The NAB Residential Property Survey Report, Q2 2015
Every three months, the National Australia Bank (NAB) releases an 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 most recent report, which you can download here, contains statistics on who is buying, what they are buying and how much they are spending.
This is helpful to know, as we can better understand who is driving demand, and then form an opinion on the sustainability of those drivers. These facts may give us a clue into what the future might hold for Australian property values.
This most recent survey confirms much of what we already know to be true: Melbourne is hot, Sydney is hotter and Brisbane is growing moderately, while Adelaide and Perth are lagging behind.
Not much has changed in three months. I could summarise the current state of the property market with a repeat of my top five insights from NAB’s last quarter report:
- First time buyers are alive and well.
- Investors continue to represent a significant portion of demand.
- Foreign capital continues to flood Australia.
- Overseas investors are buying on hype.
- Sydney real estate is damn expensive.
That said, the new findings do offer us a few key take-aways to help us chart our investing course for the coming 12 to 18 months.
Following are three standout findings from NAB’s second-quarter 2015 report:
1. Yields Will Go Lower As Rental Growth Continues To Slow
Early in our Property Apprenticeship course, we challenge the investors who currently hold rental properties to take a long and hard look at their portfolios.
Many soon realise they own properties that once offered a good yield, but are now performing poorly.
After many years of capital growth, and less than stellar increases in their rental income, their yields have dropped significantly. The equity in these properties has become quite lazy.
For example, if you bought a property 15 years ago for $300,000 and your rent was initially $350 per week, your gross rental return (GRR), or yield, was about six percent. If that same property today is worth $600,000 and only returning $450 per week, your GRR is about four percent.
That $300,000 growth in equity has become lazy, because it’s not working as hard as it used to. If you had the time, skill and risk profile to redeploy that equity in a different property and perhaps through a different strategy, it would make sense to sell.
According to NAB’s findings, faster capital growth will continue to push yields lower as rental growth slows nationwide to 0.4 percent over the next year or two. This is not surprising, as new investors in the market are increasing the supply of available rental properties. This will be a welcome by-product of low interest rates for renters.
NAB expects weaker rental growth in all states except New South Wales (NSW), which they tip to grow at 1.6 percent next year. Victoria should see rents increase by 1.2 percent and Queensland will be fairly level at 0.2 percent growth. South Australia and Northern Territory can each expect rents to move backwards by -1.5 percent and Western Australia (WA) by -1.6 percent.
If you’re not happy with a three percent yield, or if low yields are a signal to you of inflated house prices, then it may be time to look to regional areas or overseas markets. The more bearish investors may choose to sit on the sidelines and cash up.
2. Restrictions On Foreign Investment Seem To Be Having Little Effect
In a bid to cool the foreign investor market, the Abbot government recently closed one of the loopholes foreigners use to buy existing properties.
The Foreign Investment Review Board (FIRB) can no longer approve applications submitted by foreigners who want to tear down an existing home because it is at the end of its “economic life.”
The government also instituted higher application fees for all foreign investors. A $5,000 fee is presently payable on FIRB approved properties with values under $1 million, and a $10,000 application fee applies to properties of more than $1 million. For properties valued at more than $2 million, the fee rises to $20,000, and increases from there incrementally.
However, foreigners can discreetly buy through family members who are living here. Temporary residents who have a visa of more than 12 months are permitted to buy established homes for a personal residence. They could then pay rent back to their family under the table.
According to NAB’s findings, the number of foreign buyers investing in the existing property market still managed to increase to 8.6 percent, up from 7.5 percent earlier in the year. In the new property market however, their share of total demand fell to 12.8 percent, down from 15.6 percent. All in all, NAB claims that foreign buyers accounted for more than one out of 10 sales in both Victoria and NSW.
Chinese investors still love their apartments. Units remain a favourite of foreign buyers, as they accounted for 16.1 percent of all apartment sales nationally. In Victoria, foreign buyers snapped up 28 percent of all new apartment purchases. In NSW, the figure was 16.5 percent. In Queensland they accounted for 13.1 percent of sales and in WA 12.9 percent.
Keep your eye out for the impact of the recent collapse in the Chinese market. One way or another, the inflow of Renminbi into Australia will eventually slow down. It’s only a matter of time before this 10 percent of the market gets wiped out.
3. Even Bullish Economists Are Expecting Slower Capital Growth For 2016
While the NAB economists’ predictions for the remainder of 2015 remains quite bullish, they expect the average national house price growth to moderate in 2016 to three percent.
The following are their capital city growth predictions for 2016:
- Sydney: 3.9 percent
- Melbourne: 3.1 percent
- Brisbane: 4.8 percent
- Perth: – 0.1 percent
- Adelaide: 0.9 percent
- Capital City Average: 3.0 percent
The NAB economists offer this summary statement:
Overall, our assessment is that the possibility of a sharp correction in the Australian housing market is reasonably remote and would require a notable deterioration in the labour market and higher interest rates.
However, the supply response to higher prices to date has been quite pronounced, particularly in apartments, which along with prudential measures by APRA and a persistently elevated unemployment rate – forecast to remain above six percent until mid- 2017 – will work to cap price gains going forward – although demand will remain robust while interest rates stay at record lows.
Clear as mud?
What Do You Think?
What do you think NAB’s analysis means for the future of Australian real estate? Are their predictions for 2016 accurate? 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.
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