Sydney remains the most volatile property market, at least for now, due to uncertainty surrounding investor activity.
This is the latest finding in RiskWise Property Research’s quarterly Risks & Opportunities Report.
RiskWise has also upgraded projections for houses in southeast Queensland, warns to proceed with caution in Tasmania and in the Northern Territory maintains there is still a medium level of risk.
When it comes to Melbourne, while the market has significantly decelerated, it is holding reasonably well and carries in the short term a low-to-medium level of risk for houses and medium level of risk for units, however, in Western Australia the market is poor, particularly for units, due to a weak economy and population growth.
In the long term, both the Sydney and Melbourne markets are projected to deliver solid capital growth due to a strong labour market, high population growth and dwelling undersupply particularly in the middle rings.
RiskWise CEO Doron Peleg said from the second half of 2017, the major risks associated with the residential property market increased significantly.
“This was due to credit restrictions, which saw dwelling prices in Sydney and Melbourne decelerate followed by price reductions in Sydney and, to a lesser extent, Melbourne, as well as the Banking Royal Commission which is likely to recommend increased scrutiny of expenses in relation to mortgage applications,” Mr Peleg said.
He said some other factors which affected the property market were housing affordability, poor wage growth, employment, population growth and unit oversupply.
“It is likely that the solid economic growth that is followed by strong population growth in Sydney and Melbourne will mitigate, to some extent, price reductions in these capital cities,” he said.
A large number of areas in Australia are experiencing unit oversupply. Areas with a high level of stock and a large number of units in the pipeline and unit building approvals suffered from poor and often negative capital growth. This has also significantly increased the settlement risk of off-the-plan units, particularly in large unit blocks. A prime example for that is the Inner-Brisbane area where oversupply has led to price reductions and an increased number of defaults.
Oversupply of units has also led in many cases to voluntarily lending restrictions by the major banks, such as lower LVR for new units in some postcodes across Australia. These are in addition to broader lending restrictions set by APRA to significantly reduce investor activity and to mitigate the financial risks associated with residential property lending, and have triggered reduced demand for new dwellings and a reduction in new dwelling commencements.
Legislation and regulation carry high risk in the next couple of years. The potential win of the Labor party, and with it dramatic changes to negative gearing and capital gains tax for residential properties, are likely to change the entire landscape of residential properties in Australia and, in particular, impact new units.
New South Wales: On the back of unprecedented property price growth, NSW displayed strong economic fundamentals. However, great differences exist across the SA4s where high-end properties are more subject to volatility. Housing unaffordability is a key weakness with a very high dwelling price-to-income ratio. Further, investors are typically very active in NSW. Therefore, lending restrictions have had the greatest impact in NSW, and resulted in significantly reduced demand for dwellings, price reductions, lower auction clearance rates and poor growth projections.
Victoria: This state had the highest population growth across Australia. It enjoys a solid economy and a healthy job market, however, due to rising property prices and low rental returns, investment serviceability has become increasingly difficult. Overall, the state performed well for houses, and is likely to experience ‘soft lending’ and solid capital growth in the medium to long term. In Melbourne, overall both houses and units experienced significant deceleration but due to the outstanding population growth and strong job market, with unemployment at 5.1, will hold relatively well. Some SA4s, such as Geelong, the Mornington Peninsula and the western suburbs, enjoy strong demand and are projected to deliver strong capital growth in medium to long-term.
Queensland: With the Queensland Government taking significant steps to grow its economy, the local property market is likely to prosper in the medium to long term. Further, southeast QLD enjoys strong internal migration, particularly from NSW and VIC. From a 30-year perspective SEQ presented outstanding value compared to Sydney and Melbourne. The economy, demand for dwellings and the strength of the housing market are greatly varied across the state, although units there still carry a higher level of risk. Some areas, particularly in the southeast, such as the Gold Coast and the Sunshine Coast, enjoy good population growth and healthy demand for dwellings (particularly houses). Others, such as Central QLD, are still experiencing poor demand for dwellings, very high vacancy rates and very soft property market. In this edition of the quarterly report, houses in Queensland have been upgraded to low-medium largely due to the strength of the SEQ property market.
South Australia: This state performed below average due to a poor economy. Also, there is dwelling oversupply (especially of units) with nearly three times the stock required to meet population growth. However, South Australia delivered strong housing affordability relative to NSW and Victoria. This factor mitigates, to some extent, the risk associated with houses, although investors need to be aware that units carry high risk due to oversupply.
Western Australia: This was the worst performer due to its struggling economy and unattractive employment market. High levels of unit supply and low population growth have impacted capital growth and rental returns, particularly of units in central Perth, with many leaving the state to seek work elsewhere following the end of the mining boom. The report puts the risk at high for both houses and units. In inner-city Perth, the unit oversupply and low demand puts the risk at an extremely high level.
Tasmania: Leading the country in investment serviceability, thanks to its high median rental returns and low average dwelling price, investors are still warned to proceed with caution. The state delivered consistent capital growth as well as strong rental returns for both houses and units. However, its outstanding growth rate is unsustainable, and it is projected these will decelerate within 12-24 months. While the short-term risk is low, there has been decelerated growth, with less buyers in the market. In addition, while housing is considered affordable in Tasmania, the state also has a low-medium household income. It must also be remembered that houses and units carry different risk profiles.
Northern Territory: The state experienced poor population growth (largely due to the departure of a large number of employees, following the end of the mining boom) which resulted in negative dwelling growth and a very soft property market. Houses have become extremely affordable with a price-to-income ratio of 4 (by far the lowest in Australia) and it seems risk for price reduction is upgraded from medium-high to medium. The housing market is projected to remain soft, particularly for units.
Australian Capital Territory: This state delivered solid economic growth and experienced the second largest population growth rate in the country, delivering solid capital growth and a healthy property market. While growth rates have decelerated in recent months, dwellings in the ACT present a relatively low level of risk and are projected to deliver modest capital growth in the next couple of years.
This article is originally published in AAP Medianet
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