Property Investment Interview! Eliza Owen from Residex Spills all!

Hello, it's Jane Slacksmith here, and I have a very special guest. I have Eliza Owen, market analyst from Residex. Now she's going to share with us what's been happening in 2015 and some predictions for 2016. Hello, Eliza, how are you?

I'm very well, thanks, Jane, how are you?

Good, good. So let's talk about 2015. What has been happening in the property markets around Australia in general, first of all.

Okay. Well, it's sort of hard to talk about in general. Right. Because our markets are so different across the country. But generally what we've seen is a continuation of this huge boom in the housing markets in the east coast, particularly in Sydney. Melbourne has been starting to come up to a peak growth rate as well. And this comes from a general historical trend of Sydney leading the east coast markets, followed by Melbourne, followed then by Brisbane, and then on the west coast, we've seen the Perth market not doing so well coming off the commodities boom. There's been a lot of divestment from mining projects, a lot of unemployment, and of course, that's fed through to divestment in the housing markets there. And then you've seen fairly subdued growth in the Northern Territory, South Australia and Tasmania and the act. And interestingly, I think, like in the last few months of 2015, there's been some interesting pickups in Tasmania, which is something exciting to look out for in 2016 as well.

And do you think that the Tasmania pickup is around affordability or is it just the natural part of the cycle that Sydney, Melbourne, Brisbane moves and then Tassie comes along behind?

That's a really good question. And I think it's a combination of those things. So cyclically, Tasmania's long overdue for capital growth. In the dwelling market, it's had fairly subdued growth for the last ten years or so. Affordability is a big factor, especially when you've got people in Sydney who have been priced out of the market, and instead of buying their first home to live in, they look at a first home to invest in and to accumulate capital. So Tasmania has become a really interesting alternative for that. But there's also elements of Tasmania, particularly in Hobart, where it's picking up as a lifestyle sort of market. So you have a lot of people starting small hobby businesses there, you have people who are retiring there, more tourists going there, particularly in the summer. So, yeah, it's a really interesting time for that market.

And I guess, I mean, Tassie, over the last 10, 20 years hasn't had the capital growth that the other markets have had. And so as investors, I guess with a smaller economy as well and, and higher unemployment, we probably would have to be wary of all those things before we just look at the big numbers and see that there's a bit of growth that's happening there.

Absolutely. Affordability at one point in time and a little bit of capital growth doesn't always make something a really good long term investment. But I think Tasmania does have some economic strengths, particularly in agriculture. Although that depends on the global economic market as well. Right. Because really good produce from Tasmania might be considered a luxury good in some countries. So that's something to think about as well. Global economic growth is forecast to be quite subdued over the next year. So maybe we won't see the demand coming there. But yeah, it might be one to watch for the next few months and see how it goes.

Oh, nice. And tell me you mentioned cycles. I mean we talk about a five to seven year kind of cycle where the market picks up and goes through a bit of growth and comes down again. What has the cycle been like, the length this time and what's the kind of prediction long term of how long before we get back into the next cycle?

In terms of the east coast markets we've seen in Sydney there was this large sort of upswing from sort of the end of 2012 and in Sydney we're definitely seeing that sort of plateau now in 2016 we can sort of expect to see that move into next growth and you know that that may go on for a couple of years while we sort of see people catch up with affordability in that market. There's a lot of speculation that the Sydney market is currently overvalued. I think so.

Just, just on that Eliza, the negative growth, does that mean that the values are falling or just that the growth's not going to be 20% this next year, it's going to be back to more likely 2, 4, 6.

That's a really good distinction to make. So at the moment what we're seeing in the aggregate Sydney market is lower growth rates, which means it's still going up but at a lower amount. However, in 2016 I think we will see falling growth, falling values, not anything to what we've seen it go up in value by, in the last few years. So over the last two years, for example, the typical house in Sydney went up by 40%. I doubt very much that you're going to see a reduction in value of 40%. So I think overall the market will remain buoyant.

Yeah. And what about the Melbourne market, what are we expecting there? It's kind of tags along behind Sydney. Is it going to have a bit more growth next year?

