2016 will rightfully be celebrated in South East Queensland (SEQ) as the year the skyline was filled with cranes. The government induced construction boom, combined with a sustained period of investment, has created the right conditions for a flurry of activity. This is not just isolated to SEQ, this has been an Australia wide phenomenon. Despite this the market is turning, albeit slowly, back to the owner occupier market.
Finance Trends for Australian Residential Property 1991 - 2015
The above graph tells us three really important things about where the current market sits nationally in its cycle and provides an indication as to the strength of the overall economy. Clearly States and cities will differ, but the overall sentiment has merit.
The first point worth noting is that despite all of the home renovation shown, the market share of dollars spent is declining. For many reasons, this is an important piece of data as it typically reflects a growing confidence in the economy. When the economy has been flat or consumer confidence waning, people are more likely to stay at home rather than extend their mortgages by buying another property. So on this front, there is a positive that emerges despite the fact this sector is getting smaller.
The second point worth noting is that the investment peak was in June 2015 at $1.7 billion dollars and is now down to $1.36 billion. There was a small increase in November over September, but the trend still looks to be declining. What this is likely to translate into is the market now changing its design profile for new buildings as they push the owner occupier market. The challenge however will be to re-engineer and design these buildings to truly reflect a product an owner occupier is happy to live in. This should not be seen as a pointed dig at the medium rise and high rise market, this comment sits very firmly with many of the townhouse projects that have been built in the middle ring suburbs and those tiny little houses on postage sized lots found on the absolute fringes of cities. The tightening of capital will mean that many buyers become more discerning.
The third highly relevant point is that the market is moving back to an owner occupier cycle. The owner occupier cycles are largely more sustainable and flatter in their cycles the credit fuelled asset binges. The type of binges we refer to as "Lemvestment"… investing like a lemming by following the crowd. The result usually being less than successful outcomes and usually far too late into the cycle to avoid the cliff that most will fall over.
The owner occupier market whilst arguably less rational in the respects of being an emotional purchase, it is however far more stable. It doesn’t rely on disposable income, forward projections of rent due to prolonged construction cycles and will actually be used by the people buying it. An inspection is generally carried out by the individual(s) rather than purchased online or at a seminar. There is a lot to like about this stage of the cycle.
So what is the conversation yet to be had? In South East Queensland it is already being had around the potential oversupply of apartment accommodation. We won’t add to the supply side of the conversation apart from saying that there will be problems, the depth of those problems are not yet fully known and those secondary sites and secondary product types will suffer significantly. The contagion will spread to the established apartment market as tenants transition from old to new. Enough said.
The conversation that will start to reach prominence in 2016 will be the rental rates and vacancy rates. Here’s a snapshot of Brisbane’s inner suburbs.
A quick summary demonstrates the following;
One bedroom apartments in the above postcodes have experienced the following trends with regard to their weekly rents;
- 4 remained unchanged
- 6 have improved and
- 6 have declined
Two bedroom apartments in the above postcodes have experienced the following trends with regard to their weekly rents;
- 1 remained unchanged
- 8 have improved and
- 7 have declined
Three bedroom apartments in the above postcodes have experienced the following trends with regard to their weekly rents;
- 1 remained unchanged
- 5 have improved and
- 8 have declined
The reality of the above information is that the supply of new apartments is far from reaching any form of critical mass through settlements and yet rents are already starting to soften in many suburbs across many different product types. Clearly though the one and two bedroom apartments thus far have proven to be more resilient.
So the conversation that is yet to be had in any meaningful form is the state of the rental market. In 2016, particularly the latter half of the year, we would expect that this will be a more animated topic of conversation that flows through into 2017. Many developers are already on the front foot with the short term outlook having subscribed to our highly detailed Apartment Market Report and are well prepared for the year ahead
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