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Peter Spann’s Property Investment Forecast 2014

Peter Spann’s Property Investment Forecast 2014

by Peter Spann

All the signs are here that 2014 could be at the beginning of another wave of Australian Property Profits for those who are astute enough to put in the work to find the suburbs set to grow.

2013 Wrap Up

Generally it is accepted over many years that Sydney leads the Australian property market into a new growth cycle.

This was certainly the case in the 90’s and early 2000’s.  When Sydney grew, the rest of the nation followed.

Putting aside all the rivalries and my beautiful view of the harbour as I sit here writing this, Sydney is the economic hub of Australia and that attracts population simply because of depth of jobs, and immigrants are more likely to settle in Sydney than anywhere else.

Melbourne has a depth of old money but it’s “new money” that gets booms going and a lot of that is found in Sydney (and now, more and more the resource hubs around the country).

So Sydney achieved 12.5% growth across the board in 2013, leading the nation’s capital at 8.9% with Melbourne coming in at 2.6%. 

 

No surprise that after Campbell Newman’s widespread sackings, and the slowdown in the resources sector that Brisbane was the laggard of the state capitals at just 0.8%.

Capital City 2011 2012 2013
Sydney -1.2% 0.6% 12.5%
Canberra -1.6% -1.6% 8.9%
Adelaide -3.4% -3.5% 6.6%
Darwin -3.7% 8.6% 2.8%
Melbourne -4.4% -4.4% 2.6%
Perth -5.1% 3.5% 1.6%
Brisbane -6.1% -0.8% 0.8%
Hobart -9.1% -4.6% -1.4%
All -3.4% -1.1% 8.0%

 

What surprised most people was that lifestyle suburbs were leading the charge.  I followed the same trend myself by moving to the beach so it came as no surprise to me.

And new money was quick to upgrade after the worst of the GFC seemed over and the money started flowing again.

Vaucluse is the most expensive oceanfront suburb in the country, with a rise in median house price of 12.5 per cent over the past year to $3,854,468 and 114 properties sold.

2014 Outlook

As investment banking comes back, industrialists start making money again and consumer confidence returns the most desirable, trendy, and lifestyle oriented (beaches, coffee culture, great shopping high streets, etc) suburbs are likely to lead the charge in growth while the flip side, highly affordable suburbs and high yield suburbs will do well too.

The key will be quality.   This year the cream will rise to the top, and by that I don’t mean the most expensive, I just mean that people in general will be looking to upgrade their lifestyle – rent to own, own to own better.

So even if it’s a cheap suburb people will be looking to get the best they can afford.

Low interest rates will continue to make residential property look attractive from both a growth and yield point of view.

Last year’s NSW average gross rental yield sat at 4.9% with quality properties experiencing higher.

Qld average gross yield was 5.3% and Vic came in at 4.5%.

With one year fixed loans sitting at around 4.7% it’s easy to see why property is looking so attractive.  On a straight yield to interest cost comparison most of the capital cities would get you a neutral cash flow immediately.

SQM Research indicates the implied gross rental yield for a house in Sydney is around 6% leading to a potential cash flow neutral or indeed positive return including all costs.   If you include potential tax deductions this would be cash flow positive for most people.

Banks have relaxed their lending criteria’s.   I have seen offers from banks of 5% deposits, up to $2,000 in cash to switch lenders, discounted interest rates (up to 1.5%) for the first year of borrowing, and two to three year fixed rate loans lower than the standard variable rate – these are happy days for investors shrewd enough to take advantage of the offers and not over stretch, remembering that rates will have to return to between 7% and 9% sometime, if not for a few years.

Imagine this scenario:

Unit Price $500,000

Borrowed Amount: $400,000

Financed at 4.39% fixed for one year from Newcastle Permanent (Source:  Newcastle Permanent  website)

Total interest cost: $338 per week

Costs at 1%: $96 per week

Rental income at 6%: $575 per week

Total net cash flow: $141 per week (pre tax)

The average Australian earns $57,460 per year.  (Source: ABS)  If that property had been held last year in Sydney it would have also provided its owner with $62,500 in capital growth – or more than most people earn working for a crust.

