75 Investment Analysis

INVESTMENT ANALYSIS

The signs of property resilience.

THERE WAS A TIME when property observers used to discuss which locations would be the next hotspot for price growth.

These days it’s about where prices are falling the hardest and where to find signs of resilience.

After successive months of interest rate increases, the housing market has started to cool.

While this has led to notable drops in property prices generally, some markets have held up.

If the pessimists are right, and that includes some of the major banks, the market is facing further falls over the next year as the Reserve Bank of Australia (RBA) wages its battle to rein in inflation.

The National Australia Bank (NAB), for example, in its third-quarter residential property survey didn’t flinch from its forecast that capital city property prices, from the highs reached in April this year, will see a 20 per cent peak-totrough fall in the current down cycle.

To put that fall into perspective, prices nationally surged 23.7 per cent in 2021, their biggest gains since the Australian Bureau of Statistics’ (ABS) Residential Property Price Index series was introduced in 2003.

“To date, Sydney and Melbourne have led the declines, but prices in other capital cities now appear to have also peaked – and the decline in Brisbane has accelerated,” says the NAB report, which also notes that regional areas are experiencing marginally lower falls than the capitals.

The NAB is expecting the RBA to push its cash rate as high as 3.1 per cent before taking a breather to assess the impact of the heady pace of successive rate hits that have rattled some buyers.

The impact is evident in NAB’s housing market sentiment figures, supported by data from CoreLogic, which show a decline in confidence across every state in the September quarter, except for Western Australia where sentiment actually increased.

There are positives to be drawn from the data.

Although NSW and Victoria recorded negative sentiment for the first time since the second WORDS NICK NICOLS

quarter of 2020, sentiment remained positive in Queensland and South Australia which along with Western Australia were the only regions to report a positive outcome in the quarter.

As a rule, price falls are driven by either an oversupply of housing or affordability issues.

Sometimes both are at play.

The NAB survey notes that the Australian market is not suffering from a fundamental oversupply of housing, but rather affordability constraints as higher interest rates have reduced the borrowing capacity of buyers.

It should be noted that the NAB survey brings together the opinions of about 350 property professionals including real estate agents, property managers and developers as well as fund managers and investors.

So, while these professionals agree that the market has started to lean in favour of buyers, the same can’t be said for renters.

Due to the absence of an oversupply of housing stock and tighter residential vacancy rates, the opportunities have clearly increased for investors amid a robust outlook for housing rents nationally.

The NAB survey forecasts national rents will grow by 3.5 per cent over the next year and a further 3.8 per cent in two years’ time.

This is up from forecasts of 3.2 per cent and 3.4 per cent respectively in the June quarter.

Residential vacancy rates underscore this forecast, supported by data from Domain which point to the severity of the problem for tenants in Perth and Brisbane, the country’s tightest capital city rental markets.

Vacancies slumped to 0.4 and 0.6 per cent respectively in August from 0.7 per cent and 1.3 per cent respectively a year earlier.

These conditions are primed to encourage more investors into the market.

“With rents growing faster than house prices, gross yields should improve, with rents outstripping prices in all states,” says the NAB report.

Based on the latest data from the ABS, investors have remained a relatively resilient force in the national property market even though new loan commitments in August were down 4.8 per cent.

The ABS notes that investor commitments are still tracking 70 per cent higher than February 2020, just prior to the pandemic, compared with owner-occupier loans which are up 35.8 per cent over the same period.

The latest survey by the Property Investment Professionals of Australia (PIPA) offers a more nuanced view of where investors are more likely to park their money over the next year.

Despite the distraction of the now abandoned changes to land tax proposed by the Queensland Government, the Sunshine State remains the top pick for investors, according to PIPA’s 2022 Property Investment Sentiment Survey.

More than a third of respondents, or 33.3 per cent, thought Queensland offered the best investment prospects over the next 12 months, well ahead of Western Australia at 17.8 per cent and NSW at 17 per cent.

With most respondents in this year’s survey preferring to invest in metropolitan markets rather than regional and coastal markets, Brisbane is the capital that stands out as their prime target.

More than 35 per cent of respondents listed Brisbane as their top investment choice, followed by Perth at 17.7 per cent.

Sydney and Melbourne have come a distant third and fourth at 13.2 per cent and 13 per cent respectively.

Among the encouraging trends revealed in the PIPA survey is the stress investors feel amid rising interest rates.

More than 31 per cent say higher interest rates will have no bearing on their investment.

More than 26 per cent will only consider selling their property unless interest rates increased by another 3 percentage points and a further 11 per cent would be selling if there was an increase of more than 2 per cent.

That may be the point where the market’s resilience will truly be tested.