Melbourne to be Australia’s best performing capital city property market in 2016: Propertyology's Simon Pressley

GUEST OBSERVER

If there's one thing which really irks me most about property markets it's the long list of headline-chasing commentators who, each time they come public with a property opinion piece, do little more than demonstrate their limited knowledge on the complexities of property markets.

The recent Macquarie Wealth Management Aussie Macro Outlook report is a classic example. Citing a pending property oversupply and a slowdown in population growth, the report said “in terms of the price phase of the adjustment, we expect a measured 7.5% peak-to-trough decline in house prices over 2016 and into 2017, with a recovery commencing in 2H17”.

A day later, AMP couldn’t resist the urge to go one better with forecasts of a slide in property values of up to 10%.

Extraordinary jibberish by them both!

As if referring to one massive country that contains 550 different local government jurisdictions in eight states and territories as one big market isn’t laughable enough; to then try to predict a specific value that ‘the market’ will decline by is ridiculous. Why 7.5 or 10%? Why not 2% or 15%?

Unlike share markets, property markets do not have an ‘All Ords Index’. It’s not as if an investor can sink $10,000 of their savings in to a ‘Property Index’ that constitutes the cumulative value of properties within Australia’s biggest cities.

The problem with the likes of banks and economists is that many of their utterings are gross generalisations and are based on the premise that we do have a ‘Property Index’. Too often they make a diagnosis as a 'general practioner' which is often even less accurate than their monthly interest rate forecasting and only creates unhealthy drama in the lives of others. It’s irresponsible. These general practioners should stick to general economic commentary and leave the property economic commentary to the specialists. 

Exactly which ‘market’ are these general practioners referring to with their 7.5 to 10% decline in property values anyway? Is Doctor Macquarie referring to the Perth and Darwin markets which, at the very start of this year, Propertyology forecast would [and now are] declining. Is Doctor AMP referring to Adelaide, Brisbane, Canberra and Hobart which completely missed the boom and property values today are much the same as they were six years ago? My guess is that ‘Australia’ really means ‘Sydney and Melbourne’ and that they’ve probably given little thought to the remaining 61% of the country. Or, perhaps I missed the memo which referred to their exclusion from that co-called ‘Property Index’.

It would take real research to forecast the outlook of the hundreds of regional markets across the country where a significant eight million Australians elect to live and some exciting investment potential exists. This is one of the many limitations of general practitioners.

Whilst Australia’s population growth rate has eased, a growth rate to the year ending March 2015 of 1.4% is only marginally lower than the 1.5% national average over the last ten years. If Doctor Macquarie’s property market forecasting is based on the gross generalisation that ‘Australia’ actually means ‘Sydney and Melbourne’ as we suspect, they obviously haven’t looked at the facts close enough; the latest available capital city population data shows that Sydney’s growth rate of 1.8% is above its 1.5% annual average and Melbourne’s 2.3% population growth is also above its 2% average. ‘Oops’, I hear them utter. 

Many commentators [not Propertyology, mind you] are describing Brisbane as the number one place to invest in at the moment, yet its population growth of 1.7% is significantly below its ten-year average annual growth rate of 2.2%.

A specialist, as opposed to a general practioner, knows that the complex nature of property markets is much deeper than running the ruler over a few population figures; here’s plenty of research with substance to back this up.

Propertyology forecasts Melbourne to be Australia’s best performing capital city property market in 2016. It’s not a location that we’ll be investing in though. The property asset class requires a longer focus and our concerns with Melbourne’s economic profile were well documented earlier this year and nothing has changed. Dark clouds loom for Melbourne from 2017 onwards.

In regards to dwelling supply, those who have been listening will know that over the last couple of years Propertyology has warned that national building approval volumes are at all-time record levels. At a national level, over the two years ending July 2015 there were 416,141 new dwellings approved which equates to a 34% increase on the 310,797 for the two years ending July 2012.

The devil is always in the detail though. On a state-by-state basis, the biggest increases in building approvals have occurred in New South Wales (+63%), Western Australia (+55%), and Queensland (+45%). Victoria has consistently high building approval volumes for the last five years. On the other hand, supply has been better controlled in South Australia (+10%), Tasmania (-1%), and Canberra (- 21%). The wide range of results from supply data is just as prominent across regional cities.

‘Oops’, again.

Rounding out the trifecta of these gross generalisations are claims from general practioners that household incomes haven’t grown enough to sustain the increases in property prices over the last couple of years. Which of the 9.6 million Australian households would these generalisers be referring to? If they are going to generalise about wages showing a nominal increase over the last five years surely it’s relevant to at least factor in the 2.5% reduction in the cash rate which equates to an extra $11,250 in the household budget (based on a $450,000 home loan). In most of Australia, housing affordability has actually improved.

How many oops’s are we up to now?

Employment prospects in this country are much healthier than many scribes have given credit. Yes, the national unemployment rate has increased a bit but so has our population. Australia actually created 342,700 new jobs over the two years ending August 2015 but I don’t recall ever seeing that as a lead news story. Imagine what this (once) great country could achieve with less glass-half-empty people occupying the tabloids.

Another thing that the general practioners probably don’t realise is the unprecedented pipeline of infrastructure projects throughout the country which, pending greater cooperation from all levels of government, actually has the potential to supercharge Australia’s economy.

Affordability is definitely an issue for Australia’s most expensive city to live in, Sydney; that’s nothing new though. While a significant amount of new supply will hit Sydney’s market during the next couple of years, Propertyology’s research suggests that Sydney’s economy will remain very healthy for some years and property prices are likely to have a prolonged flat period. That’s one of the main reasons why Propertyology resisted the temptation to help clients invest in our biggest city.

Increased supply and a significant spike in investor home loans over the last two years is likely to result in property rents in Australia’s three biggest cities easing throughout 2016 and 2017.

Brisbane, Adelaide and Hobart will experience price growth next year while Perth and Darwin are likely to fall further and remain in a property trough for at least another year.

With 411 separate regional local governments throughout Australia there will always be mixed fortunes amongst the forgotten 35% of Australia’s population. The money trail which Propertyology is following is directly linked to the Asian Century; locations which we have identified for solid property market performance over the medium term have economies which contain a mix of agriculture, tourism, premium manufacturing, education, and health.

If these markets decline in value by 7.5 to 10% I guess the general practioners will be able to shout from the rooftops that there is such a things as a ‘Property Index’. I’ve put my money where my mouth is though and I can assure you that, before doing so, I did a lot more than look at very broad population and construction numbers.

Simon Pressley is Managing Director of Propertyology, REIA Hall of Fame Inductee, property market analyst, accredited property investment adviser, and Buyer’s Agent.