberra(ACT)

change From preVioUs peaK anD troUgh (%)

Source: RP DATA

Sydney dwelling values are now almost 18% over their previous trough, which was in 2012.


Australian Auction Clearance Rates resumed posting above average figures in February, with the market now poised in the run leading up to the Easter Weekend. Sydney’s clearance rates remained consistently close to 80% as reported by all three data providers. With the median dwelling value at $660,000, Sydney properties have already

grown by 0.8% this year. Melbourne on the other hand, has a median dwelling value of $553,000 and has grown by 3.2% this year already, recording an average of 70% clearance rate last week. This illustrates the strength of the Melbourne property market, which is returning from a slowdown in early-2013.

aUction clearance rates

property aUction clearance rates: weeK enDing 15th FeBrUaryAuction Clearance Rates

Sydney Melbourne

79.5%

67.5%

81%

74%

Australian Property Monitors RP Data REIV/REINSW*

80%

70%

0

10%

20%

30%

40%

50%

60%

80%

70%

90%

capital cities

The total return over the past year to January 2014 for all the capital cities of Australia was 14.5%. This figure indicated the strong returns buyers received form investment into property last year on a typical property in Australia. The statistic however fell short of the 18.3% and 16% return that typical buyers in Sydney and Melbourne, respectively, received in the year. Sydney properties have grown 13.4% in 2013 and have yielded 3.9% for houses and 4.7% for units. This can be compared to Melbourne,

which has seen 11.9% growth last year, and has shown a slightly lower 3.3% and 4.2% return from houses and units, respectively.

Perth and Darwin were declining property markets in 2014, with both having posted -1.1% change in dwelling values since the beginning of the year. In Perth, the decline was led by a contraction in the value of houses, while Darwin demonstrated a similar scenario; Darwin units actually posted a 2.6% positive value change.

Auction clearance rates continue to remain in a healthy range for Sydney and Melbourne.



Source: RP DATA

6.2%

1.9%

3.2%3.4%

0.5%

1.0%

3.1%

0.3%0.1%

3.3%

2.0%

2.6%

-1.8%

1.9%1.7%

2.4%

Melbourne( VIC )

Sydney( NSW )

Adelaide( SA )

Perth( WA )

Brisbane( QLD )

Canberra( ACT )

Darwin( NT )

Hobart( TAS )

Unit Price Trend Over Quarter (%)

House Price TrendOver Quarter (%)

-3%

-2%

-1%

0

1%

2%

3%

4%

5%

6%

7%

qUarterly capital city hoUse anD Unit price trenD

Gross Rental Yields

1%

0

2%

3%

4%

5%

6%

7%

8%

Darwin( NT )

Hobart( TAS )

Brisbane( QLD )

Canberra( ACT )

Adelaide( SA )

Perth( WA )

Sydney( NSW )

Melbourne( VIC )

House GrossRental Yield (%)

Units GrossRental Yield (%)

6.2%

4.4%

3.9%

3.3%

5.4% 5.4%

4.3% 4.2%

4.8% 4.7%

4.2%

4.8%4.6%

5.2%5.3%

6.0%

capital city hoUse anD Unit gross rental yielDs

Source: RP DATA

It was interesting to see Hobart houses post a 6.2% dwelling price increase in the past quarter (RP Data).


KEY INVESTmENT ThEmES

Theme Summary Future Estate View Comments

Key growth opportunities

§ Sustainable above-market capital growth

§ Capital cities set to drive the growth this year, supported by the larger regional centres especially in Queensland emerging from the dip in activity in early 2013

§ Sydney offering continued sustainability in growth in the Inner Western and Eastern Suburbs

§ Melbourne market now well into growth phase

§ Population growth likely to be one of the key drivers of property market growth

§ Dwelling undersupply is a subsequent factor with critical influence; state building restrictions play a role

§ Long term affordability; cash rate set to expansionary setting on record lows

§ International investor interest with lower AUD and overseas restrictions

Key value opportunities

§ Discounts to comparable properties; new areas to demonstrate growth

§ Distressed opportunities have reduced due to improvement in the market health

§ Adelaide and Hobart continue to demonstrate high affordability and potential of growth