I think it might have a bit.

More growth left in it.

I would say if economic conditions were sort of steady, we could even expect to see peak growth rates in the first quarter of 2016. The only thing I'm thinking is that the lending restrictions that have been passed on by the banks from Accra and also the fact that we have sort of uncertain economic conditions, this may curb that growth more suddenly. So I think cyclically there's still room for that market to peak, particularly Melbourne houses. I think it's also important to make the distinction that Melbourne units are not performing as had annualised growth in November of about 13%. In units the annualised growth was half that, you know, 6% which is still strong, but it's not going up as much as units. And that's quite a large growth disparity probably because of, you know, a large stock in units and units not being quite as desirable as housing. And what about Brisbane?

Poor Brisbane hasn't had the predicted growth results that we all expected. Is it still got some more upside in it in 2016 and beyond?

Poor Brisbane? Yeah, I think everyone sort of picked that to be like a top performer in 2015. And again, Brisbane markets have had steady growth in the inner city suburbs and sort of in the southeast of Brisbane you've actually seen really strong capital growth rates. I think for Brisbane it's a question of those structural factors. It's not just a cyclical thing. There's got to be employment happening, there's got to be a strong economic growth around the world to encourage tourism and things like that. I still think that it could do well in 2016, but just because of the general economic subdued conditions, it may not reach double digit growth as Sydney and Melbourne have.

And what about Perth and Northern Territory? You know, they've obviously been on the back of the commodity boom and we've seen that decline. Is there hope? Is there resources rebound expected?

Well, I'm sceptical. I mean, I think Perth will probably come into some gentle cyclical upswing. The Perth market has fallen in value over the year. It's sort of stabilizing a little higher than pre mining boom levels. So there is going to be some overall growth if you consider that your property is a long term investment. I mean everyone's sort of talking about these liquefied natural gas projects which are happening across Queensland, the Northern Territory and Perth. The reason I'm So skeptical is because the liquefied natural gas market, and you may know about this better than me, Jake, but it's forecast to be oversupplied by the time a lot of these come into the production period. So these projects have secured contracts at a particular price. So these things may be a short term boost to the economy which may fall into dwellings as well. But I think if we learned anything from the recent falling commodity prices, it's that these enormous booms aren't necessarily sustained for years and years. So that's something to consider when looking at those markets.

And so what about Adelaide? You know, Adelaide always seems to just have a whole world of its own. What's happening in Adelaide next year?

Okay, so Adelaide again, quite subdued growth. The problem with Adelaide and the South Australia market is that it has the highest unemployment rate in the country, which makes Darling very affordable because they're often not in high demand. And the interesting thing about really affordable dwellings is that you often have people who are unemployed or do not have enough work or money. They move to those areas because the dwellings are affordable. So that can keep the market buoyant for a little while. But in the long term I think the market faces a lot of structural issues and future growth I think would be contingent on how much the government is willing to invest in creating employment there.

Great. Well, I saw that Turnbull is kind of interested in the uranium market again. So maybe Roxby Downs and Olympic Dam could lead the charge for South Australia.

Yes, that would be such a game changer I think. But again it really depends on how the commodity markets are going and how the energy commodities are going.

And what about Canberra? We can't forget Canberra.

Yeah. So interestingly, houses in the act performed quite well in the year to November Residex return statistics of annualized capital growth about 6% units, I think they fell in value by like 0.1%. But the thing to be careful about the act is that recently they've had a lot of with asbestos in the insulation of many of their homes. So quite a few homes had to be demolished and then bought back by the government. And I have a feeling that buoyant housing market activity is reflected in that large scale project. I don't know that there are great growth prospects for Canberra. Even though the government has lifted its hiring freeze. They're sort of constrained by a budget deficit at the moment. So I'm not sure that they're too interested in generating a lot of employment growth which is really important to dwelling growth. So I would say for 2016 it might be a no, no, but if the economic situation improves then we may see more employment there.

Well, talking about the economic situation, I think the Reserve bank of US has lifted their rates finally.

