Latest Property Market Report

Introduction:
Multiple factors drive positive start to 2007
Many pundits are searching for a reason behind the uplift in market activity since the New Year. Some say it's the superannuation deadline; others believe it's rising rents; and some attribute the clamour to perceptions of stable interest rates.

Each is right and wrong at the same time. Media always looks for simple answers, but there's no one reason for the market's optimism. It's a combination of factors.

Firstly, there's the normal real estate cycle. The market peaked everywhere (except Perth and Darwin) in 2003/04, so we've had three years of bumping along the bottom. There's now a perception it's time for recovery.

This is boosted by low dwelling supply. The downturn and the trend of rising interest rates have impacted on builders and developers. Very little new product has been created relative to underlying demand. Now we have a shortage and that's generating low vacancies and higher rents.

There's also a belief we've seen the last of the rate rises for a while. The Reserve Bank appears to believe that the three 2006 increases are producing the desired effect (although it continues to make threatening noises). At the same time, the stellar rise of the sharemarket has ended – and when shares lose their gloss, money flows into real estate.

And finally, the Federal Government's deadline for people to pour money into superannuation has inspired some to sell real estate assets.

No one of these factors alone would spark a market upturn. But the combination of them is quite potent. Investors can perceive a climate of subdued prices, tight vacancies, rising rents and stable interest rates. It's not a bad time to be looking around.

For a detailed analysis of markets nationwide, click on the topics below …

National Overview:

Feature topic: Political agendas muddy the affordability debate
Adelaide
Brisbane
Canberra
Darwin
Hobart
Melbourne
Perth
Sydney
Conclusion: Confusion arises from muddled reporting

National Overview:
Positive data gives rise to market optimism

Sales of new homes have risen for three consecutive months. The value of housing finance by investors rose 4.6% in January, following a 4.1% rise in December. Property listings and auction clearance rates (if you can believe the figures) are up.

It's enough to give jaded property professionals palpitations.

The Housing Industry Association's monthly survey has found that sales of new houses and apartments rose 3% in February, headed by a 17% rise in New South Wales.

That, in itself, is meaningless – one month's data can be misleading. But the significance of the figures is that it's the third consecutive month to show a healthy rise. And it's the first time in nine months that new home sales have topped 8,000 per month.

That still may mean nothing. As the HIA's Simon Tennent points out, interest in new homes is typically stronger at the start of the year. And current sales levels remain significantly below the figures from the same time last year.

"There is cautious optimism among most volume home builders – however, buyers are still acutely aware they are not out of the woods yet following the most recent interest rate pressure," Tennent says.

The reason for optimism in the real estate industry is that this is the latest in a series of indicators which paint the market with an optimistic hue. The year has started with a flurry of activity. Professionals such as buyers advocates report it's the busiest start to a year they've seen for a long time. There's anecdotal evidence of rising prices.

All those indicators suggest a rise in demand. At the same time, the statistics show a continuing decline in supply. In trend terms, new housing commencements are at a five-year low, according to the ABS.

Westpac predicts underlying demand for dwellings will exceed supply in 2007. It expects rents to rise and yields to improve, but predicts price growth will be moderate because of low affordability. The exception to all this is Perth, which has passed the peak of its cycle and can expect rising vacancies and declining rental growth.

Brisbane research analyst Michael Matusik says the residential market is likely to be "steady" this year. Rental yields need to improve before we see the substantial lift in investor interest that is needed to really push things along.

"The recent predictions of real estate agents that we are on the cusp of another real estate boom are, we believe, premature," says Matusik. "Yes, this year has started out well, with many areas performing above trend. But this initial rush to buy is likely to calm down once an election date is called and the effects of last year's rate rises start to kick in."

Matusik forecasts house price growth averaging around 5% across the eight state and territory capital cities this year. This is down from the 7% achieved in 2006. But he expects prices to rise closer to 10% in 2008, with the strongest rises likely to be in those markets with the most under-supply – Brisbane, Sydney, Melbourne and Hobart.

"Gross investment returns for residential property remain attractive, exceeding 10% a year in several of our capital cities, but two-thirds of this return is due to capital growth and not rents. Net rental returns for detached housing currently average 2.7% across our capitals and 3.5% for apartments. These need to be closer to 5% before investors, en masse, re-enter the market. This, given current trends, is likely to take another year or so to eventuate."

There is plenty of evidence that, despite the views of many market professionals, the lower end of the market is shaping up well. This is what I expect to happen because affordability is the key issue and the outer suburbs of our capital cities can offer homes within reach of the average family. Affordable suburbs with clearly-definable reasons to grow (e.g. new transport links and government spending on infrastructure) are the ones what will shine in the next 2-3 years.

Many industry professionals continue to articulate the cliché that the prime inner-city suburbs always out-perform. The statistics often contradict them, but the myth continues to be given credence. One example is regular publicity about falling prices in the western and south-western suburbs of Sydney since the boom ended in 2003/04. The market overlooks the fact that the "better" areas of Sydney – the eastern suburbs, the north shore and the inner west – have suffered equally from falling prices.