§ Outer South and North Western Sydney seeing strong fundamentals; infrastructure upgrades will drive growth

§ Value continues to be demonstrated at the asset level, rather than capital city level

§ Pockets of opportunities as lifestyle trends emerge – i.e. inner city former industrial suburbs emerging as residential growth hubs

yield growth § Rental income and sustainable above market yield

§ Darwin, Brisbane and Perth, along with Canberra remain high yield markets due to affordability constraints and dwelling undersupply

§ Regional centers and Gold Coast showing improving yields, which are generally a leading indicator to dwelling price increases

§ Yield compression is a concern in the major capital cities as dwelling values set to further expand in 2014

§ Largely set on construction expenditure; if housing supply is strong, there could be potential for stable yield

§ Rental growth currently not likely to outstrip dwelling value growth

Source: RP DATA * Year to Date

CAPITAL CITY hOUSE AND UNIT mEDIAN PRICES

State Capital City median house Price ($)

median Unit Price ($)

Dwelling Trend YTD* (%)

New South Wales Sydney $765,000 $550,500 0.8%

Victoria Melbourne $610,000 $480,000 3.2%

Queensland Brisbane $485,000 $373,750 0.4%

South Australia Adelaide $415,000 $325,000 0%

Western Australia Perth $540,000 $439,000 -1.1%

Tasmania Hobart $350,000 $320,000 2.0%

Northern Territory Darwin $572,000 $440,000 -1.1%

Australian Capital Territory Canberra $572,000 $415,000 0.7%



KEY CYCLICAL ThEmES

Cyclical Outlook

Summary Future Estate View Comments

global economy and policy

§ US Federal Reserve has plans to curtail QE policy

§ Chinese growth is estimated to be 7.5% for 2013

§ US economy is growing at an estimated 2.5% p.a.

§ US budget and debt ceiling

§ Indirect impact on residential property market via consumer confidence, access to credit and changes to price growth areas

§ No negative impacts currently, due to current RBA policies

§ Global negative impacts on local property markets are easing, given favourable exchange rate and local cash rate changes

§ Weaker AUD is leading to international investor interest

Domestic growth and policy

§ ABS released a Q3 2013 growth rate of 0.6%, which can be annualised to 2.5%

§ Local economy is being assisted by the low Australian Dollar

§ Lowered cash rate and improved affordability is assisting in housing market growth

§ Unemployment, at 5.8% and a lower participation rate is starting to become an issue for the RBA

§ Likely slight increase in unemployment, which combined with inflation rate on the lower end of the RBA preferred range may lead to further interest rate cuts in the first two quarters of the upcoming year.

housing affordability

§ REIA reporting 28.5% (26% in QLD) of household income is spent on mortgage payments, lowest in a decade

§ The median house price/income ratio is about 4.5, which is low compared to Asia & Europe

§ Lower interest rates have translated to strong auction clearance rates of over 80% in the major capital cities, areas with high employment

§ Affordable inner city suburbs are experiencing growth

§ Increasing house prices likely to be off-set by lower interest rates

§ Historic low interest rates and new home buyer grants stimulating owner occupier property demand; investors noticing high growth areas

population growth

§ Population growth was recorded at 1.8% over the year in 2012

§ 394,200 persons annual increase in period ending December 2012

§ WA recorded highest growth: 3.5%

§ Population recently reached 23M

§ Population growth expected to rise in 2014, driven mainly by overseas skilled migration

§ Migration to Australia concentrated in capital cities of NSW, VIC and WA, which has resulted in home value growth

§ Impact on housing demand /supply imbalance substantial – housing shortage too from reduced construction activity and investment

§ QLD and WA major interstate beneficiaries, while VIC grows through international migration

Dwelling construction

§ Below-trend dwelling development continues

§ 38th consecutive month of declining construction activity, as reported by HIA

§ House approvals have seen a decline as of late, with construction and completions remaining poor