Okay, I didn't see that this morning. I knew it was happening today.

See on the top. But so what's the flow on effect for that? Is that going to affect us at all?

I think it could. I think because you have the Australian dollar measured against the US dollar, a rise in their interest rates could make the US dollar stronger, which could make ours relatively weak, which would increase demand for commodities, which could be a really good thing. So you know, there are a lot of factors involved so we might have to wait and see how that aff. I think one of the most interesting things because we had Morrison deliver the mid year economic and fiscal outlook on Tuesday and one of the really interesting things is that politicians and the RBA are quite optimistic about the economy right now because unemployment isn't as high as they thought it would be. So obviously there are some sectors across Australia, tourism, hospitality services, which are buoyants. And so that sort of says to me that there is hope in the economy for 2016. There is hope in the dwelling markets, but we just have to be very careful in looking at which areas are based on those sectors and which are more subject to commodity prices and things like that.

Fabulous. And what about these APRA ASIC kind of restrictions, interest rates? Any big bold predictions about what's going to happen in 2016?

Well, the RBA has said that they will probably maintain the cash rate for 2016 just because, as I said, employment was improving. Whether that will have much effect on the lending practices of banks, given that APRA sort of set these rules for them, I don't think the cash rate will have a big effect. And I think the banks do have to be careful about their lending practices, particularly as we have subdued GDP growth. As a result, we may see less speculative investment or we may see more investment in affordable dwelling markets across the country.

And tell me this, you know, before we wrap up, we've talked about the capital cities. What about the regional areas? Are they going to lag behind or do you think there might be some interest out there, especially for investors affordability and potentially the growth has come off in the capital cities. Does that mean that we've got the rise of the regionals?

That's a really good question. And actually one of my predictions generally for 2016 is that the regional areas of New South Wales will I think continue to perform really Strongly, as you say, there's the affordability, but there's also the fact that we've got this aging population who are looking to secure retirement where they comfortable, they have enough money from the sale of the family home perhaps to enjoy their lifestyle as well. And that's I think where you see areas like Lake Macquarie Shoalhaven in New South Wales and also more coastal remote areas of Victoria as well that become really popular for that tree change, sea change. And from that you get a boost in healthcare sectors and aged care sectors who are, you know, young professionals who move to these regional areas who look to ensure people's quality of life. So yeah, I think there's definitely potential for spillover from the capital city markets.

I was just reading the best rent report that you've just put out this week and it just surprised me. Well, not surprised me, but it was very hard to find anything in the capital cities. Everything was regionally based and some fabulous results out there of yield opportunities, obviously.

Absolutely. So the best rep report is really good for that, for identifying those rental yields when capital growth and rental yields tend to have an inverse relationship just because the rental yield is measured as a percentage of the value of the property. So when your property values are skyrocketing and rents are more sticky because they're negotiated on a 6 to 12 month basis, so it's hard for them to move up together. So I think where there is affordability, but also where there is really good employment opportunity, you can get initially strong rental yields and then long term capital growth prospects as well. And that's exactly what the best rent report is about. It's about finding a combination of long term growth and good initial rental yields.

Fabulous. Well, a final prediction from you. We know that Sydney leads that whole charge of the trends of the cycle. How long before we're going to see how many years before we see the pickup again? And I know this is a big crystal ball. We're assuming the economy is where it is today. So any thoughts there? We've got five or six years to wait or do you think the cycles are getting shorter?

I think, yeah, I'm really not sure. The cycles have gotten shorter as investment has become more salient in the market. But I think we could see at least two years of sort of small corrections or subdued growth. Really we have to wait for affordability to catch up at the Sydney market. So yes.

Oh good. Well that means some clever investors could spend the next two years picking up some things, getting ready for the next growth cycle. Thank you so much, Eliza, I really appreciate you talking to us today. And that has been Eliza Owen, market analyst from Residex, sharing with us some market trends for 2015, a great wrap and also some predictions for 2016. So thank you so much, Eliza, for joining us. And maybe we might get you in on the new year and find out what's happening as well.