While it is true that the absolute top end of the residential market in most capital cities has been strong, this refers to a tiny percentage of the market which comprises the "blue sky" properties with rare qualities – such as absolute beach frontage or harbour frontage with views of the bridge. Beyond that, there is a long list of Sydney suburbs with median prices above $1 million which have seen prices fall dramatically since 2003.

Meanwhile, around the nation, there are signs of out-performance by the cheaper suburbs in the outer ring of capital cities – the ones I call the Ugly Ducklings.

Matusik Property Insights recently published a report showing the recent price growth performance of various sectors of the national market. In each state and capital city, there are sectors which are performing above longer-term trends, those which are in line with trends, and those which are performing below the longer-term trends.

The stand-out, for me, is the out-performance of the outer ring suburbs in most capital cities. The outer suburbs are among the sectors showing house prices rising above trend in Sydney, Melbourne, Brisbane and Canberra. With units and townhouses, the outer suburbs are out-performing or showing price growth in line with longer-term trends in Sydney, Brisbane, Adelaide, Hobart and Canberra. (In Perth, all sectors are under-performing the recent trends on prices).

Meanwhile, according to Matusik's analysis, the inner-city is under-performing on house prices in Perth, Canberra and Darwin. Melbourne's inner-city sector is steady, in line with longer-term trends, which the outer suburbs are performing above the trends. With apartments, the inner-city is under-performing trends in Melbourne, Brisbane, Adelaide, Perth, Hobart and Canberra.

The other major market force is the pressure on rents. According to Australians for Affordable Housing, rents are rising twice as fast as inflation and tenants are being forced into rental auctions for scarce premises. In February the Real Estate Institute of Australia issued new guidelines which prohibit the use of rental auctions and publishing a rental price range in advertising of vacant properties.

All the major cities have vacancy rates under 2% and, according to the REIA, median rents for a three-bedroom house rose 18% in Perth last year, 16% in Brisbane, around 9% in Melbourne, Darwin and Hobart, and about 7% in Adelaide and Canberra. (Sydney, where rents rose only 4%, is the only capital city yet to show big rises).

There's been plenty of debate over whether the current situation warrants the term "rental crisis" or not. There's a certain amount of scaremongering going on, particularly by the development lobby which is unhappy about land supply, so-called red tape and property taxes. The Property Council of Australia, for example, has claimed renters could by paying $40 a week more because of recent land valuations forcing up land tax bills.

What is certain is that the rental market in the major cities is very tight and there is pressure on rents.

Feature topic:
Political agendas muddy the affordability debate

Australia needs a serious debate about affordability. What it doesn't need is having the discussion warped by shallow people with political agendas.

Both the development lobby and the major political parties have distorted debate on this critical issue by peddling so-called "research" that misleads the public.

In all cases, they have been motivated by political agendas. It's a great shame: at a time when intelligent discussion to achieve solutions is needed, media is full of nonsense peddled by developer groups and politicians.

In March we saw Federal Treasurer Peter Costello "demanding" that state governments abolish stamp duty on property transactions. Costello said stamp duty, plus the slow release of land for residential development, was responsible for the affordability problem.

Labor politicians responded that the biggest problem is "Canberra's broken promise about keeping interest rates low". The Queensland State Government said the secret to improving affordability was to keep interest rates low. "The Federal Treasurer should know that the most important ingredient in housing affordability is the price of money," said Queensland Treasurer Anna Bligh.

If Bligh actually believes that, she has no right to be Queensland Treasurer. And Costello's economic credentials are shot if he truly thinks axing stamp duty will solve the affordability crisis.

Of course, neither politician believes what they're saying.

Both sides of the political divide know the issue of affordability is complex and multi-pronged. Costello knows stamp duty is not the crux of the issue, just as he knows state governments cannot abolish it because it's one of the cornerstones of their revenue.

His political opponents, equally, are aware that rising interest rates are only one part of the affordability problem.

So why do they say things they know to be untrue, or only part of the truth? Because they're politicians – the sort of people who would lie even when the truth would save them. And because they have no intention of doing anything about the problem.

The development lobby is equally guilty of substituting political spin for intelligent debate. It has been campaigning relentlessly to create the impression that a crisis will strike real estate unless government releases more development land and abolishes stamp duty.

Developers and their representative bodies are becoming increasingly strident – and ridiculous – in their claims about what will happen if we don't allow open slather development of residential land. They have the support of the Prime Minister, who has also been blaming land shortages caused by state governments for the housing cost crisis.

The development lobby – which includes the Property Council of Australia (PCA), the Residential Development Council (RDC) and the Urban Development Institute of Australia (UDIA) – wants us to believe that low affordability is caused by land shortages created by recalcitrant state governments and greenie local councils.

They know that's not the case, but they want us to believe it.

