Australian house prices grew by 7.05% overall last year*, while unit values increased by 6.35%, with the eastern state capital city markets dominating growth across the nation in both the house and unit markets. Sales activity also increased last year*, with transactions up 10.49% and 5.34% in the house and unit market respectively. Total sales across the nation was just shy of 500,000 sales for the year*. So, overall, the residential property market performed very well in 2014, albeit some mixed results outside the Sydney, Melbourne and Brisbane capitals.
But what’s in store for 2015? Will the property price growth of 2014 continue this year, or will the market behave differently in 2015? To get a sense of where prices are headed, let’s take a look at some of the key drivers in the market and how they might affect price growth over the next 12 months.
1. Interest Rates The cost and availability of home and investor loan finance is a key driver in the market. In 2014, this was at historically low levels with no Cash Rate movement throughout the year – the Cash Rate has remained on hold at 2.5 per cent since August 2013. I would be very surprised if the Cash Rate moved during the first half of 2015 given the mixed messages we are getting about the strength of the Australian economy and our key trading partners. For example, the International Monetary Fund (IMF) predicts that the Australian economy will grow by 2.9% in 2015, which is slightly up from 2014 but below Australia’s long term average of 3.25%. This is an important measure because economic growth above the long term average is needed to help boost jobs and employment opportunities. Raising interest rates too soon could do considerable harm. I think we need more time to ensure the economy is fundamentally strong and growing sufficiently before taking any contractionary measures. There’s also the desire to see the Australian dollar fall further and increasing interest rates is unlikely to help this. Having said this, I do expect rates to go up sometime during the second half of next year once we get a clear line of sight on the economy and if inflation starts to increase above the RBA’s comfort zone. To error on the side of caution, we should factor in a Cash Rate increase of at least 0.25%, possibly during the September quarter. Therefore, the low interest rate environment in the first half of the year should support continuing house price growth, and when rates start to rise the rate of growth in property values will fall.
2. Unemployment Australia’s unemployment rate has been steadily rising for the past year or so, and is currently sitting around the 6.0% mark. The 2014 Budget predicts the unemployment rate will rise to 6.25% this year, while the IMF has this figure around 6.1%. By either estimate, unemployment is tipped to increase further this year. Unfortunately the spectre of increasing unemployment will be with us for the foreseeable future. However, while there is still some hope that conditions will improve over the next 12 to 18 months, with more people out of work and increasing uncertainty around job security – the willingness and ability to buy property may be affected. On balance though, this is unlikely to be reflected in material price movements because of the strong underlying demand from home buyers and investors with relatively secure jobs.
3. Housing Stock Speak to 10 property market experts and you’ll get 10 different views on whether Australia is in the midst of a housing shortage and how to solve the problem – that is if there actually is one. While some may argue that there are current property surpluses in certain markets, I’m not so convinced that this is the case – I think it comes down to a surplus of ‘undesired stock’ – whether it be by property type and/or location. For instance, families prefer houses or properties with a land component and most of us want to live in areas close to public transport with good schools, shops, amenities and recreational facilities nearby. Of course these types of properties are concentrated in city and suburban areas – the same areas that have limited supply. Combine this with an increasing population (through births and immigration) and a lack of housing stock and you have upward pressure on property prices. I expect this pressure to continue into 2015.
4. Affordability I see affordability, or rather unaffordability, as the biggest issue and dampener on house price growth into 2015 and beyond. Growth is already starting to slow from the unsustainable levels experienced in 2014. Median house and unit price growth has outstripped median wages growth and this is putting pressure on many households to meet mortgage (and in some cities even rent) payments, especially for Sydney and Melbourne. A simple rule of thumb says that where mortgage or rent payments are 40% or less of after tax earnings, a property is affordable; anything above this is deemed unaffordable. The below table demonstrates how mortgage repayments on houses in Melbourne and Sydney are unaffordable by the above definition, and how houses in Brisbane, Darwin and Perth are heading in the same direction. Similarly, rent for houses in the eastern states is pushing towards unaffordability, especially in Sydney. The position is noticeably better for unit rent and mortgage payments although the Sydney mortgage ratio is quite high.
Table 1: Mortgage and Rent – After Tax Ratios
This analysis is backed up by ABS figures that indicate the ratio between household income and average house prices has increased in recent times. From 1994 to 2002, house prices jumped from 3.5 times to 4.5 times annual income, and it was recorded at 5 times annual income at the end of 2012. Since then, prices have increased further so I would expect the ratio has also increased. This means household incomes have not kept pace with house price growth, thereby exacerbating the affordability issue. A serious consequence of all this (apart from the financial pressure on many existing owner-occupiers) is the exclusion of an ever increasing number of first time buyers who cannot enter the property market because they simply cannot afford to buy or compete with tax-advantaged property investors. According to the Australian Institute of Health and Welfare in its Housing Assistance in Australia 2014 report, overall homeownership rates for young Australians aged 25-34 (your typical first home buyer age group) have fallen dramatically since 1981 when it stood at 61%, to 47% in 2011 (and I don’t expect much improvement, if any, from the 2011 position to today). What this all means is that property price growth will have to moderate to reflect the sentiment and affordability of both owner occupiers and renters alike. This is already reflected in a drop (or flattening out) of rental yields as landlords find it difficult to attract and retain tenants when they attempt to align rental growth with property value growth.
5. 2015 and Beyond Predictions And so now to the $64,000 question – Where are property prices headed in 2015? That’s a difficult one to answer given all the variables at play. It is hard (and perhaps even dangerous) to set absolute growth rates. Onthehouse.com.au data reveals that our markets have passed their peak period of growth for this cycle, and auction clearance rates across the nation have now dropped back a little and are hovering around the low 70% mark. This all points to a slower market in the next 12 months.
Graph 1: Australia-wide Growth Trend
Residex predictive models indicate the market will slow in 2015, produce moderate growth for the next two and three years, and then again move forward in mid to late 2017. Another approach is to assess the rate of growth over a longer period that smooths out short terms peaks and troughs and allows for prices to move through their normal cycle.
Table 2: Median House Price Movements
From the above analysis it is clear that house and unit price growth is expected to moderate substantially in most state capitals.In fact, over the next five years, the predictions indicate the possibility of zero or negative real growth (that is, growth above inflation) for all state capitals other than Brisbane, Perth and Sydney houses and Melbourne units. The situation is slightly improved over an eight year period with Brisbane and Sydney houses expected to grow at higher rates than the other state capitals. The forward predictions indicate it would be wise to compare and contrast bricks and mortar investment with other asset classes to ensure you get the best returns over a timeframe you’re comfortable with. In particular, balancing the risk, reward, cost, liquidity and cash flow of residential property investment with other investment alternatives, to help assess which provides the better longer term returns.
There appears to be some upside value left in capital city house and unit prices for 2015, but price growth will moderate during the year and the high growth rates of 2014 are unlikely to continue. Overall price growth will fall and it may be some time yet before we see some consistent growth rates above inflation for all the state capitals.Simply put, residential property should be viewed as a long term investment and you should not base your buying or investing decisions on a single year’s performance. It is also important to remember that while growth rates will be lower in the short term, there are will be individual suburbs, streets and properties that will outperform the general market if you do your research and buy wisely.
Information from onthehouse.com.au