PROPERTY BOOM AWAITS

The Adelaide, Brisbane and Melbourne property markets are set to build on their impressive growth figures for 2007 as the sharemarket shows ongoing signs of weakness.

As an introduction to 2008, let us first examine what transpired during the 2007 calendar year. The first quarter of 2007 set the scene for the year to come. Sales volumes started to increase across each capital city – apart from Perth – and substantial value growth became apparent in Adelaide, Brisbane and Melbourne. All three markets hit their straps during the first three months, with Adelaide property values rising by 7.8 per cent, Brisbane by 7.4 per cent and Melbourne values by 5.4 per cent. On the flip side, the Perth market hit the skids. During 2006, Perth property values rose by 32.1 per cent. By the end of last March, growth had all but stalled, recording an increase of just 2.1 per cent for the previous quarter. The slowdown in Perth is proof that despite a strong state economy, a huge resources sector and the highest population growth rate of any state or territory, property demand dries up if prices overshoot the mark. The Sydney market has failed to experience a complete recovery. The overall market plodded through last year at about 2.3 per cent growth in each quarter. While the affluent inner areas showed healthy gains, the outer markets floundered due to affordability pressures, causing an imbalance between supply and demand. There were a lot of properties available for sale in these outer markets, but not a lot of buyers who were willing or able to purchase. The performances of Canberra and Darwin fall somewhere in between the boom cities of Adelaide, Brisbane and Melbourne and the comparatively average performance of Sydney. Canberra’s growth factor fell from 13.3 per cent in 2006 to 11.8 per cent last year. Darwin’s slowed from 19.8 per cent growth in 2006 to 14.6 per cent in 2007.To a large extent, the trends of last year will continue into 2008.

The Adelaide market has officially moved into "boom" territory. The median price of a dwelling is up by 20.1 per cent, from $305,200 in October last year to $366,590 at the end of September. Early indicators show the market is still gathering pace – the average time it takes to sell a property is falling, the level of vendor discounting is diminishing and price increases show no sign of abating.

The eastern seaboard and Adelaide growth cycle is only one year old and, despite an interest rate rise and the possibility of another one next month, growth is expected to continue. It can be almost guaranteed, however, that growth in property values will be a far cry from what was experienced last year. Growth rates above 20 per cent are clearly unsustainable. Adelaide will continue to be the standout performer for several reasons. The first is that house prices are the most affordable of any mainland capital city. It is still possible to buy a decent detached home within five kilometres of the city for less than $350,000. Second, the South Australian economy is likely to gather momentum through the burgeoning minerals sector and an active manufacturing industry. The flow-on effects will be jobs and wages growth, leading to higher demand for housing.

Queensland’s south-eastern corner is the pick for the strongest medium-term growth. Brisbane still provides relatively affordable price points for key suburbs within 10km of the CBD. In addition, the state economy is growing at the second-fastest rate in the nation, the resources sector is booming and population growth in the region remains high. Growth in Brisbane will slow to more sustainable levels this year, but is likely to remain above 10 per cent over the next 12 months at least. Nationally, the home-unit market is likely to continue to outperform the detached housing market. Unit values increased by five percentage points faster than houses last year and this gap is likely to be maintained during 2008.

Historically, growth patterns have been the opposite, with the land component of detached housing making sure that house values increased at a faster rate than units. Demand for higher-density living is increasing due to changing lifestyle and living preferences – and affordability constraints. A surge in the popularity of medium and high-density living will become more pronounced in areas where affordability constraints are the worst, namely Sydney and Perth. Finally, to investors. Investment levels in the Australian property market have not experienced a sustained recovery to the levels recorded back in 2003.

Last year saw an improvement in property investment levels. However, 2008 is likely to see investment step up another notch. Investors will be looking to diversify out of the sharemarket, prompted by the uncertainty in the international economy and equities markets. At the same time, many areas of Australia's property market that have hardly moved in value since 2004 are starting to "stack up".

Outer suburban areas that were flat between 2004 and 2007 may start to attract attention due to high yields and the potential for capital growth. For example, many properties located in Sydney’s outer south-west, such as Campbelltown and Camden, are returning yields in excess of 6 per cent. These areas are slated for strong population growth and infrastructure improvements in the years to come, and price growth has been sluggish. Investors will be drawn to these areas in the hopes of securing a bargain, gaining a solid rental return and, eventually, receiving a decent rate of capital growth.

Tim Lawless
Tim Lawless is research director of
RP Data. tim.lawless@rpdata.com