The loudest noise in property is always the voice of vested interests – and this is what we're hearing now from the development lobby. They want a free hand to develop cheap land to make money at a time when the market is subdued. Nothing wrong with wanting to make money, but they could try being honest about their motivations.

Among their claims is a "warning" from the NSW Urban Taskforce that NSW will lose $6.6 billion worth of investment over the next 3-4 years unless government allows Sydney to grow. The lobbyists want more and bigger buildings and they want the city's urban footprint to grow.

The PCA claims land shortages are forcing up land values and this is pushing up rates and land taxes – and that, in turn, is increasing rents. The council in Brisbane blames the State Government for all its problems and makes this ridiculous comment: "The Government should just hang out a big sign saying: Property investors keep out of Queensland."

It also says families looking for an affordable place to rent will have "no chance".

The PCA in Sydney has criticized the NSW State Government's plan to extend stamp duty exemptions for first home buyers, saying it is inadequate and will have little impact.

Meanwhile the RDC claims Generation Y people will never be able to afford to buy a home. "These younger Generation Ys are really going to suffer," it says.

And the UDIA has gone further, predicting that Brisbane will become an enclave of the rich and famous, with no one else able to buy a home. Workers will have to be flown in, because they won't be able to afford to live in the Queensland capital. Why? Because of land shortages and high development costs caused by local councils and the State Government.

Spin is one thing, but they're going really over the top with this kind of scaremongering.

The truth is that there are many components to the affordability problem. The biggest single factor is simply market forces. Demand in the recent boom pushed up prices. That's how things work under our economic system. Demand has tapered off recently but has been sufficiently strong to keep prices rising slowly-but-steadily everywhere except Sydney.

Another factor is the taxation component of the cost of a new house-and-land package. Taxes and charges at all levels of government can add $100,000 to the cost of a typical new house. The biggest single impact comes from the GST, so it's a bit rich for the Prime Minister to blame the affordability crisis on state governments.

Fortunately, there are some rational voices out there. The Australian newspaper reported recently that, far from there being a land shortage, there are 155,000 housing lots available for development in Sydney, Melbourne and Brisbane. These are home sites zoned for residential development and they provide sufficient land to be keep the market supplied for up to eight years.

The Daily Telegraph reported: "In Sydney, where housing affordability is the lowest in the nation and continuing to deteriorate, developers have thousands of housing blocks ready to sell and are sitting on tens of thousands more."

The Daily Telegraph quoted one property professional as saying: "Every time I see John Howard blaming land supply I see red because it's just not true – there are literally thousands of lots available."

Affordability is a serious issue – the most serious one in real estate, I believe – and it's a shame that the public debate is being hijacked by people with political objectives.

Until stake-holders stop pushing their own agendas, we're not going to have the sensible debate that's needed to resolve this serious problem.

Adelaide:
Watch this space: South Australia is the dark horse

Adelaide continues to be an enigma. Economists and analysts keep telling us that Adelaide has an over-supply of housing product (the biggest over-supply among the eight capital cities, according to Matusik Property Insights data) but officially it has the lowest residential vacancy rate.

The city has little in the way of population growth to drive property prices but may emerge as the surprise package of the resources boom, with high levels of exploration activity under way – giving hope of a Perth-like property surge driven by a buoyant commodities sector.

In the meantime, Adelaide continues to suffer from modest population growth, adding less than 10,000 to its numbers last year (compared with Sydney, Melbourne, Brisbane and Perth, which all added between 30,000 and 50,000). It also has the highest unemployment rate among the eight capital cities, equal with Hobart, and there was an overall decline in fulltime jobs last year, the only capital city to deliver a negative result.

It remains one of the cheapest cities to buy houses and the cheapest for apartments. It also has the lowest apartment rents among the eight capital cities.

Figures from the Housing Industry Association show that sales of new homes in SA in the three months to February were 8% higher than the preceding three months – but still 24% lower than the same time in 2006.

Given the underlying numbers, it's difficult to see where significant price growth is going to come from – without a boost from SA's emerging resources sector. The activity going on behind the scenes is quite massive and needs to be watched.

On the plus side, vacancies continue to be tight. In March the REISA announced that Adelaide vacancies had "crept above 1%" for the first time since October 2006 and were now 1.03%. The vacancy rate has been below 2% for 20 consecutive months and the REISA says many properties are being let long before they are vacated by the existing tenant.

The Hills district continues to report zero vacancies, while the Inner City and the southern suburbs have vacancies below 0.5%.

The REISA has issued new guidelines which state that "property managers must not actively solicit offers for higher than the quoted price" for rental properties. President Mark Sanderson says: "If a potential tenant wishes to make a higher offer then that is entirely their choice. The important distinction is that property managers must not encourage rental auctions." (I must say that this comment by Sanderson suggests the guidelines will be a toothless tiger.)

PRDnationwide Research notes in a February 2007 report: "In the December quarter the Adelaide market has recorded its highest growth figures since December 2003, with annual growth of 6.4% and the latest quarter's growth at 2.6%. House prices in Adelaide are still affordable compared to many of the other capital city markets around Australia. This fact, together with the ongoing minerals exploration occurring in the state, place Adelaide as a city to watch over the coming year."

