Two years ago, Sydney and Melbourne were two of Australia’s red-hot housing markets, and it seemed as if nothing could stop home values from skyrocketing. But now the party is over.
Tighter lending restrictions on housing investors introduced by the Australian Prudential Regulation Authority (APRA), Australia’s banking regulator, saw credit growth, or the amount banks have lent to from housing investors, slow to record lows. This, combined with a range of tougher regulations for foreign buyers, put the brakes on a booming housing market, hitting Sydney and Melbourne the hardest.
Australian home values fell 4.8% in aggregate through 2018, marking the weakest housing market conditions since 2008, according to CoreLogic. And uncertainty is set to continue, particularly with the opposition Labor Party promising to wind back long-enjoyed tax breaks for property investors if it wins this year’s federal election.
But buyers keen to add Australian property to their portfolios still have several options.
One is to buy in Sydney and Melbourne—the cities most popular with international investors—and suffer some further value falls in anticipation of eventual long-term growth. But this approach will take some gall, argues CoreLogic senior research analyst Cameron Kusher.
CoreLogic figures show Sydney home values fell in aggregate by 8.9%over 2018, and Melbourne values fell by 7%. Home values continue to fall, and it is impossible to predict where the bottom will be.
“Rental yields are rising [in Sydney and Melbourne] as dwelling values fall, so there may be some investment opportunities,” Mr. Kusher said. “However the expectation is that dwelling values will fall further, so for investors, it really is a question of whether you are prepared for some further declines in the market were you to purchase now.”
A second option is to look to the housing markets of other Australian cities which aren’t undergoing downturns of the same magnitude. Two worth considering are Hobart and Brisbane.
Hobart in 2018 went through a housing boom in stark contrast to every other Australian capital city. Growth in home values has eased but is still strong.
Some experts say d Brisbane is at the beginning of a growth cycle, driven by a strong state economy, high levels of inward migration and much more affordable housing prices than Sydney and Melbourne.
The picturesque capital of Tasmania emerged as an outlier in 2018 around the time Sydney and Melbourne began posting annual declines in home values. The city underwent a housing boom in stark contrast to every other Australian capital city, with annual value gains above 10% while other cities fell.
Hobart’s growth has inevitably slowed, and is predicted to slow further due to its declining affordability and the broader woes of the Australian housing market.
But for now, Hobart’s housing market is still leading the nation in by a large margin, with values rising by 8.7% in 2018, roughly the same distance that Sydney’s market fell over the same period, according to CoreLogic figures.
Hobart’s median home price was A$457,523 (US$327,369) at the end of 2018, making it far more affordable than Sydney and Melbourne, which have median values of A$808,494 and A$645,123 respectively.
Detached houses make up the vast bulk of the housing in Hobart, with a small number of terraces and apartments in the city’s inner suburbs. Many of its homes have sweeping views, as the city slopes up from the Derwent River banks.
And while rental yields in Hobart have fallen due to the city’s steep capital growth, they are still the nation’s second-highest at around 5%. A high level of inter-state migration is keeping demand for rental properties high, supporting rental growth.
The city’s property boom has also led to a surge of development in central waterfront suburbs like Sandy Bay and Battery Point, pointing to the possibility of attractive new homes coming to the market.
Economist and prolific housing commentator Andrew Wilson said Hobart’s house prices were “almost irrationally lower than anywhere else in Australia” with a pre-boom median house price that was about a third of Sydney’s. Low interest rates and a surge of migration into Tasmania kicked off the housing mania, he says.
Those looking for quick capital gains could be disappointed. Mr. Wilson believes the Hobart market has “caught up” with other capitals in terms of pricing. Demand in Hobart will likely moderate, bringing the city’s rate of growth lower than where it has been.
However the city still has relatively good prospects, he said. He expects the rate of growth to ease but is not anticipating falls in value. Migration into Tasmania is holding up and rental properties are scarce, ensuring continual demand.
And one strong positive for Hobart is its relatively high proportion of owner-occupiers compared to Australia’s largest cities, which have much higher investor activity. This makes it less vulnerable to the credit squeeze, which is stifling investor activity in Sydney and Melbourne.
“Those markets, particularly Sydney, had a much higher proportion of investor activity,” Mr. Wilson said. “So I think Hobart isn’t exposed to the same sort of withdrawal of investor activity. Even though it’s likely to have that, it’s off a much lower base there.”
Brisbane—the sunny riverside capital of Queensland—didn’t take off like Sydney and Melbourne in recent years. The decline of the Australian resources boom since 2012 hit Queensland’s economy, and a more recent building boom has left the city with an oversupply of apartments. From 2014 to 2015, net migration was its lowest in 30 years, Mr. Wilson said.
But energy is now returning to Queensland’s economy. Strong jobs growth and a surge of major infrastructure projects are enticing buyers to the state once again. Inter-state migration into Queensland is now the strongest of all the Australian states, Mr. Wilson said, driving down rental vacancy rates.
Residential building is winding down, and Mr. Wilson said the city’s housing oversupply is fast being soaked up.
Brisbane home values climbed by 0.2%in 2018 according to CoreLogic, taking its median value to A$493,568. That makes it Australia’s largest city that showed capital growth in the past year.
The bulk of homes in Brisbane are detached homes, many of them iconic “Queenslander” houses built on stilts. But the city also has a large number of apartments, with the more luxurious developments offering views of the Brisbane River.
Brisbane’s rental yields are also on the rise, taking some of the burden off investors who are planning to hold their properties for the long term. Gross rental yields are hovering around 4.5%, according to CoreLogic, and that’s well ahead of Sydney and Melbourne, which are around the 3.5% mark.
These factors have led experts to predict the Brisbane housing market will be among the strongest performers. Insurer QBE, in partnership with BIS Oxford Economics, predicts in its QBE Australian Housing Outlook 2018-2021 that the Brisbane median house price will rise nearly 11% in the three years to June 2021.
Mr. Wilson argued that Queensland’s recovering economy and clear affordability advantages will bode well for the state’s housing market.
Brisbane also has a large and well-established luxury housing market that offers much more “bang for your buck” than other cities.
“For A$2 million to A$3 million you can buy something that in Sydney would cost you well over A$10 million, and in Melbourne, well over A$5 million,” Mr. Wilson said.
But property market analyst and buyers advocate Catherine Cashmore, director of Anderson & Cashmore Real Estate Advocates advises that people should be wary of apartments in Brisbane for now and stick to houses, as this is where the demand and price growth is likely to be.
“Unlike in Sydney, there are more options [to live in a house] in Brisbane,” Ms. Cashmore said. You don’t have to live in an apartment unless you want to live in the middle of the city. Most people want to get into a family home and get close to good schools.”