Major capital city markets have started to strengthen over the past quarter, courtesy of lower interest rates, as well as a relaxation in lending policies. However, the economy remains sluggish, with the Reserve slashing the cash rate again in October – the third time this year – with jobs growth also benign. Building approvals are also significantly down, but it is only for one particular dwelling type.
Major property markets
The latest CoreLogic Hedonic Home Value Index found that median dwelling values in major markets have started to increase. According to the data, the median dwelling value in Sydney increased by 1.7 per cent in the month of September, and was up 3.5 per cent over the quarter – the strongest performer in the index.
Sydney’s median dwelling value is now about $805,000, which is still down nearly 12 per cent on its price peak. This value proposition is part of the reason why more buyers and investors are re-entering the Sydney market. This is further evidenced by the fact that I have been seeing an influx of people at open homes and auctions month on month this year. The reduction in Sydney’s dwelling value is now about $96,000 from its peak.
In Melbourne, the median dwelling value also grew by 1.7 per cent in September, and was up by 3.4 per cent over the quarter. Melbourne’s median dwelling value is now about $635,000 – still down nearly eight per cent since its peak. In our two biggest capital city markets, the confluence of lower property prices as well as reduced interest rates and lending serviceability calculations are enabling more buyers into these markets.
According to CoreLogic, the median dwelling value in Brisbane increased by 0.1 per cent in September, and was up 0.5 per cent over the quarter. Brisbane’s median dwelling value is now $492,000 – only slightly lower than its peak. Brisbane’s market remains an affordable option for investors, and is likely to keep strengthening in the months ahead.
The Reserve Bank slashed the cash rate to a historic low of 0.75 per cent in early October. However, none of the Big Four banks passed on the entire 0.25 percentage point cut to owner-occupier borrowers, citing the commercial pressures of a low-interest rate environment as the reason why. Some non-bank lenders have passed on the cut in full, while others have passed on more to interest-only borrowers whose rates were still abnormally high because of APRA policies over recent years.
What this means is the impact of future rate cuts on the economy may be blunted, with major lenders clearly not prepared to reduce rates much further. That said, I wouldn’t be surprised if there was another cash rate cut by the end of the year. The current low interest rates do assist existing borrowers with additional cash flow, as well helping more first home buyers and investors into the market.
The latest Australian Bureau of Statistics data on building approvals found that the number of dwellings fell nearly four per cent in August in trend terms. Looking more closely at the data, though, it’s clear that unit construction is dragging overall building approvals down. The trend estimate for private sector houses approved only fell one per cent in August, according to the ABS, which shows that there remains solid demand for new houses and land, especially from first home buyers.
The number of dwellings approved, excluding houses, decreased by 9.2 per cent in August, and has been falling significantly since the start of last year. Some of the reasons why is the public saga of poor-quality construction in some buildings, including flammable facades, as well as commercial loans being much harder to secure. The reduction in demand from new unit buyers means that many developers just can’t achieve the required presales to qualify for a loan to construct their projects.
According to the ABS, across the states and territories, dwelling approvals decreased in August in the Australian Capital Territory (27.7 per cent), Northern Territory (8.7 per cent), New South Wales (5.4 per cent), Victoria (4.0 per cent), Queensland (2.3 per cent), South Australia (0.9 per cent), Tasmania (0.4 per cent) and Western Australia (0.2 per cent), in trend terms.
The drastic reduction in dwelling approvals in Canberra is a further sign that our economy is soft. Clearly, jobs growth is also benign within Federal Government ranks, which has dragged down its construction sector.
Unemployment remains steady, but is masked by the increase in the percentage of part-time workers. In fact, the ABS Labour Force figures for August found that, while full-time employment increased by 7,200 persons, part-time employment increased by double that figure – up by 14,700 persons. This is another issue with our unemployment rate, which looks quite healthy at 5.3 per cent, but hides the fact that about 8.5 per cent of the potential working population is classed as underemployed, according to the ABS. This is not just a statistic, it actually represents hundreds of thousands of people who are not working to their full capacity, generally because of a lack of jobs growth.
With the unemployment rate hardly moving over the past year, there is obviously no pressure on wages. This is part of the reason why our economy is flat-lining, and inflation has remained stubbornly below the two to three per cent target band set by the Reserve for the past few years. Part of the Reserve’s motivation to cut the cash rate is to stimulate employment growth, but it is too early to tell whether it will achieve its goal.
Over the next quarter, I believe the best markets for investors to be in are Sydney and Melbourne, because there is an upswing currently under way. There are early signs of price pressures with more people now able to access finance. The fundamentals of Sydney and Melbourne were still sound over the past few years, but cash flow became a problem at the peak of their respective markets. Restricted access to finance, as well as affordability issues meant potential buyers and investors had to wait it out on the sidelines.
While I believe there is potential in the Sydney and Melbourne markets, the Queensland capital is still a solid option. There remain excellent buying opportunities in Brisbane, given its affordability, as well as significant major infrastructure programs and strong population growth – especially from interstate.
Savvy investors will be considering all three capitals, but will also not be afraid to cherry-pick the best Brisbane properties while the focus shifts back to the southern capitals once more.
WRITTEN BY VICTOR KUMAR