And presuming that investor was working and could claim tax deductions interest rates would need to go up around 2% per annum before the property would go cash flow negative.

That’s a very attractive proposition for most investors.

So these three factors:

  • Ease of monetary availability;
  • Attractive real net yield; and
  • Returning Capital Growth

Are likely to drive housing prices across capital cities this year and indeed for a little while yet.

Where to buy – Sydney

High profile Sydney Real Estate agent John McGrath CEO of McGrath Estate Agents predicts 5-10% growth for 2014.

He goes on to confirm that lifestyle will top the list saying “The best performing markets are likely to be beachside and inner city suburbs”.

“The inner west area south of Parramatta Rd will benefit with Petersham, Stanmore, Dulwich Hill, and Summer Hill performing well.  Ironically, the best bargains will be in areas like Palm Beach and Whale Beach”.

 

Let’s all move there, after all median prices are around $2.2m down 4.8% last year!   I see his point though – prices in those suburbs were shot to pieces as new money rushed to sell at any cost their trophy beach houses.   John says, “They have been oversold in recent years and there is a 12 month window to get value there.”

John builds on a theme familiar to my regular followers about looking for improving infrastructure and says,  “The new rail link to the northwest will boost the Hills district and suit suburbs like Rouse Hill, Castle Hill and Bella Vista.

The new inner east light rail will benefit Kensington and Kingsford, as will the influx in Chinese buyers looking to purchase close to major educational institutions.”

People will be looking for value so investors should stick below $1 million, in fact Peter Spann’s rule of thumb around pricing is to buy at or below the median price which for Sydney is around $640,000.

People will pay to live near the beach with Bondi and Coogee looking to benefit and as large Corporate re-staff inner city boltholes like Kirribilli and Balmain start to tick boxes.

Alexandria
Artarmon
Balmain
Bella Vista
Bondi
Campsie
Canterbury
Castle Hill
Coogee
Darlington
Dulwich Hill
Epping
Freshwater
Gladesville
Homebush
Kensington
Kingsford
Kirribilli
Marrickville
Menai
Petersham
Roselands
Rouse Hill
St Peter’s
Stanmore
Summer Hill
Wentworthville
Westmead
Wiley Park
Willoughby

Where to buy – Melbourne

Melbourne didn’t suffer as badly as Sydney post GFC and even saw increases in 2010 and 2011.  2012 and 2013 were tougher years for Melbournian investors and they are likely to be outdone by their Sydney cousins again this year but there will still be good buying.

Prestige suburbs such as Camberwell, Toorak and Hawthorn had seen improvement in their prices by 10 to 15 per cent and may lag better value suburbs for investors.

Some areas in the inner bayside such as Garden City in Port Melbourne still remain  undervalued.  Homes were fetching a price of about $800,000.

Melbourne hot suburbs are likely to include affordable Thomastown and Epping (house median price of $388,000, while units were priced at $296,000) where prices are proving to be popular with first home buyers.  Rents sitting at $330 (4.9%) per week on average look attractive as well.

The $500k to $750k market is likely to have strongest growth so consider suburbs like Newport (median price $668k) and Yarraville (median price $640k) considered undervalued by experts.

Burwood
Clayton
Coburg North
Collingwood
Epping
Flemington
Footscray
Garden City
Glen Waverly
Newport
Reservoir
Ringwood
St Kilda West
Sunshine
Thomastown
Williamstown
Yarraville

 

Where to buy – Brisbane

With the Qld economy stalling and still suffering post-flood, Government cutbacks, and the slowdown in the resources sector it is a much harder proposition to pin point where growth is likely to occur, however 2014 is likely to be a much better year for investors for all the same reasons with growth likely to be in the 3-5% bracket.

 

In addition Brisbane’s high popularity with internal immigrants and relative affordability still makes it a popular choice and stock levels have been declining for some months.

This all looks slightly more positive for the year ahead.

