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The Market Metrics

The Market Metrics

The mining sector in Australia created a two-speed economy between the east and west coasts for over a decade, similarly we are experiencing a two-speed market in Victoria’s property sector. There is a significant pipeline of new dwellings that will cause an oversupply of apartments in the areas in and around the Melbourne Central Business District, Southbank and Docklands, however we are seeing an undersupply coupled with strong and consistent demand in the inner and middle ring suburbs 5km-20km from Melbourne CBD. Inner Melbourne has approximately 13,675 apartments currently under construction with an additional 10,349 apartments currently marketed and are expected to complete over 2016-2020(1). Dwelling growth in the middle-ring suburbs – those in a 10-20km band from the CBD – is not great enough to meet the demand for suburban downsizers and investors due to planning restrictions. The constraints are even tighter in inner ring suburbs 5-10km from the CBD. There are 4085 additional new dwellings required to be built each year to keep up with demand, with the great majority of the demand coming from inner and middle ring suburbs(2). The Melbourne CBD is currently the focal point for apartment development in Inner Melbourne, accounting for 61 percent of all apartments under construction and due to complete in 2016-2017(3).

 

For continued capital growth and the health of housing there are four critical factors:

  • Steady population growth
  • Steady employment growth
  • Low interest rates
  • Low supply of quality properties in established areas

To turn this market and for our housing sector to collapse it would take:

  • Overbuilding
  • A collapse in the economy
  • A rise in interest rates
  • A population decrease

 

 

POPULATION - Victoria

Australia is to China what Switzerland is to Europe, a transparent economy where business can be freely conducted, good education can be obtained and investments can experience growth without overt government intervention.

World population is increasing at 1.18 percent per year as at 2015, with Australia increasing by a rate of 1.3 percent per year(4). Victoria will experience a 100+ percent increase in population by 2051 to 10,086,517 residents(5).

The appetite for foreigners to live, learn and invest in this country does not seem to be slowing down.

 
EMPLOYMENT

Australia's unemployment rate unexpectedly fell to 5.7 percent in July of 2016 from 5.8 percent in June and below market consensus of 5.8 percent. The economy added 26,200 jobs and the number of unemployed decreased by 5,500. Unemployment Rate in Australia averaged 6.93 percent from 1978 until 2016, reaching an all time high of 11.10 percent in October of 1992 and a record low of 4 percent in February of 2008. Australia’s unemployment rate is forecast to reach 6% by 2020(6), this poses no immediate threat to the local property market, but it is a sign that our government will need to keep a close eye on growing unemployment.

LOW INTEREST RATE
Those of us that think the RBA will be lifting the cash rate anytime soon, think again. We are living in a low yielding world. 25% of the global government bond market is in negative yield territory and another 40% has a yield between 0%-1%(7).
The yield on the benchmark 10-year government bond fell to a record low of 1.81 per cent in August 2016. That is telling investors that the cash rate, now at 1.5 per cent, will be on average 1.81 per cent for the next decade(8).
Domestic shares, bonds and cash yielded sub 3% returns in 2015, and Australian shares lagged overseas markets for the third successive year. In Australia, residential property was the best performing asset class, delivering an 8% pa gross return over the 10-year period to 31 December 2015(9).

 

LOW SUPPLY
In the end what it all comes down to in every industry is supply and demand. With an average of 2.53 people per household and population growth to have a forecast net increase of 4,145,575 people between 2016 and 2051, Victoria will require 1,638,567 new dwellings to be built between 2016 and 2051. Victoria would have to lift historic building rates from 42,731 per annum to 46,816 per annum to meet demand, short 4085 new unit dwellings per year(10).

"The market is looking for a 1.5 per cent decline in headline owner-occupied approval numbers and interest in investment lending approvals that have risen for the past two months, by 5.3 per cent in May and 3.2 per cent in June, a sign perhaps of demand resilience," according to NAB economist David de Garis(11).

We have recently seen banking policy tighten on foreign lending and government creating more barriers to entry like the 7% tax to foreigners on new dwellings, all hoping that it will slow the strong capital growth of cities such as Melbourne and Sydney from recording continued 9.1% and 9.4% YTD growth(12) in their respective housing markets.

It seems that based on continued strong population growth, an increase in investment loan approvals, another decade of low interest rates forecast and a lack of supply of good quality new dwellings in the inner and middle rings of Melbourne, even if the upward cycle of this property market slows down, it will continue to serve its believers well as it has done since 1980 -2014 where real capital growth, taking into account inflation, has been increasing around 3.5% annually and with rental yields on new dwellings at 4%-5% gross, off the plan real estate remains a strong asset class for now.

Please seek specific personal advice from your real estate agent, accountant and financial planner when investing.

 

[1] JLL Research, Core Logic RP Data, REIV
[2] Charter Keck Cramer & HIA
[3] JLL Research, Core Logic RP Data, REIV
[4] World Bank
[5] Department of Environment, Land, Water and Planning
[6] Trading Economics
[7] Quarterly Perspectives Australia 2Q 2016, JP Morgan Asset Management
[8] Bloomberg
[9] 2016 Long-term investing report, Russell Investments and ASX, May 2016
[10] Australian Bureau of Statistics & HIA
[11] Australian Financial Review – “ASX to open lower, housing finance ahead” – 9 September 2016
[12] Core Logic RP Date, REIV

 

 


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