first national property outllook by sean scallion

The

2009 PROPERTY

Outlook mid year update

Enquiry 1800 032 332 stewart.bunn@firstnational.com.au This document is not to be recreated for sales or public purposes.

CONTENTS The 2009 Property Outlook Mid Year Update EXECUTIVE SUMMARY

VICTORIA

SOURCES

CONTACTS

NOTES

EXECUTIVE SUMMARY First National Real Estate believe the property market has turned the corner after one of the most challenging years seen in quite some time. The upward trend is expected to continue throughout 2009, and strengthen as it gains momentum into 2010. Record levels of housing affordability, coupled with a continuing shortage of housing supply across the nation will provide on-going support for the Australian property market in the coming years. Housing prices are expected to rise, rental yields are forecast to continue improving and the government is investing heavily in major infrastructure and property projects. All this should ensure the Australian property market continues to thrive and will soon leave the global financial crisis (GFC) behind it. As a result, there are plenty of bargains and opportunities for investors and owner-occupiers to realise the Australian dream of home ownership. However, these conditions wonâ&#x20AC;&#x2122;t last for long. With the market already showing strong signs of recovery, now is the time to buy or invest before the property cycle starts to rise again. The middle market has already been positively affected and momentum is expected to gather in the latter half of 2009. The top end should then begin to recover and the market will be well and truly in an upward cycle. First home buyers are borrowing more, with the average first home buyersâ&#x20AC;&#x2122; loan roughly $50,000 higher than it was last year. It should be remembered though, that first home buyers only represent 30 per cent of the overall property market, so there is plenty of scope for the middle and top end tiers to move too. Strong auction clearance rates have been posted for most months in the first half of 2009, confirming that first home buyers are not the only ones taking advantage of current affordability. In the last weekend of June 2009, Sydney and Melbourne achieved clearance results of 74 per cent and 87 per cent respectively. Recent figures indicate auction clearance rates are approaching 2007 levels on a national scale. In mid June, Sydney, Melbourne and Brisbane all recorded 52 week-high auction clearance rates

According to the experts, properties selling at auction are those popular with investors, first home buyers as well as second and third time buyers. It is expected activity will remain buoyant for many months, with an increase in both demand and supply likely to occur in spring. Low rates and attractive rental yields have been enough to entice a growing number of investors toward their next purchase. Investors accounted for 28 per cent of loans in May 2009, after an all-time low of 24.5 per cent in March.

Conditions Ripe for Sustained Recovery Optimistic property market forecasts, combined with excellent consumer confidence figures confirm what First National Real Estate has been indicating since January 2009 â&#x20AC;&#x201C; conditions are ripe for a sustained recovery of the Australian Property Market. Some forecasters are predicting property prices will rise in Sydney, Melbourne and Adelaide by 19 per cent (followed by Brisbane, Canberra and Hobart with between 15 and 17 per cent), in the three years to 2012, further strengthening consumer confidence. The lowest growth projections are Darwin at 11 per cent, followed closely by Perth with 12 per cent. It is expected first home buyer activity will slow towards the yearâ&#x20AC;&#x2122;s end, as the recovery gains momentum and the government initiatives are phased out. However, the second time home buyers and investors are already beginning to return to the market, a trend expected to grow in the second half of 2009 and throughout 2010.

EXECUTIVE SUMMARY Issues to Consider While the lower end of the market (driven mainly by first home buyers) has performed strongly, prestige residential properties have been hard hit. Yet overall, the residential property market has demonstrated resilience, consistent with Australia’s slowdown proving to be mild, compared with many other countries affected by the global financial crisis. A national residential market recovery is being heralded, and the market is abuzz with buying activity, so it is timely to consider those factors that affect any property market. As astute investors and property buyers will be quick to recognise, the property market is at the start of a new cycle that features low prices, strong rental returns and low interest rates, setting the scene for a potential ‘boom’ period. Supply and demand underpins all property markets and the tightening credit conditions in Australia add even more pressure to an already undersupplied market.

Demand will continue to outstrip supply Even with the government’s announcement in the State Budget in May this year, that it will build 20,000 new homes, demand will still outstrip supply. Home building in Australia recorded its lowest levels for eight years in the first three months of 2009. Housing construction is expected by many to be the driver for the recovery of Australia’s economy next year – yet the government is not doing enough to ensure more houses will be built. In the 12 months to September 2008, 389,300 new residents were added to our population tally with the city of Brisbane the most consistent for growth – the city recorded an average 2.3 per cent increase of new residents each year over the last five years. Perth and Darwin also recorded a jump in new residents, largely spurred on by an influx of workers in the mining and resources sector over the last three years. South East Queensland remains the population growth centre of the nation with four of the top five growth regions located in the region. This region accounts for 18 per cent of the nation’s overall population growth, equating to an additional 65,348 new residents over the last year.

