Leith van Onselen July 03, 2012
The outlook for Sydney's housing is less clouded than for Melbourne. Photo: Rob Homer
Anyone who has followed my blog on MacroBusiness will be aware that this columnist holds a bearish view on the Australian housing market overall.
This view is based primarily on the fact that Australian home prices experienced a decade of strong growth that was not matched by the growth in underlying fundamentals: incomes, rents and construction costs (see chart below).
While my overall view of the Australian housing market is pessimistic, it is by no means uniform, with some capital cities providing superior investment prospects than others.
In this report, I provide my 12-month price forecasts for each of Australia's capital city housing markets, based on consideration of key price drivers: housing finance; housing supply; affordability; and the macroeconomic outlook. My forecasts are based on a "stable" economy, and would change materially should conditions deteriorate (e.g. a Chinese "hard landing").
Relative to the rest of the nation, Sydney's housing market has displayed resilience, with detached house values declining by 6.4 per cent since peak and unit values remaining flat as at May 2012, according to RP Data-Rismark. This result compares with declines of 8.1 per cent (houses) and 2.8 per cent (units) at the national capital city level.
Over the next 12-months, Sydney's home prices are projected to perform slightly better than the national average, experiencing a price shift of between minus-3 per cent and 1 per cent.
While Sydney home prices are the most expensive in the nation on a price-to-income basis, due to its relatively attractive rental returns, Sydney's price-to-rent ratio is below the national average, suggesting that buying is relatively more attractive than renting.
Sydney's housing market is also relatively supply-constrained, experiencing one of the lowest home construction rates in the nation.
The number of homes for sale in Sydney is also not particularly elevated, and has fallen from this time last year.
In addition, Rental vacancy rates, while higher than last year, are below the national average, as is the average time taken to sell a home.
Melbourne's recent price performance has been poor, declining by 11.0 per cent (houses) and 7.4 per cent (units) since peak as at May 2012, according to RP Data-Rismark. Yet, despite the sharp decline in values, Melbourne's housing market still offers the worst investment fundamentals in the nation and is the market most at risk of a severe house price correction.
Our baseline forecast is for Melbourne home prices to decline by between 5 per cent and 8 per cent over the next 12 months. This pessimistic view is based a wide range of considerations.
First, Melbourne home prices are the second-most expensive in the nation on a price-to-income basis, and owing to its very low rental returns, the most expensive when home prices are compared against rents. Melbourne's housing supply is also relatively abundant, with the rate of construction running well above average, as are the number of homes for sale, which are nearly 20 per cent above last year's levels.
There is also significant construction in the pipeline.
Brisbane's recent price performance has been poor, declining by 12.4 per cent (houses) and 10.8 per cent (units) since peak as at May 2012, according to RP Data-Rismark. However, investment fundamentals are improving, which should result in above-average performance over the coming 12 months, with prices forecast to shift by between minus-2 per cent and 2 per cent.
Brisbane home prices are relatively affordable, with its ratio of house prices-to-incomes the second lowest out of the major capitals and its home prices compared to rents the lowest, suggesting that buying is relatively attractive compared with renting.
Housing supply in Brisbane is tightening, with dwelling construction rates running below average and the number of homes for sale some 8 per cent below last year's levels (albeit still elevated). Rental vacancy rates in Brisbane also remain tight relative to both the national average and last year's levels.
Perth's housing market is likely to be a star performer over the coming year. Although values have declined by 9.5 per cent (houses) and 4.7 per cent (units) since peak, which are above the average decline nationally, fundamentals have improved significantly, which should support price growth of between 2 per cent and 5 per cent over the next 12 months.
Affordability in Perth has improved considerably, with home prices relative to incomes the lowest in the nation, and prices compared with rents below the national average.
Rents are also rising sharply - up by around 16 per cent over the past year according to RP Data - caused by a rental vacancy rate that is the second lowest in the nation and has tightened considerably compared with the same period last year.
The tightening of Perth's rental market has been driven by the highest population growth in the nation combined with a low rate of dwelling construction. The number of homes for sale is also relatively low, and has fallen by 14 per cent since the same period last year.
Adelaide's housing market has performed surprisingly well, experiencing the lowest decline in values from peak in the nation (3.7 per cent for houses and 3.6 per cent for units as at May 2012, according to RP Data-Rismark). However, the good fortune is unlikely to last, with prices predicted to fall by 2 per cent to 5 per cent over the next 12 months.
Although Adelaide housing provides better-than-average affordability when measured against incomes, prices are more expensive than average when compared with rents.
The overall supply situation in Adelaide is deteriorating. Dwelling construction relative to population growth is the highest in the nation, whereas the number of homes for sale is elevated and some 3 per cent higher than the same period last year.
Hobart's housing market has been one of the weakest performers in the nation, declining by 11.8 per cent (houses) and 8.9 per cent (units) from peak as at May 2012, according to RP Data-Rismark.
A broad range of indicators suggest that Hobart housing is unlikely to improve any time soon, with prices predicted to decline by a further 4 per cent to 7 per cent over the next 12 months.
Housing affordability is not a key concern in Hobart, with home prices amongst the lowest in the nation compared to both incomes and rents.
Rather, the supply situation is deteriorating, with the number of homes for sale some 20 per cent higher than a year ago and dwelling construction rates relative to population growth running well above the national average. Similarly, rental vacancy rates in Hobart are around 50 per cent higher than this time last year and are the second highest in the nation after Melbourne.
Darwin's housing market has experienced the heaviest losses in Australia, falling by 15.2 per cent (houses) and 16.9 per cent (units) from peak as at May 2012, according to RP Data-Rismark.
However, key indicators suggest that Darwin's fortunes are turning around, which should support price growth of between 3 per cent and 6 per cent over the next 12 months.
Affordability in Darwin has improved considerably, with home prices relative to incomes just below the national average, and prices compared to rents the second lowest in the nation. Rents have rising sharply - up by around 14 per cent (houses) over the past year according to APM - caused by a rental vacancy rate that is the lowest in the nation and has tightened considerably over the past year.
The tightening of Darwin's rental market has been driven by the lowest rate of dwelling construction in the nation. Meanwhile, the number of homes for sale is also relatively low, and has fallen by 30 per cent since the same period of last year.
Relative to the rest of the nation, Canberra's housing market has displayed resilience, with values declining by 5.0 per cent (houses) and 7.9 per cent (units) since peak, according to RP Data-Rismark.
However, the outlook for the capital is mixed, resulting in projected price shift of between minus-3 per cent to 0 per cent over the coming year.
Although Canberra's housing market is relatively affordable - with prices relative to both incomes and rents below the national average - the supply situation has deteriorated somewhat, driven by a recent housing construction boom, as well as a near doubling in the number of homes offered for sale over the past two years. Canberra's rental vacancy rate, too, has been rising, although it remains roughly half that of the national average.
Leith van Onselen is the Chief Economist at the Macro Investor newsletter. He has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. To read the full Australian Cities Housing Valuation Report 2012/13, sign up for your free trial at Macro Investor (www.macroinvestor.com.au)