Brisbane:
Everyone seems to agree: Brisbane's the place to be

If Brisbane is not the best place to buy property this year, it will amount to the biggest mis-reading of a situation in decades.

Analyst after analyst, me included, has nominated the Queensland capital as the best place to park spare investment money. Economic growth, population growth, relative affordability, rising rents, new infrastructure spending, a favourable supply/demand equation – there's an alignment of important underlying factors. With Perth and Darwin at the end of their run, the city most likely to surge next is Brisbane.

Matusik Property Insights finds that Brisbane is under-supplied with housing product, more so than any other capital city. It also has low property prices (relative to Sydney, Melbourne, Perth, Darwin and Canberra) and low house rents (compared to Sydney, Canberra, Darwin and Hobart). Brisbane also has low unemployment, at 4% compared to the national rate of 4.5%.

Figures from the Housing Industry Association show that sales of new homes in Queensland in the three months to February were 13.5% higher than the preceding three months – although still lower than the same time in 2006.

Brisbane prices rose a steady but unspectacular 7% last year but there was 3% growth in the median house price in the December quarter. PRDnationwide Research notes in a February 2007 report: "This is the strongest quarterly growth figure since December 2003 and reinforces the health of the Brisbane market and overall strength of the South East Queensland economy. We expect the remainder of 2007 to see a further improvement in the market, with double-digit annual growth becoming apparent as we move into 2008."

Valuation firm Herron Todd White (HTW) notes that plans for major new infrastructure dominate the Brisbane landscape and expects ongoing capital growth "of a subdued nature" this year.

HTW says the inner suburbs of Brisbane have continued their good form from the end of 2006 with modest but tangible capital growth. "Our valuers in the near-city suburbs expect that capital growth will continue into 2007, as buyers assess what is good value in these prime locations. Many of our near-city and inner-city locations will continue to benefit from interstate and overseas migration as Brisbane heads towards the status of Australia's second major capital."

HTW says the $750,000 to $1.5 million price category was surging until late in 2006 but more recently has slowed down. It says properties in this price range are becoming more common and, in some locations, supply exceeds demand.

"The notable surprise has been in the outer suburbs which experienced none of the traditional Christmas slowdown," HTW says. "Agents generally reported record results in the early months of 2007. The primary drivers have been first-home buyers and investors. Product priced at the bottom end of these markets is enjoying the attentions of these two groups, although astute buyers are ensuring the fundamentals are right. Many agents can't get listings and feel it is inevitable that the bottom price rung will elevate."

HTW's office on the Gold Coast also notes that "the lower end of the housing market on the Gold Coast is still the best-performing sector of the market with demand still coming from first-home buyers and investors".

It say: "Much of this demand appears to be as a result of population growth and a strengthening rental market. As a result, most of the lower end stock on the western fringe of the Gold Coast is now in the $350,000 to $450,000 price bracket.

'The northern end of the Gold Coast within the Beenleigh, Eagleby and Bethania areas is also seeing a significant increase in demand. This is a result of properties being available in this locality for around $200,000."

Matusik notes that Brisbane prices recently have been performing above the trend of the past three years, particularly the inner city and the outer suburbs. The middle ring suburbs have been performing less well, but steady.

According to Matusik, Brisbane rents rose 11% last year for houses and 12% for apartments. The inner-city increased slightly more – 13% for both houses and apartments. Around the state, the biggest rental increases for houses last year were in Gladstone, Mackay and Rockhampton, which all had rises between 20% and 30%, according to Matusik data.

The apartment market in South East Queensland should be approached tentatively.

According to the Midwood Queensland Investment Report, the supply of unsold new high-rise apartments on the Gold Coast amounts to almost two years supply. The number of unsold apartments has remained largely unchanged for the past two years and there is substantial new supply in the pipeline.

HTW says of the Gold Coast high-rise market: "Sales in the investor-targeted holiday complexes will continue to be slow, while there is still a large amount of re-sale stock available."

Midwood also finds there is two years supply of unsold apartments in the Brisbane high-rise market. There are currently more unsold apartments in central Brisbane than a year ago. Matusik notes that inner-city apartments in Brisbane have recently been performing below the trend of the past three years on price growth. Outer Brisbane, however, has been performing above trend.

Canberra:
Quietly, the capital keeps on keeping on

Canberra was one of the nation's better performers last year, with house prices growing 9.2% – the best result outside of the boom cities of Perth and Darwin (no longer booming, by the way). Canberra has the most expensive homes among the capital cities, after Sydney and Perth.

The February 2007 Month in Review from valuers Herron Todd White says a strong local economy, underpinned by the commercial construction industry and net gains in interstate migration, have ensured continued demand for housing.

