What’s the outlook for Australian property in 2020?
With a strong start to the year, Australia’s property market is looking bright for investors once again. We expect house prices to rise substantially this year, led by double-digit gains in Sydney and Melbourne.
Having made a rapid comeback in recent months, home price gains are forecasted to reach as high as 15% in Melbourne and 14% in Sydney in 2020. The other Australian capital cities are expected to have low to mid single-digit price increases — up to 7% in Hobart, 6% in Canberra, 5% in Perth and Brisbane, and 3% in Adelaide.
Historically low interest rates, strong population growth and tight supply of housing are providing support for price growth. Sydney and Melbourne, in particular, are tipped to surpass their previous house price records towards the end of 2020.
Prior to the slump of the last two years, house prices were at their highest in 2017, with the average house costing $859,500 in Melbourne, while Sydney’s broke the 7-figure mark at a staggering $1.05 mil.
Australia’s economic growth is expected to pick up this year, but risks to that include the recent global outbreak of the Covid-19 virus, and damage from the bushfire crisis.
The Reserve Bank has already taken steps to boost a flagging economy, having cut rates late last year to a record low of 0.75%. Economists have predicted further cuts this year to stimulate growth and increase employment.
Demand from a growing population
Australia has one of the highest population growth rates in the developed world. The World Bank puts it at fifth place behind Iceland, Luxembourg, New Zealand and Israel, although the first four are significantly smaller countries.
The growth in population comes mostly from migration, which accounted for 62% of total growth, according to latest figures from the Australian Bureau of Statistics (ABS).
Although the number of residents continues to go up, housing supply has decreased. The number of completions declined severely last year, and construction activity is expected to remain weak going towards 2020/21, which will fuel a higher demand for housing.
While interest rate serviceability thresholds for most borrowers has been reduced, lenders are expected to maintain their more conservative approach towards assessing borrower income and expenses.
Hence, although a market rebound is expected, it is unlikely that we will see a repeat of the surge that lifted prices by about 75% in Sydney and 65% in Melbourne from 2013–2017.
Currently, the favourable exchange rate is opening a window of opportunity for Malaysian investors. The Australian dollar fell to a 10-year low against the Malaysian ringgit in February 2020, at RM 2.74 to the dollar.
Here is our investor’s pick of Australian cities for 2020:
Australia’s star performer, this state has the highest economic and population growth of the nation. More than any other city in the country, Melbourne sees a continuing increase in migrants each year. Its present population of 5 million is not far off from Sydney’s 5.2 million, and is set to replace it as Australia’s largest city in the next few years.
House prices made a comeback at the end of 2019, attributable to lower interest rates and easier credit conditions. Melbourne rose a total of 8.2% in the year to Jan 2020.
The demand for housing in Melbourne will increase due to the continued migration and tightening supply. This will support the rental market and push values higher.
Vacancy rates, historically lean in this city, are at a tight 2.1% according to data in as recent as January. Although Melbourne has the largest supply pipeline of apartments of all the capital cities, this has significantly shrunk over the past two years. The number of starting projects has decreased, and we have seen several sites converted to other uses, like hotels, offices and purpose-built student accommodation.
Sydney (New South Wales)
Sydney’s sentiment and market activity have picked up in recent months, and demand continues to improve on the back of lower interest rates and easier credit conditions.
House prices went up by 7.9% in the year to Jan 2020, and auction clearance rates are hovering at around 70%.
The city saw a period of strong supply that reached its peak in 2018. Supply has since dropped and it is likely Sydney will fall into a position of undersupply for the next two years, causing rentals to stabilize, and support price growth.
Infrastructure spending and increased commercial construction activity will bolster economic growth in Sydney over the next few years, with projects like the $45 bil WestConnex and $12 bil Sydney Metro well underway.
Brisbane’s population growth has increased over the past few years and is expected to remain strong, growing by about 2% annually.
Housing remains very affordable compared to Sydney and Melbourne. The recent drop in house prices here has been quite shallow compared to the big two cities, with local values only 2.4% below their peak.
Supply is already very thin, and there are fears of undersupply in the coming years, especially as the population continues to expand. Increased infrastructure spending from key inner city projects such as the $3.6 bil Queens Wharf and $5.4 bil Cross River Rail are expected to support jobs growth, migration and housing demand.
Vacancy rates have fallen to 2.4% in Jan 2020 since their 4.1% peak at the end of 2016. The improving rental market, with relatively high yields, is expected to draw more investor interest this year.
Perth (Western Australia)
After a long decline since 2014, property in Perth has become one of the most affordable in Australia. Vacancy rates have also fallen dramatically to 2.1% early this year since peaking at 5.5% in 2016, indicating a ripe environment for growth.
Early in 2019 we saw the state government follow the trend to introduce a stamp duty surcharge for foreign buyers, but this was pulled back by the announcement of a stamp duty rebate just a few months later.
The stamp duty rebate is limited to buyers of off-the-plan apartments, and will last until the end of this year. Investors should take advantage of this window to benefit from the stamp duty savings.
Perth’s local economy is expected to bounce back strongly over the next few years with a recovery in the mining industry, which will boost jobs growth, migration and housing demand.
Article by Ian Choong; Edits by VP
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