THE MARKET IN 2017
Our forecast for the market for quality residential property in 2017 follows. We trust that you find it of benefit or at least of interest. As with previous years, we start our forecast with a quick recap of last year.
LOOKING BACK OVER 2016
On the sales front 2016 proved even more character building than expected courtesy of the moronic politically driven decision to run a marathon federal election campaign which the economy was hardly in a position to bear and which rather predictably produced such an unemphatic result that one even wonders why they did it.
As predicted banks tightened up further on lending as they further derisked their books (particularly for investment apartments and very particularly for all those 10,000’s sold to overseas buyers) and the RBA stuck with its habit of cutting benchmark interest rates far too little far too late.
Events overseas also played out largely as forecast with China’s shrinking economy and concurrent clampdown on capital flight leading the charge on matters that influence property values here. This was followed closely by the slow motion train wreck that is the EU (the latter given some surprise – though not to all - momentum mid-year with Brexit).
Here in Brisbane investment apartment sales slowed markedly, inner ring housing up to $1million stayed strong, and the top end did as well as could have been expected given the state of the economy, and particularly our state’s.
The leasing market too ran to plan, the sheer size of the investment apartment flood drove down yields at the lower end for both houses and apartments, and particularly the latter; demand for mid priced houses remained robust to be the best performing market sector; and the higher end exhibited some more top down softening as the corporate world sought to tighten its purse strings further.
LOOKING FORWARD IN 2017
This year will be another roller coaster ride with its share of curve balls, false starts and bad calls, the majority this year though more from abroad though than from here (where Trump factor and Brexit will star).
Generally though, short of another bout of governmental interventionist ineptitude the likes of APRA’s or the marathon election decision, the market will broadly close the year here in better shape than how it started it.
How you ask might that be possible given the overall parlous states of the state, national and global economies and the personalities and persuasions at home and abroad that are most likely to be influencing them?
‘Gut feel’, ‘intuition’ first and foremost but for something more tangible throw into the mix in no particular order:
~ Our traditional feeder markets in Sydney and Melbourne have either largely or fully exhausted their runs for this cycle leaving a record price differential between their house prices and our own
~ Housing affordability will rise further this year either because interest rates drop further or because competition will drive down bank margins (currently unconscionably high generally and particularly given their repeated failures to pass on most of the recent benchmark or interbank lending rate cuts) or both. Don’t be surprised should a preferred client finance provider emerge this year offering rates much closer to prime
~ The Australian dollar will fall further making our property more internationally competitive
~ The current rebound in inbound tourism in all its forms will gather pace and the dollars will start to spill over
~ Our hapless state government will be 1 year closer to quietly disappearing into the dark annals of history
~ Any business that has survived Queensland’s great economic downturn is running mean, lean and keen
~ The resources sector having completed its bust will find firmer ground, particularly if coking coal prices hold
~ Stock levels at the higher end of the market will remain constrained as people hold back either out of concern that they may not realise what they need or that if they sell now they may miss any coming upswing
~ Whilst globally disparaged for its repeated fiscal ineptitude, Australia is still broadly seen as a safe harbour
~ The wave of investment in apartments will swing across to the landed equivalent in no small measure
In 2017 key TAILWINDS for the market will include: the comparative attractiveness of our house prices versus those interstate and overseas; still historically very cheap and potentially cheapening further finance (assuming you can satisfy the tougher qualification criteria); and Brexit which will send many expats scurrying home
HEADWINDS are likely to be: a federal government unwilling or unable to get on the front foot with the economy; an increasingly inward looking US of A; banks over-tightening to the point that they precipitate the very crisis they are trying to avoid or at least mitigate; and not unrelated, cross market contagion from the investment apartment rout.
This years market CROSSWINDS may prove particularly flukey: If the US does ramp up protectionism, the Chinese reaction may well prove very positive for our economy and property which would be boosted further were it to place an unofficial embargo on US investment which it is wont to do.