HTW says there is a shortage of skilled workers (reflected in a low unemployment rate – around 3% compared with a national average of 4.5%) and high disposable incomes have influenced a greater proportion of workers to move to Canberra. "A worsening drought, a sluggish NSW economy and active marketing of Canberra by the ACT Government have aided population growth," it says.

Canberra has a residential vacancy rate of 1.1% and the highest rents in the nation. "And they are tipped to go higher," HTW says. Typical three-bedroom houses rent for $320 per week and two-bedroom apartments fetch $300.

Low residential vacancies have long been a characteristic of the Canberra market. "A tight rental market and the lack of choice of rental accommodation have often been the gripe of a relatively large transient population coming into Canberra," it says.

"Any change in the short-to-medium term is unlikely, even as the large Metropolitan unit development nears completion and the ACT Government makes available a total of 2,800 blocks during the 2006-07 financial year in response to increased demand and concerns over housing affordability. Over the next four years, 11,000 residential dwelling and multi-unit sites are to be released. Will that number, however, be enough?"

A number of large infrastructure projects – including the ACT Prison at Hume and the Defence Theatre Headquarters – and commercial developments are happening and these should keep the Canberra economy healthy.

'Increasing numbers in the public service will also create a pent-up demand for housing," HTW says. "Overall we see a strengthening in the Canberra residential property market with those properties in quality locations providing superior accommodation enhancing their potential for capital growth."

One area that may require caution is the Inner South of Canberra. According to Matusik Property Insights, both houses and apartments have been recently performing below the trend of the last three years on price growth in the Inner South, whereas the Inner Central precinct has been performing above trend.

Darwin:
Prices follow sales numbers in downward spiral

The Darwin housing market is feeling the impact of several quarters of declining sales numbers. Prices are now falling.

In previous editions of this report, we have noted the growing symptoms of a market that was peaking and likely to go into decline. In mid-2006 we recorded the drop the sales volumes and predicted prices would eventually follow. In the September quarter, we saw the first signs of prices falling. In the December quarter there was evidence of values decreasing right across the Darwin market.

The median house price for Darwin fell 4% in the December quarter. In Inner Darwin, prices declined 2% in the quarter, while Darwin Rural prices fell a similar amount.

There was also a continuation of the trend of falling sales volumes. In the Northern Suburbs, sales numbers fell 13% in the December quarter, the Darwin Rural market declined 7% and sales numbers for Darwin overall dropped 2.5%. There was evidence of major decline in the markets in Alice Springs and Katherine.

The Real Estate Institute of the Northern Territory blames interest rate rises for the slump, but it really has little to do with rates. The market in Darwin, as in Perth, became overheated early in 2006 and prices overshot true value.

This overall impression is reflected in Matusik Property Insights' assessment of price growth trends. It finds that Inner Darwin and the Northern Suburbs (the two key precincts in the Darwin residential market) are both now performing below the trend of the past three years on price growth. The Northern Suburbs are also under-performing in the apartment market.

Affordability is the big issue. Darwin is a small city, with fewer than 120,000 residents, but has more expensive housing than much larger cities such as Brisbane and Adelaide. House rents are also higher than in Melbourne, Brisbane, Perth, Adelaide and Hobart. This possibly reflects the fact that Darwin has the biggest rental market, relatively speaking, among the capital cities, with 40% of households renting.

The big danger now in Darwin is the apartment market, which continues to make sales at rising prices. All the evidence points to over-supply and over-pricing in this market, and investors who don't heed the warnings will get burnt.

Valuation firm Herron Todd White (HTW) says supply in Darwin is "skewed" – there's not enough residential land and too many apartments. "There are near-critical shortages of residential land and rental accommodation," HTW says. "On the other hand a great many apartment blocks are coming on stream."

HTW says the only sub-division with a significant reserve of R1 land is in the new northern suburb of Lyons – stage one was sold by ballot in November but several stages remain. "The price of vacant blocks has been surging along – leaving young people, in particular those with young families, unable to afford a home. Short-term action is imperative.

"Such families are also in trouble if they attempt to rent. The figures show Darwin's rental vacancy rate at 1.7%."

But there is hope. The NT Government has announced it will soon commence a new suburb called Bellamack in the satellite city of Palmerston.

HTW repeats earlier warnings over the level of supply of new apartments. "Affordable, entry-level housing opportunities have been rapidly evaporating, but the flood of apartments is continuing," it says. "While warnings of an over-supply have been sounding for some time, sales keep rolling along."

HTW says 190 units came on stream in central Darwin in 2005, 270 more in 2006, 400 more are due this year and over 1,400 in 2008 and beyond. The proposed projects include several towers of 25 storeys or more; one project under construction is a $100 million development of twin towers, each 23 or 24 storeys.

"Darwin's median prices are now third in Australia, behind only Sydney and Perth. We await the effect of all this planned supply-side activity with a great deal of interest," says HTW.

Hobart:
Signs of waning after a solid 12 months

The Hobart market has been a solid performer since its boom subsided in 2004 but there are some worrying signs. The economy, population growth and unemployment trends are all producing bearish figures – and there is a surplus of apartment stock.

