This week we have an overview of the Australian property market over the last 12 months. Has your state been a strong performer or just experienced a mediocre result? Michael Yardney joins us to share his extensive research of the State of the Market and provides us with some very interesting statistics.

Listen in to the podcast by using the player embedded into this page or read the transcript provided below. Enjoy!

PODCAST TRANSCRIPT :

Andrew Mirams (AM): Thanks for joining me. Sitting with mee today is Michael Yardney, one of Australia’s leading investment property analysts and managing director of Metropole Properties. It’s great to see you again Michael.

Michael Yardney (MY): Thanks for having me Andrew.

AM: My pleasure. The end of the financial year has just passed and I’m really interested to get your opinion on what’s happened across the markets, I guess, in the last 12 months but also where we’re at in the different property cycles. Metropole, of course, have offices in Melbourne, Sydney and Brisbane so I think you’re got some great insights into all those markets. So, where are we at? Let’s maybe start with Melbourne, our home city.

MY: When you have a look at what’s happened in the markets in the last 12 months Andrew, it’s a bit of a mixed bag because people said there’s been a property boom, some even say a property bubble. But its bit like me putting one hand in a bucket of cold water and the other hand in a bucket of hot water and saying on average ‘I’m feeling comfortable’.

Some parts of Australia’s property market have performed really strongly in the last 12 months and others have had a much more mediocre result. Every capital city has had some capital growth, but if you have a look back at the last 12 months, Sydney’s had about 15.4% growth. On average, a house in Sydney would have gone up well over a thousand dollars a week.

Melbourne came second in the last 12 months with 9.4% capital growth with houses just a little bit outperforming apartments last year. Brisbane had started off the year slowly but starting to gather some momentum now, it had about 7% capital growth. Darwin, which had a couple of bad years, is starting to pick up a bit and had 5.7% capital growth. Perth, again, has been a little bit flat at 5.2% growth. Canberra and Adelaide both did just under 3% in capital growth and Hobart 2.5%. So, those last 3 places, Canberra, Adelaide and Hobart, have actually not even kept up with inflation.

Our property markets have been mixed. Sydney and Melbourne were the prime drivers of capital growth and, in fact, all the others under performed a little bit so I see an interesting year ahead with probably not as much capital growth in the two big capital cities. But, there’s lots of green shoots that markets are being driven by. Low interest rates, strongish-increasing again consumer confidence after a bit of lag after the election, strong population growth and our households. We’re actually financially in a pretty good position so I see people still wanting to continue on moving house, upgrading, getting into the market and investing. I think we’ve got another interesting year ahead.

AM: Really interesting. When I talk to clients about the Sydney market, everyone says ‘Oh Sydney, it’s too dear in Sydney’. I guess they were probably saying that a year ago and they’ve missed out on 15% growth. It’s interesting because Sydney was probably playing a little bit of catch up where it hadn’t performed as well for a few years. Is that right?

MY: You’re right Andrew. Over the last 5 years Sydney’s only had on average 6.1% capital growth so that’s not astounding, that’s not bubble material. It’s acceptable and, in fact over the last 10 years, interestingly, Sydney’s been one of the underperforming markets. It hasn’t done well because between about 2003 and 2008 it actually stagnated and that followed on from a huge building boom, I guess, around the time of Commonwealth Games.

Sydney, you’re right, is doing some catch up and has still got levels of under supply, lots of demand outstripping supply, reasonably high yields but, again, it’s not just one market. The inner and middle ring suburbs are doing particularly well but the people are still struggling a bit in some of the outer western suburbs, Andrew.

AM: That can, obviously, come down to all the underlying economic data, doesn’t it? Like jobs and employment, manufacturing and the changes in the way that we earn an income.

MY: It is very much so. I think one is looking forward to seeing what segments of the market are going to do well. You’re right when you talk about manufacturing and jobs. I think those areas where jobs are increasing are more likely to be in IT, in services, in health, maybe in retail and the manufacturing industrial sectors are going to suffer a bit. Interestingly, they’re also the suburbs where probably people are struggling a bit with their mortgages already.

In the next year or two as interest rates go up, they’re the sort of areas that are probably going to lag behind and even maybe fall back a bit in property values, while those areas where people are a little bit more affluent, have a little bit more disposable income, in Sydney in particular but in all of our capital cities, are likely to be the areas that will be a bit stronger performing.

AM: But shouldn’t I rush out to the outer western suburbs because there’s going to be a new airport out there, Michael?

MY: Interestingly, people love investing where infrastructure’s happening because they think infrastructure…

AM: …It’s the next big thing, isn’t it?

MY: But it actually isn’t and we can show you example after example where freeways ended, in Melbourne, Sydney, Perth’s a great example with a freeway to Mandurah, and property values dropped. In Melbourne there was a freeway to Geelong and Geelong property values haven’t done particularly well. East Link in Melbourne hasn’t really brought our property values a lot further from the outer eastern suburbs. Yes, it does make places more accessible but still the majority of people want to live close to where the action is.

