|
|
|
|
|
|
Vacancy Rates Dip, Pressure Off Sydney Rents
By Louis Christopher
Data released by SQM Research this week has revealed the national residential vacancy rate dipped to 2.1% in August 2018, while Sydney’s vacancy rate remained at its highest level in 13 years as an oversupply of rental property emerges there, which is keeping asking rents down.
The number of vacancies Australia-wide sat at 70,447 properties. Sydney’s vacancy rate was unchanged at 2.8% from July with 19,114 properties available for rent, and remains at the highest level since SQM started recording the data in 2005, and well up from 1.9% a year ago.
In contrast, Melbourne’s vacancy rate was much lower at 1.6% in August, though unchanged from July. Hobart's vacancy rate dropped to 0.5% from 0.7% in July. Canberra’s vacancy rate slipped to 0.7% in August, down from 0.8%
Brisbane has seen a sustained reduction in its vacancy rate, which fell to 2.8% in August, down from 2.9% in July and 3.4% a year ago. Perth’s vacancy rate dropped to 3.7% and is well down from 4.9% a year earlier as the oversupply of rental properties eases in that city. Darwin’s vacancy rate bucked the trend and rose to 3.5% from 3.4% in July.
The trend for the Sydney vacancy rate is definitely up and, as a result, Sydney is increasingly becoming a tenant’s market. Over the year to 12 September, asking rents for houses in Sydney dropped by 3.4% and we expect to see further falls. In contrast, the tight rental markets in Hobart and Canberra is continuing to push asking rents higher.
Asking Rents
Capital city asking rents for houses rose over the month to 12 September 2018 by 0.7% to $552 a week.Unit asking rents were steady at $440 a week. Over the year, asking rents for houses and units rose just 0.5%. The asking rent for a three-bedroom house in Sydney remains the highest nationwide at $708 a week and units $515 a week. Canberra asking house rents follow at $636 a week for houses and $439 for units.
Like Sydney, asking rents have fallen for units in Melbourne, being down 0.5% over the month to 12 September to $409 a week. Asking rents for houses were up 0.8% to $527.
60 Minutes Bricks and Slaughter Story – further thoughts
I was disappointed and unhappy with how the 60 Minutes segment Bricks and Slaughter, which aired on Sunday and sensationalised the country’s property downturn.
The interview I conducted with the 60 Minutes team spanned approximately 45 minutes, of which approximately one minute was featured in the segment.
I stated in my interview with 60 Minutes the risks as well as the safety valves that are still present in the property market, including strong local economies, strong population growth, banks very unlikely to fail, the RBA and/or the Federal Government likely intervening in the property market should the market quickly deteriorate. The program covered my comments on the risks and overvaluation only, which distorted my views.
During the interview, I actually covered the following:
- A city-by-city state of the market. Which capital city markets are strong. Which are not.
- The magnitude of overvaluation of Sydney and Melbourne and how the markets got to that point.
- The weakening rental market in Sydney.
- How many distressed properties there were in Sydney and where they are located.
- How the market is vulnerable to further price falls if any adverse factors came along.
- The banks potentially holding back information on the health of the market.
- The rapid growth of the non-bank financial sector.
Crash unlikely
Overall, I think a full blown housing crash scenario playing out is unlikely. What is far more likely is that Sydney and Melbourne will record further ongoing price declines, followed by a lengthy period of price stagnation. The magnitude of those price declines still depends upon future events that have yet to unfold, if they do at all.
A housing crash in Sydney and Melbourne is unlikely for the following reasons:
- Our various government bodies have the capacity and the will to intervene if such a scenario were to become apparent. They can cut interest rates. They can introduce a first home owner grant. They can introduce quantitative easing. They can loosen recent regulatory requirements on the banking sector. There are precedents for all these actions.
- Leading indicators such as auction clearance rates, housing finance approvals, rental vacancy rates, credit growth rates, while not always perfect in their forecasting abilities, are suggesting this will be a correction that will be material but not calamitous. SQM Research continues to monitor these indicators closely for further deterioration.
- The economy is healthy and has shown itself to be somewhat resilient when past housing downturns have come and gone.
- Population growth rates are still very strong, if not excessive.
- The mining downturn has come to an end and the mining sector is now creating positive input into the economy.
- While it has become tougher to qualify for a home loans, the banks are still lending and conservatively competing for borrowers within the APRA boundaries set.