The West to East unravelling of the EU could also prove a foul weather friend as it would increase our appeal as an economic safe harbour.
More generally in the market this coming year demand for quality landed property will increase as demand for its non-landed investment equivalent continues to suffer from chronic investment apartment oversupply, a situation which will see house price consolidation at worst or more likely growth across most inner and near ring suburbs.
Further upmarket other factors will dictate the state of play. Short of a Chinese government rethink on their current restraints on Chinese nationals investing abroad and the reversal or relaxation of some of our own recently introduced politically motivated property investment disincentives for overseas (Chinese) investors, both will continue to be constrained by the broader internal economic reality.
As with most things governmental where cures rule and prevention doesn’t get a look in, when the change comes, expect it to be overdue and overdone. Such has always been the byproduct of governments interfering in markets to try and influence votes. Of course they should leave all market alone but they will never do that because neither their ego nor their respective party puppeteers would allow that.
On the overseas investor front something will probably soon give given the political (donation) clout of the developers exposed to the Chinese shutout. The government has already back flipped some ways by introducing policy to allow developers to re-sell product that didn’t settle when due to other overseas investors where under previous long standing policy they could not.
Given Sydney’s largest developer in Harry Triguboff’s claim that 50% of his sales to Chinese nationals (who buy 75% of his product) are not settling, that means some 40% of all of his stock is in default and will need to be resold (either by him or his financiers). Given his massive volume, that is many hundreds or perhaps even thousands of apartments Australia wide technically in default and he is only one developer among hundreds exposed to the Chinese.
He won’t go under but many others will. Just how much pressure this will put on governments state and federal to do something (rash and stupidly short-sighted if they remain true to form) remains to be seen but it will be significant.
Also expect a surge in the number of Brits who have come to call Australia home feeling an urgent (economic) need to go back, one inspired by how much more 20% cheaper UK property their 25% higher Australian dollar will buy. Do your math, that is a big difference in a year. Those on UK pensions here have an even greater need to un-emigrate.
The flip side of that is many expat Aussies who have been earning the big pounds in The Old Dart might see Brexit as a good time to also exit, though sadly not with their shirt fully on having to wear a 25% discount on any money they have, a situation expounded by a further 20% plus if they have property to clear in order to effect the change as that is how much areas of greater London has come back from pre-Brexit decision and investor supertax highs.
PROPERTY AROUND THE NATION
The national residential property picture will again this year be largely determined by just where the respective states and capitals sit in the property and governmental administration cycle (yes, state governments really do matter as we have seen most recently in NSW where effective management of its economy is reaping significant property price rewards, and where we will likely soon see the opposite in Victoria given its recent management.
Brisbane is in for a better year at the quality end of the market (finally I hear many of you gasp), this despite our economy still only running on far less cylinders than it has and of course the rout in the investment apartment market which is reaching its loud crescendo (which a surprising number of people seem very sanguine about, which could be a good or a bad thing, or something between - some things in life just beggar explanation).
Whilst you seemingly have to prove to banks that you don’t need the money for them to lend it to you presently, the market is so gun shy of other previously safer forms of ‘investments’ that demand for ‘unblemished’ (by roads, power lines, etc) residential property within a 10km radius of the city has become more of an investment holy grail today than it’s ever been, confirming our contention that residential property in a growing city in a growing country is the real gold standard…..’.
Sydney property will continue to confound many this year but less so those who genuinely understand home economics and the see-sawing effects our political systems can have on it. This year Sydney will continue to enjoy the fruits of its unique geography and the unwinding of the economic mismanagement that held its market back for most of the noughties as ours and many others powered ahead.
Houses under $2million in the better quality areas of Sydney still represent particularly good value and should continue their recent upward price trend through 2017.