§ New Home Sales are increasing

§ 25,000 fewer homes built in 2013 compared to a decade ago

§ Construction has fallen since 2010 given credit crunch – rental growth and yield has been high as a result

consumer confidence

§ Consumer confidence emerging, with stronger market fundamentals

§ Investor confidence substantially improved from lows in 2012

§ Over 50% of investors expect house prices to rise in 2013 as compared to 8% who expect a fall

§ RP Data is reporting 250 suburbs around Australia tipped to double property values in 10 years

§ HIA reports hotspots are emerging

household savings / demand for credit

§ Household savings ratio remains elevated at ~10% of income – back to 1980’s levels

§ Demand for housing credit still comparatively low

§ With confidence emerging, it is anticipated that demand for housing credit will emerge, especially given substantial buffer to mortgage repayments after recent savings

§ Demand for housing credit is still increasing, albeit it at below trend

§ Investor credit demand is leading owner-occupier demand


BRISBANE

DARWIN

Future Estate Capital City Rating

PERTH

3.34Future Estate Capital City Rating

2.89

State Auction Clearance RateState Days on Market (days) State Discount RateAsking Price Index ChangeCity Vacancy RateState Property Market Score*




37%1447.9%0.5%2.4%2.7

85%1305.2%-2.7%1.5%3.34

36.3%926.0%-1.1%1.9%2.89

SYDNEY


CANBERRA


HOBART


MELBOURNE


ADELAIDE

70%1026.1%-0.9%1.7%3.61


3.61

45%895.0%-0.7%2.3%2.96


Future Estate Capital City RatingFuture Estate Capital City RatingFuture Estate Capital City Rating

2.96

67%1097.1%-0.2%2.9%3.41

3.41

30%19510.2%-0.1%1.6%2.18

2.18

51.1%1547.3%1.1%1.5%3.26

3.26

DARWIN

BRISBANE

SYDNEY

CANBERRA

HOBART

MELBOURNE

ADELAIDE

PERTH

NSW

ACT

QLD

NT

SA

WA

VIC

TAS


2.70

* The State Property Market Score, which is out of 5, takes into account several factors, including demographic factors that indicate Future Growth, Quarterly House and Unit Median Price Growth Rates, Annual Dwelling Growth Rates and the Median Mortgage Payments as a proportion of the Median Household Income.

Sources: Australian Property Monitors, Domain.com.au and SQM Research.

FUtUre estate capital city rating


This document contains general information and does not contain personal advice or financial product advice. This information has been prepared without taking account of your objectives, financial situation or needs. Accordingly, before acting on this information and making financial decisions, you should consider whether this information is appropriate for you and are recommended to seek independent financial, investment, tax and/or legal advice having regard to your own objectives, financial situation and needs. This information may contain material provided to Future Estate Group Pty Ltd by third parties. While such material is published with necessary permission, Future Estate Group Pty Ltd and its related entities accept no responsibility for the accuracy or completeness of this information, nor endorses it. To the maximum extent permitted by law, Future Estate Group Pty and its related entities disclaim all liability for any loss, costs or damage which arises in connection with the use or reliance on the information and material contained in this document. Any forward looking statements and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. Furthermore, past performance is not a true indicator of future performance. Any past performance information in this document has been given for illustrative purposes only and should not be relied upon as an indication of future performance.

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www.futureestate.com.au

@futureestate

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Copyright © Future Estate Group Pty Ltd 2014

please contact our team at Future estate for more information on our methodology and/or our range of other property investment advisory services.

Future estate’s research team has developed an extensive quantitative modelling process to critically assess the australian residential property market. For the capital city rating, our team records, benchmarks, assigns weights to and scores various key property market lead indicators and descriptive statistics.

our services include:

§ Buyers’ agency

§ research – suburb reports and due-diligence markets

§ personalised advice and investment strategy

§ panel of “endorsed projects”- over $1bn portfolio of “investment grade” projects nationally

§ contact us to arrange a complimentary consultation to discuss your needs

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2014 02 property market overview and outlook lowres

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