We continue to hear opinions that the Australian property market may be heading to a burst bubble scenario.
One of the key difficulties in filtering out this conversation is the realisation that there are many markets in Australia, but the moment the main dominators remain Sydney and Melbourne. Often talks of bubbles are solely relating to these markets which are in high growth phases while the likes of Brisbane & Perth remain more subdued and indeed undervalued after a few years of soft or backward price growth.
We maintain our view that there is no bubble in Australia and remind you of our key reasons for this, being:
Population
In recent time, population growth in Sydney and Melbourne has hit new highs which is causing demand pressure in these markets. It has always been our contention that population is the key driver and so it is no surprise for us to see this high level acting as a pricing stimulate.
This is further proven when you consider that Brisbane and Perth are at traditional low levels of population growth and as a result there property prices have been underperforming.
We do not see any real change in the future apart from the fact that we should see an increase in Sydney & Melbourne residents following traditional retirement plans where they head to the warmer climate and cheaper living costs available in Queensland and potentially Perth. This won’t have a detrimental impact on NSW or Victoria but will be very beneficial to the Queensland market.
Again we remind you that most of this population growth is in net births, which is a reminder that multi bedroom dwellings are in strongest demand and likely to outperform the general market.
Supply
We have seen an incredible influx of foreign developer and buyer activity in recent years with well over 70,000 properties acquired by foreign investors in Australia over the past 3 years. Sadly, much of this is the less desirable inner city apartment market of 1 or 2 bedroom stock and often barely liveable in size.
As such, we have a problem of significant supply of investment style property taken up by large foreign investor demand and a shortfall of locally demanded quality accommodation for an ever increasing population.
There is risk in the smaller investment property market but that has mainly been passed to the unsuspecting foreign buyer that has the capacity to hold and appear to have a willingness to keep the property rather than flip out at any price. That will be an interesting space to watch in the coming year.
On the other hand, the fact that quality sites are delivering inferior products means there remains a supply shortage which inevitably supports the genuine property market which will remain stable due to genuine demand pressures and lack of supply to satisfy the needs of an expanding population.
Finance
There is a myth that finance is easy to obtain in Australia and a credit bubble exists.
It is true that Australians have a high debt ratio on average, but that is largely due to our higher incomes. It is also underestimated how difficult it is to get large property loans under the current regulations.
Banks have toughened up their assessment criteria over the past few years, and the focus has remained on servicing capacity rather than asset position. All loans are also stress tested on application at much higher interest rates than actually given to borrowers which further de-risks our lending market.
Another critical element is that over 65% of the property market is actually owner occupiers. This is a highly protective element as a large portion of these acquired their homes many years ago when prices were much lower, so their debt ratio is now very reasonable based on their current property value.
Australia remains in a very enviable position when it comes to arrears and default rates of home loans which shows the sensible lending strategies have been able to keep a safer, more stable property market for all.
Vacancy
Perhaps the biggest safety or risk indicator in any market is vacancy. If there is excessive vacancy then that would imply oversupply and risk, whereas a low vacancy shows a strong market with good demand able to hold prices.
According to the March 2017 Real Estate Facts from the Real Estate Institute of Australia, Sydney has a very impressive 1.8% vacancy rate, second only to Canberra at 1.5%. Melbourne comes in third at 2.3%.
These are extremely low by global standards and show the quality and strength of the Australian property market. With rising population and modest increase in new buildings, these rates are likely to persist in the medium term and are a key reason as to why we would not expect a dramatic drop on values in the main cities of Sydney or Melbourne.
In Brisbane the vacancy sits at a more traditional level of 3% which is close to a balanced market so a higher population growth is needed to stimulate the market.
In Perth, vacancy rates have hit 6.5% which shows the impact of a departing expatriate population and a market now under challenge to rebuild their population base and absorb the over-supply.
Natural Market Cycles
Many people don’t understand that not everything goes up, or down, for ever. Natural cycles move property markets globally from soft to strong growth, risk to opportunity.
It is easy to forget that Sydney was Australia’s worst performing market up to 2012, then started the shift upwards and has now enjoyed many years of strong growth. Sadly this will not continue at the current pace for much longer.
Not because doom and gloom is near, rather the market naturally runs out of steam as confidence in future growth and lack of buyers to be able to afford the asking prices combine to slow activity and dampen prices. This doesn’t mean a drop of in the underlying market, but a softening of the hype often causes a reduction in sales values as they normalise back to a more sensible, less urgent level.
This should be welcomed in any market as if this didn’t occur, then no one would ever be able to afford to enter an ever increasing market.
The key in any cycle progressing is population growth as that is what absorbs periods of over-supply and then activates periods of high demand, and that remains Australia’s secret safety net for our property markets.
Summary
It is fair to say that there is always risk in any market, strong or weak. Over the many years that we have been directly involved in the property market, the one clear truth has always remained. Buy a quality property.
Quality is a protector against risk and an accelerator of profit. It comes in many forms that vary depending on your budget but it is easy to find.
Location, size, amenities, internal space, views, parking and infrastructure are just a few of the obvious traits that combine for what we call "liveability" which is the overall measure of quality.
The future of Australian property remains positive thanks to the continuing demand from population growth. That doesn't mean any Australian property will be profitable, but it does mean that the more desirable locations and liveable houses will continue to have demand pressure that is not being appeased through supply measures. As an owner or investor, that lets me sleep very peacefully if I have a quality property portfolio.
If you would like more advice about the Australian property market or assistance with purchasing property email our team to arrange a chat.
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