The apartment market in Sydney is also presently the most balanced in the country. Saying that, should the inventive Chinese not be able to find their way around ever tightening restrictions on getting money out of their country and or getting our banks to restart lending to them using the previously tolerated but always rubbery overseas income and asset figures, the current supply versus demand balance could tip to see Sydney move towards joining Brisbane and Melbourne (and to lesser degrees the other capitals) on the lower end investor apartment market slippery slope.
Melbourne is the most ‘toppy’ of the post Chinese exodus capital city markets also for the reasons above but particularly because Melbourne’s internationally recognised schools which the Chinese covet so greatly drove its prices up far more than did they drive up Sydney’s, and therefore their latent forced departure from the market will leave a far greater void in Melbourne.
Unlike Sydney also, Melbourne was developing an apartment oversupply problem even before it become clear that (this time) the Chinese government was really serious about stemming capital flight. Now that we know they are and with no potential let-up on the horizon (indeed greater tightening is planned with threats of severe retribution for anyone who ignores or tries to get around them - punishment which the Chinese know can and often is administered retrospectively) the investment apartment glut in Melbourne could prove even more catastrophic than many are already saying it will be, and be far worse than Brisbane’s.
Adelaide will continue to benefit from those who see that the Melbourne market has peaked for this cycle and who are selling up there to buy in a city offering a similar climate and lifestyle (accent and football code) but at a far lesser price and retire on the money left over. This will continue to be a fillip for Adelaide whilesoever the Melbourne market continues to hold up. Longer term though, Adelaide will need something stronger than repatriating Melbourne money to rely on.
Perth as the most resources fortune dependant capital in the country will have another challenging year although if commodity prices continue their current rebound bias off the bottom, a bottom for the Perth market may also form.
With mining services demand having fallen away so perceptibly though, even if ore prices were to maintain or extend their recent price recovery, the demand for housing just won’t be there as it was before, and least not for some time.
Hobart will continue to enjoy the influx of green retirees from the mainland, many of whom choose it over Adelaide or Brisbane given its significant price (and climate - if you are a polar bear) advantage over them.
Canberra has benefited from the political impasse in the nation which has stayed the threatened axe to the additional 25,000 public servants who had jobs created for them under the former federal government. Given where we are in the political cycle, those jobs can pretty much now be considered to be here to stay and as such Canberra can look forward to enjoying its latest politically motivated population spurt.
Darwin’s recent market correction will likely continue through 2017 though at a lesser pace as the largely resource driven capital and territory finds firmer ground in mining and elsewhere. Being such a small market, Darwin is of course incredibly fickle and hard to predict with any accuracy. It only takes one new major infrastructure announcement (good or bad) to completely turn the market on its head.
AROUND THE GLOBE (select countries of interest | relevance)
The global flight to safety will reach new highs and take new forms this year, not because people will stop searching for it (indeed quite the contrary), but because safe real estate harbours will be much harder to find in the midst of rising economic tension and increasing political intervention in markets.
Recently exacted supertaxes on foreign investors in Australia, Canada and the UK (and equally disastrously the French before them) are just a foretaste of what’s to come as governments try to cling to power and at the same time finance ever bloated, dysfunctional administrations (not caring for the long term damage this does as most know it won’t be their problem as they will be long gone by the time the mess from the meddling becomes apparent).
Given what is known and suspected, it is more likely than not that in real terms broad property prices in CANADA will slip this year, in CHINA show some tapering after a significant recent (capital flight restriction inspired) spike, in FRANCE fall noticeably, in GERMANY hold at worst, in HONG KONG also be stable, in INDIA ease, in JAPAN hold, in NZ slip from recent highs, in the PIIGS remain soft except for IRELAND which may receive a BREXIT boost, in SINGAPORE firm, in SOUTH AFRICA continue perpetual decline, in SWITZERLAND as the safest European market rise, in the UAE ease, in the UK be perceptibly softer, and the US continue to firm thanks to trumped up adrenaline.
