What We Can Learn from NAB’s Residential Property Survey, Q1 2015

Every three months, the National Australia Bank (NAB) releases a quarterly update on residential property in Australia. Their findings are based on a survey of approximately 300 respondents consisting of real estate agents and managers, property developers, asset and fund managers, valuers and property owners.

The report, which you can download here, contains statistics on who is buying, what they are buying, and how much they are spending. This is obviously helpful to know, as we can better understand who is driving demand, and then determine how sustainable those drivers of growth are. After that, we can better form an opinion on what the future might hold for Australian property prices.

Here are my top five insights from NAB’s first quarter report:

1. First Time Buyers are Alive and Well.

We’ve all heard the media reports of how the poor would-be first homebuyers are being crowded out of the market due to overpriced real estate. But according to NAB’s findings, first time home buyers are alive and well.

While I’m sure many renters are struggling to save a deposit or obtain finance approval, there’s still plenty of activity. In the first quarter of this year, around 25 percent of property was purchased by first home buyers. With one in four buyers being first timers, it’s hard to make a case that they are being squeezed out.

One could make the case; however, that low interest rates are the only reason they can afford to buy. I seriously doubt the majority of them are basing their budgets on the average historical interest rate. I hope at least some of them have read my article, 6 Strategies for Mitigating Interest Rate Risk.

An interesting side note is that two out of five first timers, or 40 percent, are opting to buy an investment property as a first purchase, rather than buy a place of residence. Perhaps they can’t afford to buy where they want to live, so they buy in a cheaper suburb and rent to someone else. Or perhaps they are speculating on growth in other suburbs besides the one they want to live in.

Either way, they are buying, which means they feel a sense of urgency to get into the market before they are left behind. Otherwise, they would keep saving, and wait for a “better time” to buy. I believe this reveals the prevailing sentiment in our nation that property values only ever increase in value.

2. Investors Continue to Represent a Significant Portion of Demand

As I mentioned here, ideally we want to see the strongest segment of the market being owner-occupiers using savings to purchase new homes. Together with robust employment, this would be a sign of a fundamentally strong property market having the prospect of sustainable growth.

While owner-occupiers are still buying more than investors, it’s only by a small margin. About 45 percent of all property sales in New South Wales and Victoria last quarter were the result of investor demand. This means that investors remain a significant driver of growth in the Aussie real estate market. If they stop buying, property values stop rising.

Another reason we want the majority of property owners to be owner-occupiers is that it makes the property market more resilient. Investors tend to be the first to sell when the market takes a turn for the worse. With such a large percentage of property being owned by investors, when the market finally rolls over, we may see a sharper downturn.

3. Foreign Capital Continues to Flood Australia

Foreign investment accounted for 21 percent of the total real estate market demand in Victoria and New South Wales last quarter. Nationally, the figure is closer to 16 percent. Depending on the State, that’s one in five or six houses being sold to overseas investors.

A weak Aussie dollar has boosted the purchasing power of those holding foreign capital, so unless something unravels in the world economy, we will likely see this trend continue in the coming months. This will be especially true if the RBA lowers rates again to further devalue our currency, all other factors being equal.

4. Overseas Investors are Buying on Hype

Hidden in NAB’s data are insights on the level of sophistication of overseas investors. One thing is clear: They lack local knowledge, are highly speculative, and are relying heavily on the opinions of “professionals.”

Around 53 percent of foreign purchases are apartments primarily located in the CBDs of Sydney, Melbourne and Brisbane. This trend has continued month after month, despite reports of an oversupply of units.

Steve McKnight recently mentioned at one of our Market Update events that currently more than a quarter of the units in Docklands are unoccupied. Even back in November last year, The Age reported a “‘Ghost tower’ warning for Docklands.”

What’s interesting is that these units are not even on the market for rental. Foreign investors are sitting on them, presumably in anticipation of capital growth.

Clearly these investors are highly speculative, but the question now is, “Who’s story are they believing?” As property blogger and author, Pete Wargent recently wrote, “The sale of high-rise apartments has been one of Australia’s thriving export industries of the past half decade, with new developments in the three largest capital cities being fluently marketed via slick multilingual brochures and websites.”

I’ve personally heard from an Asian financial planner in Melbourne of marketing groups who have sold entire apartment buildings to Asian investors in less than a week. He spoke of young Mandarin-speaking Aussies in their early 20’s earning sales commissions of $300,000 to $400,000 per year.

Perhaps we should start marketing Steve McKnight’s Property Apprenticeship course in China. It sounds like they desperately need it.

I suppose there is a bright side for Aussie renters. To quote Wargent again, “This will result in an oversupply of high-rise apartments in a number of capital city hubs around Australia, which will drive vacancy rates higher and place an equivalent downward pressure on rents.”

Maybe this is why so many first time buyers are opting to purchase investment properties. If you were a young professional working in the CBD, and you believed property would be more expensive in five years, you would be wise to buy your future family home in the suburbs now and then rent it out. That way, you could rent one of these cheap apartments in the CBD for yourself, and then walk to work, while enjoying the city lifestyle before you have kids.

5. Sydney Real Estate is Damn Expensive

As if we didn’t know this already, but I was shocked to see not only just how expensive properties have become, but also how many buyers can afford to jump into this market.

As a matter of fact, 42 percent of all home purchases in New South Wales during the last quarter were above $1 million. What does this mean in real terms? If your budget is $1 million to $1.25 million, you can afford a two or three bedroom apartment in Sydney’s CBD or an older three or four bedroom home in Cherrybrook. In other words, this is not a flash mansion.

If you desire a normal middle-class standard of living in Sydney, you better be able to afford a $1 million home. Melbourne is not too far behind. Unless Australia experiences mass inflation, bringing wages up to make housing more affordable, I can’t see how this home-price-to-income-ratio is sustainable.

What Do You Think?

If you would like to see NAB’s state specific analysis, you can find their download links for those reports here.

What do you think NAB’s analysis means for the future of Australian real estate? Are there any other insights that you’ve gathered from reading their report? If so, take a few moments to share your thoughts in the comment section below.

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.