Herron Todd White (HTW) says the Tasmania market is "running pretty flat in most areas" and showing signs of weakness.

This is reflected in ABS price data, which shows that Hobart's median house price rose 7% last year but did not move forward in the December quarter. Another measure, provided by Australian Property Monitors, finds Hobart prices rose 7% last year but fell 1.4% in the December quarter.

"Stock levels are still very high, particularly through the mid-range-priced markets," says HTW. "Should the market be pushed too far by interest rates, we could see prices drop."

Population growth is mediocre, with Hobart adding only 2,000 to its population last year and few new jobs were created. Unemployment is the highest of the eight capital cities, at 5.7%.

On the positive side, homes are cheaper in Hobart than in the other capital cities and generally affordability is better than elsewhere.

Supply of housing appears reasonably in balance, but the unit market is over-supplied (as we have warned previously). This follows big price growth in 2006, thanks to new product coming into the market.

Matusik Property Insights finds that house price growth in inner-city Hobart and Middle Hobart is performing above trend but apartments are under-performing (indeed, prices are falling) in inner Hobart.

HTW notes there is a mini-mining boom happening on the west cost which has seen prices rise in towns such as Zeehan, where the Allegiance Nickel mine is being established. "This has been the town's prices rise dramatically in the last few months, in speculation of the workforce that will be required. We expect further rises here until the speculation settles."

Another small town expecting a mini-boom is George Town near Launceston. Already a location driven by major industrial activity, this town has a new power station in prospect. There is also a $1.4 billion pulp mill in planning, although currently the subject of major controversy over efforts by the Tasmanian Premier to "heavy" officials responsible for the assessment and approval process.

Melbourne:
After Brisbane, it's the best place for property money

Melbourne, our second biggest city, seldom gets any plaudits as a population growth area, but last year it added more to its population than any other city.

Melbourne's population grew almost 50,000 in 2006, well ahead of Sydney's 37,000 and the 30,000 achieved by Brisbane and Perth. Over the past five years, Melbourne has averaged population growth of 43,000 a year, compared with 33,000 in Sydney and 38,000 in Brisbane.

It's the population growth star of the eight capital cities. It's also a significant creator of new jobs. Last year Melbourne generated 60,000 new full-time jobs, second only to Brisbane, and miles ahead to Sydney (13,000) and Perth (19,000).

The Victorian capital's unemployment rate is better than in Sydney, Adelaide and Hobart and generally in line with the national average.

Melbourne also has the highest level of home ownership of all the capital cities; only 25% of households rent in Melbourne.

Given all that, it's curious that houses are cheaper in Melbourne than in Canberra, Perth and Darwin (as well as $130,000 cheaper than Sydney) and that Melbourne is the cheapest capital city to rent a house and one of the cheapest for apartment rents.

None of this makes any sense. Why does it cost more to rent a house in Adelaide and Hobart than in Melbourne? Why did prices rise more in Canberra, Darwin and Brisbane last year?

It's difficult to escape the conclusion that Melbourne is in line for price growth and rental growth – particularly as the city, according to Matusik Property Insights figures, is under-supplied with dwelling product.

Matusik finds that the Middle and Outer Ring suburbs of Melbourne are currently performing above trend on price growth, while Inner Melbourne is steady. But the apartment market throughout the city is performing below trend.

Sales of new houses and units in Victoria rose in February – the third consecutive monthly increase. Sales in December/January/February were 9% higher than sales in September/October/November – but still well below levels of a year earlier.

PRDnationwide Research says in a February 2007 report: "Melbourne continues to perform well. In 2006 Melbourne house prices increased 8.1%, demonstrating that Australia's second-largest capital city has certainly left the worst times behind."

James Buyers Advocates says in a March newsletter that the top end of the Melbourne market has been performing strongly for some time and that the city market generally has been firing since the start of the year. "The market has started the year with some incredible buyer force – with, in some cases, panicked demand," it says.

The February 2007 Month in Review from valuers Herron Todd White says: "The state election was held late last year and with Labor retaining power there is increased confidence of continued growth and stability in the local economy."

The bottom end of the market is likely to thrive in 2007, because affordability is such a big issue in real estate. Any affordable suburb with clearly identifiable reasons to grow and improve will do well in the next couple of years.

Locations such as Frankston, Dandenong, Epping and Melton – which all benefit from new transport infrastructure, government spending, strong private sector investment and rail links to the city – are well-positioned of capitalise on their relative affordability. They're also high population growth areas in the nation's highest population growth capital city.

HTW expects demand for inner-city apartments to rise in 2007. It suggests the completion of the Spencer Street Station, together with increased services and amenities at the western end of the CBD, we could see this area become more popular with investors.

"Traditionally, city apartments have shown strong returns, with yields often in the order of 5.5% to 6.5%, which we expect to continue and perhaps strengthen in 2007," says HTW.

