Tips and trends for buyers, vendors and investors
With clear signs the growth rate of housing values is slowing, we asked CoreLogic RP Data's Head of Research Tim Lawless about the current data and trends he's seeing – and what he predicts for the future.
How would you describe the state of the property market right now?
In a word, diverse. At one end of the spectrum we have Sydney and Melbourne's extremely high housing value growth, and at the other the regions that were reliant on big resource infrastructure projects – particularly Perth and Darwin.
To give it some context, since 2009 we've seen Sydney dwelling values rise by 77 per cent and Melbourne values by 66 per cent. The next best performing major capital was Perth up by 14 per cent, and then Brisbane and Adelaide both at 11 per cent.
What has driven that strong house price growth in Sydney and Melbourne?
This is a post-GFC phenomenon, with changing economic conditions across the states. Business and financial services now power the economy, and most of those jobs are being created in Sydney and Melbourne. That really drives buyer demand and confidence. Migration rates haven't fallen away, compared with the mining states, and Melbourne is now leading the nation for population growth and interstate migration.
I also don't think you can discount the confidence in the marketplace, and the psychological impact when the 'herd mentality' takes hold. When things move rapidly, people become afraid that if they don't buy now they'll miss out. This is starting to diminish now because there are price obstacles.
So if you're planning to sell your property now, should you be worried?
If you're a vendor right now in Sydney or Melbourne, the market is still good. Perhaps not quite as buoyant as pre-spring, but homes are still selling in less than 30 days in Sydney and 35 days in Melbourne, and we're not seeing a great deal of discounting.
Even though auction clearance rates have slipped, they're still around the high 60 to 70 per cent mark, which is historically still strong.
But if you're trying to sell a home in Darwin or Perth, you've got some competition. Listing numbers are rising quickly, so you may need to be flexible on price – you probably won't get the same value as six or 12 months ago because values are starting to slip backwards.
Does this make it a good time to be thinking about investing?
It really depends on your long-term objectives. As a buyer – especially in those softer markets – you'll have more time to make a decision, you can negotiate harder and there's a lot of stock to choose from. Given we are still seeing values falling in Darwin and Perth, if you're looking for a quick investment turnaround there's more risk because transaction costs are high.
On the flipside, if you're an investor (or first home buyer) willing to hold that property for a long time, you can amortise those costs and risks over the longer term.
What are the key trends for investors?
One thing investors need to start thinking more about is the other side of the capital gain equation – yield.
At the moment capital growth seems to be the main motivator, and with low interest rates yield it might seem less important. But we have seen yields being compressed across every capital city, especially in Sydney and Melbourne where value growth is extraordinary but rents are hardly moving. That means yields get squashed further – and they're now at their lowest level on record in Sydney and Melbourne.
To put that in context, Sydney values rose by 17 per cent in the last 12 months but rents only rose just over 2 per cent.
A typical healthy gross yield for an investor would be around 5 per cent. At the moment in Sydney and Melbourne they're around 3 per cent on average, with houses quite a bit less than that.
You should be looking for some balance in your investment decisions. Capital gain will always be the main game for most property investors, but a healthier yield means better cash flow.
Interest rates will start rising eventually, and yields don't recover quickly in response. That's the risk for investors buying at the peak of the market – you won't achieve your expected capital gain if the market slows, or have the yield to carry you through, which makes servicing the mortgage difficult.
Are there any notable pockets of investment opportunity?
Across the regional markets we're seeing the lifestyle areas bounce back – the Gold Coast, Sunshine Coast, Byron Bay and the Surf Coast of Victoria. Those markets were impacted between 2008 and 2014, so their recovery is a relatively new trend and values are generally less than in 2007.
There are some good bargains to be had in these areas – rents are rising, their economies are improving with increased tourism and service workers need accommodation.
Major service towns such as Dubbo and Tamworth, are also showing some strength as they're not linked to just one sector of the economy.
But the mining regions are still doing it tough – the Pilbara in WA, the Bowen Basin in Queensland and the Surat Basin in NSW for example. I wouldn't expect values there to start rising anytime soon.
What tools can buyers use to make sure they're informed before they start negotiating?
These days, transparency in the property market is the best it's ever been. It's so easy now to research the area on sites like CoreLogic or Property Value. You can drill down to find the suburbs and streets with most appeal, get median values, transaction numbers and yields, and understand the true value of your home by looking at comparable recent sales.
Given growth might be more subdued, what do real estate agents need to consider?
I think for those agents operating in markets that are still quite buoyant, it's a case of make hay while the sun shines while also building up new business areas.
For example, rental and property management services will keep things operational and profitable if the market softens. It's also one of the best assets that you can build – you can sell your rent book, it's quite liquid.
It's also a good time to get back to the basics. When the market's racing you've got people lining up to sign contracts, but when it gets a bit tougher that's when really good agents come to the fore.
Finally, looking into your crystal ball, what do you think will happen in the property market over the next year?
I think we're already seeing signs that the markets in Sydney and Melbourne, are slowing down. We reported a zero growth rate in dwelling values in September for Sydney, clearance rates are easing and listing numbers rising. Investor demand is also slowing, given the natural affordability and yield constraints.
So I think we'll see a substantial slowdown in the rate of housing value growth in Sydney and Melbourne. That doesn't mean values are going to go backwards next year, I'd be surprised if they did.
In some of the smaller markets, such as Brisbane, Adelaide or Hobart where conditions have just been chugging along, we're actually seeing some subtle rises. However, those markets linked to the mining sector are probably the ones that will be the softest. They'll eventually level out and stay flat for some time, before they move into the next growth cycle in four or five years.
Want to know more about the market? Watch Tim Lawless present Core Logic RP Data's latest property update.