Sam Khalil’s property outlook for summer 2016

Earlier this year I predicted that we’d see a cooling in the property market, after the frenzy of 2015, and that a calculated forensic approach would pay dividends. What I predicted has come to pass. Many types of properties are not as wildly popular as last year and others are showing signs of vulnerability.

This is most apparent with the apartment market and is mostly due to oversupply, especially in high rise developments in the CBD. We’ve written before how Melbourne apartment prices have taken a pounding due to a glut of supply. This trend has continued, with predictions that Melbourne unit prices will drop by 9% while Sydney apartment prices will go down by 6.8%.

Lenders are very concerned with this sector - there are many instances that banks want 120% of debt cover for any development project financing - meaning the apartment pre-sales required need to cover 120% of the debt and construction cost to allow for up to 20% of contracts failing to complete due to lower valuations or an inability to get finance due to the stricter lending. 

Meanwhile a recently released QBE report, prepared by BIS Shrapnel, finds that tighter lending restrictions to investors will lead to a further softening in the residential property market. Stamp duty surcharges have also been levied on overseas investors in Victoria, NSW and Queensland by banks to reduce this sector’s influence.

Yet despite all this, prices are still rising in certain suburbs in the main capital cities: Brisbane, Melbourne and Sydney. This is mostly fuelled by the continued low interest rates and the unabated thirst for property. The spring markets have so far proved robust with strong clearance rates in Sydney and Melbourne. Sydney has proven particularly rapacious: consistently going well over 70% clearance rates throughout spring. Plus, we’re also seeing prices rising quite high in a number of Sydney, Melbourne and Brisbane’s prestigious and exclusive suburbs such as Point Piper or Toorak. Demand for property in these areas shows no signs of abating.

And that’s perhaps the biggest long term thing to remember about the housing market. That while the housing market may be relatively flat, the long term trends always show that property is a highly desirable commodity in Australia. 

Yet there is a caveat here, that houses and land are always a surer bet than apartments. Brisbane is a great example of this. Brisbane has recorded the greatest disparity in terms of housing and apartment growth: median house prices jumped by around 7% this year, whilst apartment prices have been moving in the other direction to a negative 8%. 

Land is still in short supply in a number of Sydney’s outer metropolitan areas, along with Brisbane’s middle ring of suburbs which is creating steady growth in land values, but rental yields are static. There’s also been a clear spread of investor interest beyond the capital cities and out into the regions. We’ve spoken before about how places like Wollongong and Newcastle in NSW or Geelong in Victoria are worth watching. This has certainly proved to be the case. Newcastle is rapidly becoming every investor’s second option to Sydney. Wollongong and the Illawarra area has seen a 9% jump in median house prices. And of course, investors are starting to hunt beyond those areas to find low priced properties further afield with good capital growth.

So what we’ve seen for 2016 is a number of different tensions all at play and straining against each other. The oversupply of new apartments; the restrictions on foreign and local investor lending; a fall in apartment prices, yet a strong growth in housing prices; more caution by buyers generally, yet a unsated demand for homes in the major capitals and owner occupiers continuing to push prices up. So this hasn’t been a year of swashbuckling daring like 2015. 

2015 was a little like a gold rush, where almost anyone could get lucky without any research or knowledge. It was like throwing a spear into a crowded waterhole bursting with fish. 2016 though has really separated the well-researched investors from the amateurs.

So, as I surmised earlier this year, a more forensic and considered approach is required to be a successful property investor in 2016. There are a number of properties and markets which are extremely vulnerable to a downturn. You’re quite liable to get burned if you just buy anywhere and don’t have strong research to back you up.

A clever strategy of looking for well-priced, strong growth properties to create excellent returns through high rental yields is one way to ensure success. When the market is nervous and unsure, the cooler heads will always prevail.