KEY MARKET INFLUENCES CRYSTAL BALL
~ The RBA finally gives in to stark reality and cuts benchmark interest rates further
~ A lower dollar from lower interest rates makes us more competitive and brings more visitors to our shores
~ A lower dollar makes our property more attractively priced for overseas investors
~ Lower Interest rates improve housing affordability further providing a much needed boost to our market
~ The stimulation to southern feeder markets from the further rate cuts has a positive flow on effect here
~ The federal government continues in survival mode and the state government continues in reverse
~ The RBA keeps its head firmly stuck in the ground
~ As foreseen last year, the Chinese and Trump go toe to toe for a time disrupting world markets
~ China and the US enter into a full blown tit for tat trade war (or worse)
~ Australia gets clobbered for taking sides or for not taking sides
THE UNKNOWN (or Good Luck – Bad Luck – Who Knows File)
~ A Marie le Pen ascension to the French presidency speeds ‘EUROGEDDON’ up markedly
~ Further Yuan depreciation is okay for the market if slight, good if moderate, terrible if significant
~ The end game of 0% Interest Rates + Negative Birth Rates + Money Printing + Runaway Debt
THE HOPE FILE
~ Queensland goes to the polls early to allow it to break the current political dead-lock
~ Bank lending margins running at all time record highs come down through competition or dictate
THE HOPE NOT FILE
~ The government tries to spend and tax its way out of the current mess it is in
~ APRA or a similar government non-body sees fit to again interfere in the market to extend last year’s disaster
THE WHAT WON’T HAPPEN THIS YEAR FILE
~ Any interest rate rises in Australia
~ A sustained recovery in commodity prices
Trumponomics | EU Fracturing ( West to East or richer to poorer) | Investment Apartment Market Implosion
Brisbane’s quality residential leasing market in 2017 will generally strengthen with one significant and obvious exception, that of lower end apartments where the long predicted flood of new investor apartment product will drive further softening in yields, some of which will be significant, incentives already being offered to attract tenants to the apartments including extended rental holidays and loyalty rebates, all totally unprecedented in our history.
Demand for houses across all price points will remain solid as will rents for mid to higher range apartments not affected by the lower end oversupply carnage.
Top end rents for both houses and apartments will firm as supply levels trend to fall below the demand line. Should the planets align completely, we may well see the Brisbane record rental of just over $3,000 per week we set earlier in the decade topple.
Whilst rents in the $2,000 per week plus range have become almost commonplace, that extra step up into the $3’s has proven elusive in the recent more austere economic times.
What hasn’t impacted at all on our market despite all the talk they might are the user pays accommodation finder sites that have popped up, Airbnb being the current most prominent among them to have gained some traction in the holiday and other short term accommodation sphere.
These sites may have their attraction in certain market sectors but what they all have in common is putting the onus fully back on to the owner to do all the work, do all the checks, manage the whole process, and assume all the risk.
Property owners have always had such a self-management option but given the general consensus of the work entailed, unless you have a portfolio of at least 10 properties (and preferably 20+) from an economies of scale perspective self-management is not practical or viable.
~ The migration tide to Queensland is on the turn, though just not as aggressively as in the past (at least not yet)
~ The economic reality driven trend to lease over buying will continue to put upward pressure on house rents
~ The flood of investment apartment product shows no sign of easing (but it eventually must)
~ Contagion from the investment apartment glut affecting Brisbane and Melbourne so badly spreads
THE FINAL WORD
‘GLOBAL MARKET ADJUSTMENT’ – (a bit of light relief to end our forecast)
A Chinese developer (from Shanghai) doing his first project in Sydney when advised of the standard service connection charges says he shouldn’t have to pay because he had only recently made a substantial donation to the local member. He duly advised his man (woman actually) on the ground here to have the local member call the service provider and order that the charges be waived. Seems he is perplexed that his entirely logical request isn’t being acceded to. We all have some adjusting to do in this great Sino-Australian rapprochement.
I hope you have a great year in 2017. We certainly intend to.