As 2011 gets well and truly underway, we find ourselves in the midst of one of the most important selling periods for some time. Everyone is asking whether the market will gain traction and build upon some early positive signs. I believe the ‘green shoots’ that we saw appearing in 2010 will continue to build momentum and I continue to predict that we will see solid growth in almost all major residential markets across Australia. With a continuing shortage of property around the country, rising rents and a rebounding economy the drivers are in place for a strong year in property.

For this review, we have analysed the new drivers impacting the property market, and see many more positives than negatives. Key factors are an improving economic climate, population growth and a severe housing shortage as summarised in the table below.

The positive key drivers of the market in 2011

Market confidence

While clearance rates have had a slow start this year, one indicator that has bucked the trend is mortgage applications – one of the best forward indicators of the market. AFG Mortgage Index (Australia’s largest mortgage broker) data for December 2010 shows national home loan lodgments were 9.1 per cent above those of Dec 2009. All states were up, led by VIC (18.1 per cent), NSW (14 per cent), WA (6.1 per cent), SA (4.9 per cent) and QLD (1.4 per cent). 

Economic confidence

We are among the world’s strongest economies due to huge offshore demand for our commodities. The power behind our economic growth has shifted from west to east as big economies like the US, UK and Europe faltered during the GFC (according to Macquarie Bank Market Focus 2010). With our new international reputation for economic resilience, we are seeing many more offshore buyers migrating here from China, HK, Singapore and Malaysia. 

Population growth

At 1.8 per cent per annum, our population growth is among the highest of any OECD nation. Such high population growth coupled with low building approvals will continue to apply pressure on housing. There is no quick fix for the undersupply even with changing government policies on land releases. 

Ongoing property shortage

New housing construction is at 30-year lows and many more people are living alone. The National Housing Supply Council (NHSC) estimates Australia is undersupplied by around 200,000 dwellings, with projections this could rise to more than 600,000 by 2029 based on current trends. 

Increasing rents

Population growth and the undersupply have led to low vacancy rates and high rents with average yields of 4.5 to five per cent in prime metro locations.

A new rental boom is on the horizon for Sydney as rents could soar by up to nine per cent. Fuelling this is Gen Y’s desire for CBD and lifestyle living. They are renting longer to save a better deposit. Of all the capital cities, Melbourne tenants are in the best position with December vacancy rates at 3.6 per cent. All other cities were under two per cent. In Brisbane, there has been a surge in rental demand due to the floods but this is a temporary spike.

More investors

AFG reports investors taking up 35 per cent of all new loans nationally and 41 per cent in NSW.

Self-managed super funds

We are now seeing the strong emergence of DIY Super investing in property. I believe this will have a huge impact on the investor property market and the supply and demand issue. Last year, the law was modified to allow negative gearing for self-managed super funds (SMSF) and this created new demand. Buying property using a SMSF loan can increase investors’ net return on a newly built property by more than 50 per cent compared to buying the same property personally. This is due to super tax rates (15 per cent) being much lower than personal tax rates.

Offshore buyers

Offshore buyers are increasingly migrating to Australia for security, education and our strong economy and currency. Sydney is presently the fourth most popular city in the world for international property investment. According to the FIRB, during the worst of the GFC (2008/09), foreign investors purchased 3639 residential properties.

The negative key drivers of the market in 2011 

Rising interest rates

Standard variable home loan rates are up from five per cent to seven per cent over the past 12 months. A new Mortgage Choice survey reveals one in 10 recent first homebuyers have sold or are considering selling due to financial stress. 

Mortgagee overhang

Continued mortgage stress and mortgagee sales in some markets will delay price growth.

Other market observations

There’s been a small but noticeable increase in first home purchases since mid-2010. And recent stats tell the story. According to ABS, the percentage of first homebuyers was 15.6 per cent in November 2010. Forty-two per cent of recent first homebuyers say high rents made buying more attractive (Mortgage Choice Survey).

Activity among first homebuyers and investors will keep the apartment market strong with gains of around five per cent in most capitals in the first half of 2010. There is a continuing cycle of buyers entering the market with many incentives still available. In NSW, the purchase price for grant eligibility has been lifted from $750,000 to $835,000 – there is no stamp duty on first homes under $500,000 and concessions for homes between $500,000 and $600,000.

The prestige market remains patchy but some good sales have been achieved in Sydney’s Eastern Suburbs recently as vendors become more realistic on price. At McGrath, we’ve had 20 sales above $3 million since January and there are 58 homes above $3 million currently listed with us. This indicates a little more confidence among prestige vendors.

Canberra remains one of Australia’s strongest capital city markets with greater activity now occurring in the sub-$1 million family houses sector. Investors from other capitals are increasingly investigating Canberra, where a typical $300,000 one-bedroom apartment is yielding seven per cent.

John McGrath’s top metro suburb picks

Houses
  • Artarmon
  • Birchgrove
  • Curl Curl
  • Glebe
  • Haberfield
  • Lindfield
  • McMahons Point
  • Northbridge
  • Palm Beach  
  • Sylvania Waters
Apartments
  • Balmain East  
  • Cremorne Point
  • Cronulla
  • Curl Curl
  • Kensington
  • Newtown
  • North Parramatta
  • Potts Point
  • Pyrmont
  • Sans Souci

Regional Markets – regional recovery

As predicted, the spillover effect from strong metropolitan activity has gained traction in some blue-ribbon regional areas. Buyers are more motivated as the window for bargain buying is closing. We’re seeing many city-based investors exploring regional centres for affordable opportunities and executives are also buying their dream retirement homes earlier.

Regionals in full recovery mode include Wollongong Local Government Area (LGA) (11.5 per cent in 2010 says RP Data), Blue Mountains LGA (10.5 per cent), Warners Bay LGA (8.6 per cent) and Port Macquarie LGA (seven per cent) with more gains likely this year. Other areas like Byron Bay and Bowral are only just showing signs of new activity.

Southern Gold Coast

There’s been a notable increase in buyer numbers at opens including investors and owner-occupiers from Sydney, Melbourne and Brisbane this year. Property values are off by up to 60 per cent (prestige end) and yields are strong at 4.5 to 5.5 per cent. No major rebound is anticipated with three to five per cent growth per annum the most we can expect over the next five years.

The beachfront ‘Golden Miles’ of Mermaid Beach, Hedges Ave and Albatross Ave, previously commanded $8.5 to $10.5 million for vacant land. Houses are now selling for $5 to $6 million. The sub-$750,000 bracket is 25 per cent off and we’re expecting more mortgagee sales this year.

John McGrath’s top 10 regional picks – best buying opportunities

  • Bowral
  • Bulli
  • Byron Bay
  • Charlestown
  • East Port Macquarie
  • Isle of Capri (QLD)
  • Kingston (ACT)
  • Tugun (QLD)
  • Wamberal
  • Wollongong

Key points and predictions

  • Modest city price growth in 2011 with best results in beachside suburbs and within 10kms of the CBD.
  • Higher than average price growth in regional areas with the GFC recovery in full swing in many towns.
  • Market stability with more positive than negative drivers in play in 2011.
  • A new rental boom is on the horizon for Sydney with rents to soar by nine per cent in our view.
  • More investors in the marketplace, particularly those buying with DIY super funds.
  • The apartment market to benefit from higher activity among first homebuyers and investors.