Property Outlook:Australian Property Market Report – January 2019
Downturn far less pronounced than first thought, but the worst is not over...
We are now well and truly in the midst of a housing downturn. While conditions remain highly variable across Australia, only four capital cities saw price increases in 2018 with the rest recording declines. Across regional Australia, conditions are even more variable. The realestate.com.au House Price Index is showing that declines are far less severe than what many other commentators are saying. There is no doubt we are seeing price declines in Melbourne and Sydney, but they are not as pronounced as first thought; and we are certainly not seeing the worst conditions in 30 years. In most other capital cities, prices are either stabilising or seeing moderate growth. The capital cities continuing to record growth are Hobart, Canberra, Adelaide and Brisbane (in order of price growth). For regional areas, it is Victoria that is doing particularly well with Ballarat seeing the strongest regional price growth in Australia. While declines are not as bad as widely reported, it does look like the worst is still to come in Melbourne and Sydney. For at least the first half of the year prices will fall and from there, it will depend on the outcome of two major events which could dramatically change the direction of the market.
The outcome of the Financial Services Royal Commission - at this stage, it is looking like restrictions on home loans will not be a big focus of the final report. Banks reacted very quickly to restrict home lending as soon as the commission was announced and as a result, it is unlikely it will get any tougher for home buyers looking to borrow. As a further indication that it is unlikely to get any more restrictive, at the end of 2018, APRA removed the cap on interest only loans. This was seen as one of the riskier types of lending given the jump in repayments once the interest only period was over.
Result of the Federal Election and subsequent change to negative gearing and capital gains tax concessions - it is now looking likely we will see a change of Government sometime in the first half of 2019. While a more stable Government is good news for property, it is the potential changes to negative gearing and capital gains concessions that could continue to lead to price falls. It defies common sense that the changes won't hit house prices or rental rates and this assertion has been backed by modelling from both sides of Government, as well as independent consultants.
For house prices, best case, lending restrictions are eased up and there are only minimal changes to negative gearing. If this happens, we will see flatter conditions in the second half of the year. Worst case, finance becomes even more restrictive and negative gearing changes outlined by the ALP kick in. A continual fall is then likely for Melbourne, Sydney and potentially the rest of Australia.
Melbourne's performance is certainly a lot stronger than Sydney and while the city has been hit by the same finance restrictions, it does seem to be supported by jobs growth. It will take some time to get a clear read on what is happening with jobs, but the demand from renters in the city suggests that jobs are being created and people are continuing to move to Melbourne. Ultimately, this is underpinning housing demand which is stemming the price falls - now down 2.5% from peak and 1.5% over the past 12 months.
The other sign that Melbourne is holding up a lot better is that we are seeing a number of Melbourne suburbs with very high views per listings. Middle Park and Red Hill are even making the national list, a position usually reserved for suburbs in strong performing markets. This popularity is flowing through to price growth with both suburbs seeing double digit growth over the past 12 months.
On a regional level, the popularity of the west is evident with the area seeing the strongest growth - prices are up 1.8% over the past 12 months. Although this is partly driven by new supply suburbs like Truganina and Melton, established suburbs like Footscray and Yarraville are also seeing good increases.
While Melbourne is holding up a lot better, it will be hit by similar forces to the rest of Australia in early 2019 and it is likely we will continue to see a fall. Potentially another 3% for the first half of the year. Like Sydney, the direction after the election will depend on what happens to finance restrictions, as well as negative gearing.
Melbourne might be seeing a slight price decline, but regional Victoria is booming. Regional cities within close proximity to Melbourne are doing particularly well, driven, it seems, by first home buyers and young families. Ballarat, Geelong and Latrobe Gippsland are currently the strongest regional areas in Australia. East Geelong made it onto the list of most popular suburbs on realestate.com.au for 2018.