The fundamentals driving property growth

24th Sep 2014By: Greville Pabst

It’s been a strong year for Australia’s residential property sector, with all major capital cities experiencing positive growth in median dwelling values.

Unsurprisingly, eastern seaboard capital cities Sydney and Melbourne have been the stand out performers, growing by 16.2% and 11.7% respectively in the year to July 2014, according to researcher RP Data.

Property prices in these rival metropolises are on the rise yet again – both cities have median dwelling prices well above half a million dollars. The strong growth has proponents and antagonists alike asking, can prices continue to rise? The answer, unequivocally, is, yes.

The fundamentals

Lending affordability and confidence

Australia’s residential real estate markets are underpinned by strong fundamentals, chiefly positive lending affordability. This has prompted a boost in consumer confidence and reinvigorated interest in the residential property sector.

Consumers find comfort in consistency and predictability, and with interest rates declining since November 2010 to a stable 2.5%, buying property for investment and occupation can become a reality for many more people than in the past.

While this has underpinned housing market performance during the last two years, lowering of fixed-term interest rates in July 2014 by major banks was a further catalyst to market activity, fuelling even greater interest in the asset class.

Population trends

This is another factor driving price growth in local real estate markets, with a growing and aging population accounting for the increasing need for more housing, namely in our capital cities. According to the Australian Bureau of Statistics, 64% of New South Wales’ population resides in Sydney, a figure projected to increase to 74% by 2061.

Perth, Melbourne and Adelaide are expected to house the largest shares of their respective state populations in the next 50 years, with 85% of Western Australians residing in Perth, 83% of Victorians living in Melbourne (up from 75% in 2012) and 83% of South Australians living in Adelaide, by 2061.

Melbourne’s population growth has consistently exceeded Sydney’s in recent years, driving a narrowing gap between real estate performances in these two competing cities.

The projected population growth for Australia’s capital cities will drive housing demand, resulting in rising costs for established housing and the construction of higher-density dwellings, similar to Europe and Asia.

Buyer profiles

While all buyer groups from homebuyers to investors are represented in the marketplace, investors remain the lynchpin to strong competition, driving exceptional results for vendors and making it increasingly challenging for other buyers, particularly in the established apartment markets of Sydney, Melbourne and Brisbane.

In fact, it’s estimated that more than a third of all occupied housing in Australia are rentals, with almost half of all new housing loans in 2014 defined as investment loans. With this in mind, it’s unsurprising that competition from investors has resulted in many would-be homebuyers forgoing the idea of owner-occupation. Instead, they are joining the investor ranks to gain a foothold in the marketplace. Recent first-home owner figures show applications are at record lows, with further investigation revealing many first-time buyers are now turning to investment instead.

What’s ahead?

While spring isn’t expected to break any records in terms of listing volumes, national markets will see a notable increase in stock levels. The increase will be slow during the first few weeks of spring, with the large majority of spring properties to hit the market commencing mid-October, after third-term school holidays conclude.

Although the increase is not expected to entirely satisfy demand in the cities of Melbourne and Sydney, it will assist in abating residual demand from the glut of unsuccessful buyers in the winter and early spring period.

With fewer than 12 weekends remaining until the market closes for the festive break, the expected increase in buyer activity will support continued high clearance rates during the seasonal increase in property listings.

Competition will be particularly strong for family homes within 10 to 20 kilometres of Australia’s major capitals, while $1 million-plus homes will be a popular choice among professional households and families in inner suburbs. Established one and two-bedroom apartments in inner city suburbs will be the go-to choice for first-home buyers and investors.

Location is paramount in selecting a high performing investment-grade property. In a buoyant market, the price differential between an average property and an investment-grade property is not always obvious. However in a soft market, or downturn, the price differential widens, with the investment-grade property performing better than the average property.

The outlook

Overall, capital growth has been strong in 2014. Further growth is expected in the residential property sector in many capital city markets as the year draws to a close – presuming no significant change in the current economic climate, namely interest rates. While growth is currently positive, it’s also stable and not exorbitant to a point necessitating a correction in a year’s time – a calming notion for the more discerning buyer.

With only months until the real estate market closes for the year, buyers mustn’t allow time pressures to influence their property decisions. They must undertake the necessary due diligence to ensure the property they buy is one that will perform well into the future.

Statistics: ABS – population growth by state