Perth:
Mounting evidence of a struggling market

Perth's changing fortunes are aptly illustrated by ABS price data for the December quarter. Perth's median price rose 37% for the year (easily the biggest growth in the nation) but only 1.7% in the December quarter (below the growth achieved in Brisbane, Adelaide, Canberra and Darwin).

Another measure, provided by Australian Property Monitors, finds Perth prices rose 31% last year but only 0.9% in the December quarter.

And PRDnationwide Research notes in a February 2007 report: "The two most recent quarters have seen Perth price growth fall considerably as housing affordability issues become apparent and fears of an overheated market become more widespread."

Matusik Property Insights' monitor of price growth trends finds that most of the Western Australia markets are performing below trend on price growth. This includes all sectors of Perth, as well as boom markets like Mandurah and Bunbury. This confirms predictions in the past two editions of this report that the WA market is in decline after an extraordinary boom.

The only major exception for houses, according to the Matusik data, is Geraldton, which continues to perform above trend. Apartments in Mandurah and Bunbury, as well as Geraldton, have continued to perform well on price growth, according to Matusik, but Perth is now under-performing.

This is despite strong economic data. Perth added 30,000 to its population last year, well above trend averages, and its unemployment rate (at 3%) is well below the national average.

The big issue is the price of real estate. Perth is the most expensive city in which to buy an apartment and second only to Sydney on house prices, following several years of huge growth. Perth has also seen huge growth in residential rents recently. Growth of that magnitude was unsustainable, notwithstanding the strength of the state economy.

Figures from the Housing Industry Association show that sales of new homes in WA in the three months to February were 18% higher than the preceding three months – but 11% lower than the same time in 2006. New dwelling commencements in WA fell 10.2% in the September quarter and a further 2.3% in the December quarter.

The ANZ Bank, in its "Outlook for the WA housing market" report, notes that the economic fundamentals for WA remain strong. The state economy grew almost 5% last year, well above the national average of 2.8%, and business investment grew 37%, more than double the national average.

But the report says: "The housing market in the past few years has experienced remarkably strong prices growth, healthy construction and sales, and outstanding growth in housing finance. The performance has raised concern that the market is running too hot and is setting itself up for a major correction. Demand for finance has showed clear signs of cooling from the heady levels recorded in the first half of 2006 and building approvals have peaked."

The ANZ report notes that house price growth has driven affordability to a record low and Perth has pipped Sydney as the least affordable state capital. First-time buyers are being priced out the market, with finance to this group showing little or no growth in recent years. First-home buyers, as a share of total owner-occupier finance, reached a record low of 13% in the October 2006 quarter.

"Recovery in the penetration of first-home buyers is going to depend on improvement in affordability. Until this occurs, net new demand for housing will be satisfied increasingly via rental stock. New housing demand from new settlers from interstate and overseas will also more likely translate into higher demand for rental stock than to higher demand for owner-occupier dwellings."

ANZ says an over-supply of housing is emerging in Western Australia. Completions are expected to hit near-record levels next year and the surplus will get even bigger in 2009. "While this alone is unlikely to de-rail activity, weakened fundamentals introduce a vulnerability into the market should the more general economy falter."

There has been evidence of easing in demand for housing in the past six months and a flattening of prices is likely. "It is tempting to argue that given the extent to which house prices have risen in the past few years, that a price fall of some magnitude at some stage over the next year or so is inevitable," the report says.

ANZ says WA's greatest risk is a deterioration in local economic conditions, caused by a global slowdown, a collapse in commodity prices or a reduction in demand from China. Such events are "likely to impact negatively on house prices and land prices".

Sydney:
Gathering signs of recovery

It's been a long time since anyone could review the Sydney property market from a positive standpoint. But 2007 is looking more and more like the year of recovery in residential real estate.

The fundamentals underlying the market are more positive than at any time in the past four years. There is population growth, jobs are being created and the supply/demand equation favours investors.

And let's face it, Sydney is overdue for a turnaround. The news has been all bad for three years. As one example, home unit sales in NSW have halved over the past four years, with only 30,000 apartments sold in 2006 compared with 64,000 in 2002, according to the Real Estate Institute of NSW.

Rod Cornish, head of property research at Macquarie Bank, expects Sydney to move into a "stabilisation phase" some time in 2007, although three interest rates rises in 2006 haven't helped. Cornish says NSW is experiencing the strongest migration figures in four years and the affordability gap between Sydney and the rest of Australia is the narrowest in ten years. The vacancy/rental trends are also positive for a pickup in the market.

According to Australian Property Monitors, Sydney prices grew 0.5% in 2006 and 1.2% in the December quarter. It's not much, but it's much better than the previous trend of falling values.

PRDnationwide Research notes in a February 2007 report: "The Sydney market continues to hover on the brink of positive growth, with quarterly figures creeping just above or below the zero market over the last seven quarters. With Sydney prices still languishing, many investors are now picking the market to be ripe for investment as yields are showing improvement and the prospect of long-term capital growth becomes apparent."