This all said, a housing crash, however unlikely, is not an impossible scenario. A string of events could materialise that could translate to peak to trough declines in our two largest cities of greater than 20%. Such events could include:
- A significant additional contraction in the supply of housing credit brought upon by perhaps a second global financial crisis.
- A deep domestic recession triggering sharply rising unemployment which would have flow on effects into housing in the form of lower demand and rapidly rising defaults thereby creating a cascading effect of bank forced sales.
- A nationwide oversupply of new real estate brought upon by either too much speculative property investment combined with rapid cuts in population growth rates.
- A rapid cut in population growth rates.
- A rapid and significant rise in lending rates.
- A lengthy series of other miscalculated policy action.
There is also the possibility of an adverse feedback loop whereby the housing market commences a correction which triggers a domestic recession. Such a recession could easily feedback into the housing correction, turning it into a crash. I am watchful of this scenario but I do believe governments would intervene to prevent this possibility.
I note some recent mixed signals in the economy via weakening retails sales data and new car sales data but other sectors of the economy remain robust including ongoing strong jobs creation.
Overvaluation still present
The Sydney and Melbourne housing markets though, despite the recent falls, remain excessively overvalued and in our opinion vulnerable to future negative adverse events. These events, while perhaps may not be strong enough to create a precipitous crash, may still create larger price falls than currently recorded. These events could include:
- The banks, out of step with the RBA, lift lending rates once again.
- The repeal of negative gearing which is the Labor Party’s current policy.
SQM Research measures relative housing market valuation by studying dwelling price changes to changes in nominal GDP, which is a good measure of a nation’s total income. We have found there is a relationship between the two where in the past, excessive dwelling price growth over nominal GDP growth has eventually unwound. The charts presented illustrate the relationship as well as where Sydney and Melbourne currently sit.
The red lines effectively represent the excess (in other words overvaluation) over and above of dwelling prices to nominal GDP while the green represents a discount (undervaluation).
The charts clearly illustrate that both Sydney and Melbourne are excessively overvalued. Indeed, on our numbers, Melbourne has never been more overvalued since the data began in the mid-1980s.
Our forecasts for 2019 will hopefully be released by November via the 2019 Housing Boom and Bust Report.
I do note that the current downturn has parallels with the one incurred by Sydney between 2003 to 2006. During that downturn, prices fell by 9.6% from peak to trough. The magnitude of overvaluation was similar to what we are experiencing now (indeed it was slightly worse on our numbers). The magnitude of oversupply that was in the Sydney market at the time is also similar to now.
Finally, banks also took some steps to restrict lending to new apartments in the Sydney inner-city market. The levels of lending restrictions now are greater than at that point in time. So the current thinking is that this current downturn will be at least on par with the 2003 to 2006 downturn. And given the price falls to date (down 6.5% for Sydney) the market will likely have a larger fall. How much more, we are very unsure at this stage as the final result will be driven by events (some of those mentioned above) that have yet to pass.
As per previous years, the Housing Boom and Bust Report will provide further evidence backed details surrounding our forecasts.
Overall the point of the exercise for me featuring on 60 Minutes was to note that any additional adverse events or adverse policy action could trigger a deeper correction which may have consequences for the economy overall. The property market is vulnerable right now and will remain that way until we see valuations return to more normal levels.
Unfortunately, the segment was sensationalist to say the least and so going forward, I have decided to only work with trusted reporters and to heavily rely on our newsletter to put forward any messages.
Distressed Property of the Week
The price of this property has been slashed by around $30,000 to $429,000 from $460,000 in February so it has been on the market for several months. A good time to haggle with the owner who is clearly keen to get the property off their hands.
The agent says all you have to do is pick up the keys and move into to this house which features five bedrooms on a 667sqm block, offering wide lawns, low maintenance and affordability.
But let's take a look at the facts first. Rothwell is a residential suburb of the Moreton Bay Region, Queensland, about 28km north of the Brisbane CBD. In recent years, it has featured a quickly growing population, though that appears to have steadied in recent times.
The vacancy rate in postcode 4022 is just 1.6%, compared to 2.8% in the Brisbane overall. That's a good sign of tight rental demand. Asking rents for houses are up 1.1% over the year to 12 September and are up 2.6% over three years, so the returns, while not great, aren't bad either.
Asking sales prices for houses haven't, however, done much, having grown at just 0.8% over the year to 18 September and 4.5% over three years. For a list of recent sales in the areas, click here.
Keep doing your research into this market. Access free property data at SQM’s website and also consider the Property Valuation product for more in-depth, specific knowledge and a property price estimator.
|
|
|
|
|
|
|
|
