Cities not created equal

The ultimate barbeque stopper, Australia’s property market is a seemingly constant source of anxiety and discussion: where will it all land?

Conversations about Australia’s residential property boom tend to focus almost entirely on Sydney and Melbourne – with some justification. The latest CoreLogic Home Value Index shows Sydney’s prices rose 12.4 per cent for the year ending 31 July and Melbourne’s grew by 15.9 per cent.

But Sydney and Melbourne are not the whole story. Other parts of the market are performing quite differently. CoreLogic’s data, for example, shows that Perth’s prices have fallen 10.2 per cent and Darwin’s 14.5 per cent since both peaked in 2014.

That said, home prices across all Australian capital cities combined continue to rise, edging up by 10.5 per cent over the year to 31 July.

CoreLogic research analyst Cameron Kusher says the annual growth rate for residential property has slowed from its recent peak of 12.9 per cent in March; but that doesn’t mean the boom is over.

“While value growth has slowed it continues to rise at a double-digit rate,” Kusher says. “Our view is that the rate of growth will likely continue to slow values will still be rising, just at a more moderate pace.”

Enter the government

Beyond supply, the market is also affected by changes to government regulation.

Housing is becoming increasingly unaffordable, particularly for young Australians, and the regulatory response has largely been targeted at cooling the investor market and encouraging more owner occupiers.

“The pendulum is swinging back towards home occupier and first home buyers.” - Real Estate Institute of Australia president Malcolm Gunning

At the behest of the Australian Prudential Regulation Authority, mortgage lenders have been tightening their practices on interest-only loans to investors and are charging investors higher interest rates.

Other measures, announced in the May federal budget took aim specifically at foreign investors. These include limiting foreign ownership in new developments, charging a vacancy tax and tightening rules on capital gains tax avoidance.

Real Estate Institute of Australia president Malcolm Gunning says the combined affect has been to lower foreign investment with a corresponding rise in first-home buyer activity.

“The pendulum is swinging back towards home occupier and first home buyers,” Gunning says. “They are able to secure reasonably competitive loans at lower interest rates than investors who they compete against within the market.”

Where will it all land? And will it land hard?

CoreLogic expects value growth will slow and maybe even “go moderately negative” in the next few years, particularly in Melbourne and Sydney.

Kusher says Canberra and Hobart values are likely to keep growing “fairly robustly” in the short term, Brisbane and Adelaide can expect moderate growth while Perth and Darwin “still have a way to go before value rises return”.

What’s next for investors?

Mercer financial adviser Meg Rennie says there are still pockets of affordable housing stock suitable as investment properties in most capital cities, including Melbourne and Sydney.

“For instance, many people have their eye on Melbourne’s western suburbs where public transport is fairly good and roadways are constantly improving,” Rennie says. “Scarcity drives prices up and there remains scarcity at the lower end of the housing market and savvy investors will be prepared to branch out and look at those areas as always.

“Investing in apartments is clearly not one of those areas with many apartment prices falling.”

This article first appeared on the website of Mercer, our superannuation partner.