Albion
Alderley
Chermside
Coorparoo
Hendra
Kedron
Keperra
Mt Gravatt
New Farm
Nundah
Redcliffe
South Brisbane
Springwood
Stafford Heights
Toowong
Underwood
Woolloongabba

 

 

“The Reserve Bank isn’t worried about a housing boom – not yet anyhow. Still, it is warning investors not to pay over the top and to realise that property prices can go up as well as go down,” he said.

Mr James said home construction was now lifting to meet higher demand, and this should ease the growth in home prices.

With such a significant increase, there is a question as to whether the Sydney market can sustain this level of growth in 2014.  Notably, all capital city dwelling values except Sydney remain below the most recent peak. It is expected that prices will continue to experience growth; however values may be more closely aligned with wage price growth in 2014.  Deloitte Access Economics forecasts suggest wage price index growth may be slightly below the 10-year average at 3.4%.

The Reserve Bank of Australia’s (RBA) cash rate setting should remain accommodative to household lending, as a result of the moderate economic forecast for 2014/15.  This will further support dwelling prices, however if growth in Sydney and Melbourne continues at an unsustainable pace the RBA may have to adjust its settings accordingly, albeit for a short period.  In terms of affordability, the interest rate cycle has done more than offset dwelling price growth in most markets.  We expect that a supportive interest rate environment will continue to maintain affordability within markets where price growth remains at a sustainable level.

Risks

  • The primary risks would seem to be interest rates and prices;
  • If growth in Sydney and Melbourne continues at a similar pace to last year the RBA may have to increase rates, even for a short time to put the brakes on – this would impact yield and possibly turn a cash flow positive investment into a cash flow negative investment – build in a sizeable buffer;
  • Wage growth may slow – what people earns determines what they can afford both as investors and renters.  Deloitte Access Economics forecasts suggest wage price index growth may be slightly below the 10-year average at 3.4%;
  • Greater slow down in manufacturing or resources.   Resources have already slowed considerably and sates like WA and Qld, used to strong growth are now feeling the pinch.  This decrease is likely to continue however if it accelerates and if other sectors were to cool due to global factors this could impact housing;
  • Cuts in Government spending – Liberal Governments around Australia are making it their mission to balance budgets and bring them rapidly into surplus (despite any real evidence that economic rationalism works).   In addition they have clearing indicated they will not prop up companies (like Ford and Holden) even to save employment.   If people get afraid for their jobs and consumer confidence lowers the “lifestyle upgrade” effect I was talking about will come to an end;
  • Tightening money availability – all of these factors would increase bad debt and in this part of the cycle banks would act rapidly and return to tight lending criteria, stalling investment growth.

However on balance of probabilities property looks set to rise again this year in all major capitals provided investors act sensibly.

What about the doomsayers?

People like Harry Dent and other doomsayers have been predicting a property crash in Australia since 2005.  One of these days they might even be right if they hang in there long enough.  I have endeavored to explain numerous times why the Australian property market is different to the US but no joy – they like to stick to their song sheet.  There’s always ups and down in the market and you’ve got to be prepared for those but the chances of a complete residential property market collapse would be infinitesimally small.

Fact is the Australian residential property market has displayed it’s usual long term pattern over the last ten years.

ie:  Growth spurts of two to three years where property can go up in value dramatically, followed by years of inactivity and flat growth followed by another spurt followed by Sydney and Melbourne prices, and luxury leisure areas prices falling followed by years of inactivity followed by another growth spurt and so on.

And within that pattern there are always various suburbs, and ares that will buck the trend – rise when the rest of the market is falling and fall when the rest of the marketing is rising.  That’s why your investment research needs to be spot on and your selection criteria needs to be bullet proof.

 

 

Profit From the New Property Boom

Find out about Peter Spann’s exciting new On-Line Property Investing Course Property Pay Day:

http://www.propertypayday.com.au/property-pay-day-2/

original-logos-2014-Jan-6759-713028

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Written by Peter Spann

Peter Spann – Film Maker | Director | Business Coach | Writer | Public Speaking Coach | Presenter | Investor.

Click Here  to learn about my business services.

© Copyright: 2014 Peter Spann – All rights reserved

 

© Copyright – 2013 – Peter Spann – All Rights Reserved

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