Australiaâ&#x20AC;&#x2122;s residential property developers will need to build 155,000 homes annually for the next five years to cater for the additional 1.6 million people expected to live here. With an average influx of 330,000 people annually, this is well above the governmentâ&#x20AC;&#x2122;s 20,000 homes to be built for the next 12 months. In the 2009 financial year, new housing supply built was 15 per cent lower than demand. Queensland, NSW and the Northern Territory are believed to be undersupplied by 40 per cent and Sydney is expected to need 24,155 new dwellings each year for the next five years. The following table forecasts dwelling stock deficiency, per state, for 2009/2010: State New South Wales Victoria Queensland South Australia Western Australia

June 2009 64,000 26,700 22,200 700 10,400

June 2010 83,700 25,700 27,200 -1,800 11,200

Tasmania Northern Territory Australian Capital Territory TOTAL

1,000 2,400 1,600 128,900

900 3,300 1,500 151,600

Strong demand is fuelling the market in all Australian capital cities, due to the population growing at its fastest rate in 40 years, record low interest rates and strong rental returns (in the first quarter of 2009, units outperformed houses - 13.3 per cent compared to 12.7 per cent respectively).

EXECUTIVE SUMMARY Rental yields are up Rental yields for units across Australia are 5.25 per cent and houses 4.7 per cent, and with low vacancy rates nationally, these will move up and make residential property even more appealing to investors. Low interest rates equate to an ideal time for investors, with price growth predicted to flow into the mid market over the next two to three years. Investors are already seeing evidence that price growth is returning to the property market, so investor demand is expected to strengthen throughout the remainder of 2009 and accelerate towards the end of 2010.

Property has proved a secure investment Australiaâ&#x20AC;&#x2122;s housing market recovery has been the cornerstone of the Australian economyâ&#x20AC;&#x2122;s stability in 2009. Existing property owners are comfortable in the knowledge that their largest investment is secure and investors have been given confidence to once again look to bricks and mortar over other asset classes, which have been decimated over the last 12 months.

Australiaâ&#x20AC;&#x2122;s Economy Australiaâ&#x20AC;&#x2122;s slowdown, due to the global financial crisis, has so far proven to be mild compared to that in many other countries. Despite low interest rates, and stimulus payments, household spending remained subdued in the first few months of 2009. Growth in consumer spending has been minimal. The economy has reasonable momentum and the Reserve Bank and government have adequate leverage to provide the economy with a soft landing. What should be remembered is that at some stage in the near future, higher interest rates will be a feature of the Australian economy, as the nation repays the debt it has incurred in its efforts to sustain itself through the global financial crisis and subsequent recovery. An improvement in demand for new dwellings and a substantial rise in new dwelling approvals will manifest in an expansion of building work in the latter part of 2009. It is not anticipated that there will be wholesale job losses, or a blow out in unemployment levels, although unemployment may reach 7 per cent â&#x20AC;&#x201C; the point at which the last property growth cycle commenced. Consequently, sharp drops in house prices are not expected and the undersupply of dwellings will effectively put a floor under construction.

EXECUTIVE VICTORIA SUMMARY Strong market keeps things looking good Victoria is considered one of the strongest markets in the country, with some of the best ‘value’ properties in Australia and a ‘fierce’ first home buyer market. It is predicted that growth for median house prices in the state will be solid, with growth likely from now until 2012 at around 19 per cent. Victoria continues to face a shortfall of residential construction, worsened by stricter credit conditions, ensuring the property market continues to be undersupplied. This will keep prices for property strong and rents high as vacancy rates are set to remain low. According to experts, while slowing, the Victorian economy is expected to out-perform the national economy over the next couple of years, providing a relatively benign backdrop for housing markets, compared to some other states.

Melbourne and Surrounds The Melbourne market continues to attract record numbers of investors and the prospect of further growth in 2009 is excellent, with the ongoing strong demand and supply struggling to keep up. A recent report shows the population of Australia will rise by 8 per cent in five years – mostly around the major cities, with the greatest demand expected in Melbourne. Government is expected to expand growth corridors in the north, west and south east with land releases, less prohibitive infrastructure charges and road and rail link improvements facilitating expansion in these corridors. A decommissioned defence site in Melbourne’s west is to become a new suburb, with about 300 homes being built on the 128 hectare site near Maribyrnong over the next decade. In addition, nearly 700 social housing dwellings are to be built by July 2010 in Victoria, and an extra 41,000 hectares of land will be rezoned for development, making way for 284,000 more homes and boosting jobs in the construction industry. Melbourne’s median house price has fallen in recent quarters, largely because of price decline at the upper end of the market. Prices have been rising in the first home buyer suburbs but because there are more homes selling at the cheaper end, the overall city median has fallen. Increased purchaser activity in the Melbourne market, as owners upgrade, resulted in Melbourne’s median house price reaching $425,000 in June 2009. An increasing shortage of dwellings will maintain upward pressure on rents, while the reductions in interest rates have boosted affordability in Melbourne to its best levels since 1999. A decline in the forecasted number of new apartment completions for Melbourne’s inner city will be the key to further price growth going forward. Over the 2009 to 2012 period, Melbourne’s median house price is forecast to rise by a total of 19 percent, which is 9 per cent growth in real terms. Carlton has some of the most affordable inner city units ($246,000) in the state, along with Footscray ($240,000) which also has some of the most affordable houses ($453,750).