Matusik Property Insights says most sectors in the Sydney housing market are now showing price growth above the trend of the past three years – which means, in effect, that prices have stopped falling and are beginning to show small growth. Both Inner Sydney and Outer Sydney are performing above trend with apartment prices as well.

Matusik's analysis of population growth and new housing supply indicates that Sydney is under-supplied. Matusik data also suggests Sydney has not yet seen meaningful rent rises and is due for some. This is confirmed by REIA figures which indicate Sydney was the only capital city not to have a major rise in median rents in 2006.

But BIS Shrapnel, which says rental markets around Australia as "as tight as a drum", predicts Sydney rents will rise 40% between now and 2010, including 5% in 2007 and at least 10% in 2008. "The extreme under-supply in the Sydney market will trigger a substantial and extended adjustment to residential rents … The cumulative increase in average rents in Sydney could be as high as 40% over the years from 2006 to 2010," says BIS Shrapnel is its Building Industry Prospects Bulletin .

In another BIS Shrapnel report, Inner Sydney Apartments 2006 to 2011, it predicts inner-city unit rents could rise 42% in the next five years.

Henry Wilkinson of HomeSearch Solutions says the strength of tenant demand is a feature of his work in finding investment properties for clients. "Every place I buy for clients, the line of prospective tenants coming through the door is enormous," Wilkinson says. "Managing agents give us a list of ten good quality applicants and it's a case of 'which one do you want to take?'. It's very difficult for people to get rental accommodation if they have just arrived in town or have just started a new job. They're really going to struggle."

Valuer LandMark White said in a November 2006 report: "With rising interest rates, low housing affordability, decreasing vacancies and growing rents, savvy investors will be scouring the market for opportunities which may spark some movement in an otherwise slow Sydney market."

Sydney is overdue for price growth as well. After three years of declining values across the city, including the higher-priced suburbs, Sydney showed a small amount of growth last year and appears ready to display some sustainable price recovery.

This is a common theme from property analysts: that Sydney has seen the worst of its market downturn and 2007 is likely to see the first signs of upside, though the market won't do anything spectacular.

The only major voice of dissent from that view is John Symond, head of Aussie Home Loans, who says the NSW housing market is so bad there won't be any recovery before the end of 2008. However, Symond has little credibility in my view: he's a media junkie who seeks profile by making outrageous statements.

Most of key data is positive for Sydney and NSW. For example, the number of unlet rental properties in inner Sydney fell from 4,600 at the start of 2006 to fewer than 2,000 by the end of the year, according to an article in the Sydney Morning Herald . "The number of available rental properties is at a six-year low and still dropping, forcing house-hunters to offer 20% above advertised rents," the SMH reported.

There are growing reports of rent auctions and tenancy hopefuls offering to pay well above the advertised asking rent to secure accommodation. Sydney Rental Search says the city is "definitely a landlord's market" and queues are forming at homes that become vacant.

This is partly an outcome of several years of low levels of new dwelling construction. Building levels in 2005 were 30% below those of 2002 and housing approvals have recently reached a 30-year low in NSW. Construction has fallen so far that renovations activity is worth more than new housing construction.

Industry forecaster BIS Shrapnel predicts NSW commencements will fall a further 3% in the 2006-07 financial year (to the lowest number since 1983, taking the decline in dwelling construction into a fourth year).

Sales of new houses and units in NSW rose 17% in February and sales in December-January-February were 5.6% higher than the preceding three months. That gives rise to some optimism.

Conclusion:
Confusion arises from muddled reporting

It's difficult for consumers to make sense of the real estate market because of poor reporting standards.

Media feels compelled to place a sweeping conclusion an every scrap of data that emerges from the industry – and the result is confused nonsense in newspapers and other news outlets. The market is surging one day and declining the next.

There is little proper analysis and a failure to recognise that one month's data on housing approvals or new home sales is meaningless, unless it is part of a longer-term trend. Because many articles about the market are written by novices, rather than experts, unrealistic significance is placed on the normal rise and fall in statistics from one month to the next.

Media believes we're all fascinated by property and any comment about real estate, no matter how silly or who makes it, can be turned into a headline.

A fine example came when Melbourne-based spruiker Michael Yardney, one of Australia's more desperate media junkies, came up with an idea for easy publicity. It consisted of taking a healthy annual growth rate, applying it to the current median house and projecting that several decades into the future – to come up with the potential price of a typical house in 30 or 40 years.

This produced some cheap headlines in a number of newspapers which should have known better. The Courier-Mail in Brisbane shouted that the average house in Brisbane would cost $16 million (in 40 years, if values grow 10% every year between now and then). The Northern Territory News went big with a front-page splash on Darwin's median house price reaching $8 million (30 years from now, assuming a very high growth rate).

I'm uncertain what the point of publishing this nonsense might be – other than to create a startling headline without effort. In journalism they call it making an omelette with one egg. In this case, newspapers made their omelettes with no eggs at all.

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