EXECUTIVE VICTORIA SUMMARY The Rental Market Carlton, renowned locally for its ‘Little Italy’ precinct on Lygon Street and its Victorian architecture, represents one of the best places for rental yields in Australia, achieving 8.6 per cent for units. Other top unit rental yields include Burnley with 8.1 per cent, Melbourne with 6.8 per cent, Southbank with 6.5 per cent and Docklands with 6.2 per cent. Top rental yields for houses in Melbourne are 5.1 per cent in Collingwood, 4.8 per cent in Parkville, 4.6 per cent in South Kingsville and 4.2 per cent in Abbotsford and Port Melbourne. Victoria’s underlying demand and supply balance remains tight with a shortage equivalent to around one years’ production. Yields are increasing, and investors are coming back to the market and buying. Low interest and very low vacancy rates are driving rising rents and high rental yields, proving too attractive for investors to pass up. As rental growth continues and interest rates remain low, better buying conditions will improve demand for inner city apartments in Melbourne. Demand will pick up in 2010 as the economic outlook becomes more positive. It will then gather momentum in 2011 as the improvement in demand results in stronger capital growth. Ultimately, investor demand will continue to increase on the back of stronger price growth over the following two or three years, with forecasts for total growth in apartment values of around 30 per cent over the 2009 to 2014 period.

Mornington Peninsula The lower end of the market still dominates buying activity in the Westernport region of the Mornington Peninsula. There is some movement now occurring in the middle market as lower end owners trade up, taking advantage of current market conditions. The market is expected to soften by the end of the year when the first home owner grant drops. High rental values and low rates are expected to prop up the market to perform well as it heads into the 2010 year. On the investment side, positive growth is expected as opportunities for neutrally geared, or positively geared investments loom. Portsea has been rated as among the top growth performing suburbs for 2008, experiencing a median house price increase of 38.6 per cent. Bellarine Peninsula Wyndham City is the number one growth region in Victoria and encompasses suburbs in the south-west, heading down the Princes Highway towards Geelong, including Werribee, Hoppers Crossing, Wyndham Vale, Point Cook and Tarneit. Itâ&#x20AC;&#x2122;s an area that has been allocated $3 billion to build a new rail link to central Melbourne. According to recent reports, Geelong suburbs, such as Highton, Grovedale, Waurn Ponds and Belmont are attracting more first home builders than anywhere else in regional Victoria, with Mildura and Ballarat the next most popular.

EXECUTIVE VICTORIA SUMMARY Gippsland Based on infrastructure spending commitments in the Budget, we can expect to see property hot spots created in the Latrobe Valley, particularly for towns like Morwell and Traralgon. Hot Spots Coolaroo, located 18 km north of the Melbourne CBD, is the capital cityâ&#x20AC;&#x2122;s most affordable suburb with a median house price of $220,000. Houses in Frankston continue to attract attention for many home buyers and investors. With a median house price of under $300,000, close to beaches and major infrastructure expenditure as part of the Melbourne 2030 strategy, Frankston offers great value for money. Inner city suburb Kensington represents one of the most affordable suburbs within the 5 km ring and with most of the offerings being timber cottages on small blocks, there is substantial renovation potential. Units in Flemington are hard to beat. With city views and a median unit price of $300,000 there should be no shortage of tenants looking to rent units. Brunswick West is also considered a hot spot for units. Strong growth potential is predicted for Maidstone, Braybrook, West Footscray and Footscray where central location will play a key part in the overall return.

Regional Jeparit, Rainbow, Hopetoun, Sea Lake and Murtoa are considered regional Victoria’s cheapest suburbs. The Warrnambool region, where there are major energy-generation projects underway and in the planning, is an area to watch over the medium-term. Cranbourne South, in Melbourne’s south east growth corridor, was listed as among BRW’s list of top 10 property bargain suburbs nationally.

EXECUTIVE SOURCES SUMMARY SOURCES: BIS Shrapnel – Residential Property Prospects 2009-2012 RP Data – various reports and website REIA – Housing Affordability Report and media releases REIWA – reports and website REIT - reports BRW Magazine ABC Radio Ironfish – Australian Residential Property Market Update, June 2009 Housing Industry Association – reports and website Westpac– Index of Consumer Sentiment, Residential Property Monitor Terry Ryder – Property Report Australian Property Investor Planning Your Investment Property Magazine – June 2009 Newspaper articles – The Australian, Weekend Australian, Australian Financial Review, Sydney Morning Herald, The Age, Herald Sun, AAP, Gold Coast publications, Cairns Post www.domain.com.au www.onthehouse.yahoo.com www.poweproperty.com.au www.investsmart.com.au First National Real Estate members across the country

Disclaimer: There are many uncertainties in forecasting movements in the market such as government policy changes, interest rate changes and global economies. Therefore, the forecasts in this report should be taken to be indicative of market directions. First National takes no responsibility for actions taken on the basis of this report and we encourage all vendors and buyers to conduct their own research.

Contacts NATIONAL OFFICE 89 Hoddle Street, Richmond VIC 3121 Phone: 1800 032 332

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