I think what’s going to drive our property markets in the next years more than ever is lifestyle. Lifestyle has always driven markets Andrew. When you and I grew up lifestyle was different. We wanted to live in the outer suburbs in the mansions but now our lifestyles have changed. We’re getting married later. We’re having kids later. More than half the households have only got one or two people in them and we tend to entertain outside and have coffee outside. Our lifestyles are different so our lifestyle requirements are different. We want to be near transport, near shops, near the cafes that you know about where you can go out and entertain.

AM: Those outer western suburbs aren’t getting any closer to beach still are they?

MY: No they’re not. No they’re not. I don’t think an airport or a freeways really going to make a difference.

AM: Yep. I think that’s sage advice for those people trying to chase the next big boom. Let’s talk a little bit about Melbourne, who obviously didn’t go as strongly as Sydney in the last year, but it’s still recorded some really good growth and, I think, at the moment it’s still quite a positive market to be in. Jobs are a little bit of an issue in Melbourne with, again, the change of the manufacturing and things like that, and some job losses or the changing economy, I guess, or the job market.

MY: Yes it is. One of the things that have kept driving the Melbourne property market is our population growth, which has been about 1.9% per annum. If you annualise that out Andrew, in the next 5 years our population is going to go up 10%. Where are we going to put them all? 60% of the overseas migrants are coming to Melbourne and Sydney.

AM: We’re going to go up 10% so we’re effectively going to put Canberra into Melbourne.

MY: If you think about it, Melbourne’s population is going up 1.9%. Just compound that by 5 and that’s 10%.

AM: Yeah. People that think properties are dear, again if we go back to the properties that are dear now, wait until there’s all of Canberra trying to move into Melbourne and all wanting to live somewhere.

MY: And most of them want to live in the same place.

AM: Yeah.

MY: They actually want to be where the action is, where the jobs are, near where facilities and transport are, and there’s a lot of construction going on in Melbourne, but a lot of the migrants don’t want to live in those new high rise blocks. Our State Planning Minister says he wants to Manhattanise Melbourne. Melbourne’s population is growing and we’re building, probably at the moment to be honest, a few too many properties but maybe not the right sort of properties. They have planned lots of new high rise towers. Come as a visitor now and come back from overseas in 10 years time and you won’t recognise Melbourne.

Even if half the properties that are on the drawing board are going to come to fruition, there’s a number of very, very high rise towers there and that’s probably not the way the average Australian wants to live. Too many of those and probably not enough of the normal, sort of, suburban home, suburban apartment, suburban townhouse that you and I want to live in.

AM: Yeah and they’ve been in the news, a little bit, of late about the quality of the build and the type of, I guess, the features that are unique, the living, the light and all of the sorts of add-ons, that you’d want in a good investment property, that these places have.

MY: Great point Andrew. Interestingly, as recent studies have shown, that 55% of properties in Melbourne, recently built apartments, wouldn’t be accepted overseas with regards to either the standard or the quality and a lot of them have got building problems and issues so I see a lot of those high rise buildings being the slums of the future, unfortunately.

AM: That’s staggering isn’t it? 55% and we call ourselves the lucky country and yet 55% of the places we’re building today wouldn’t be acceptable in…

MY: They wouldn’t be able to get planning approval for them in New York, in Hong Kong or in London.

AM: That’s staggering. Melbourne, we still like the inner ring. I’m really interested. I know one of Metropol’s philosophies…

MY: Inner-middle ring. The inner ring, I think, you’re too close to the CBD (Central Business District). You are going to get some spill over from all those new apartments. You drive down most of those main roads and there’s too many of those so very selective in the middle ring. I’d be going out maybe from 5 to 10 or 12km from the CBD rather than 0 to 5km from the CBD, Andrew.

AM: I guess that, sort of, follows Metropole’s mantra a little bit in that only around 5% of properties are investment grade properties, which is really important term, I think, investment grade.

MY: To me investment grade property’s one that’s going to outperform the averages with regards to capital growth and how we select those are based on demographics. In Melbourne there’s only 23 suburbs, we believe, one should invest in. In Sydney there are 19 and in Brisbane there are about 15. But even within those suburbs, Andrew, there are streets you would invest in, streets you would live in and especially streets you wouldn’t.

Narrow it further; they’re the sort of properties that would be in strong demand by owner occupiers. To be an investment grade property’s not one that an investor wants, it’s one an owner occupier wants because they’re the ones, if you lend money against them; the banks will send their valuer around and will be happy to refinance any day.

AM: Absolutely.

MY: They’re the sort that will be in strong demand. And in my mind, maybe something that’s a bit scare, a bit special, a bit different, a bit unique not another ‘me too’ property.

AM: Yeah, sure. Let’s maybe move up north to our banana bender friends in Brisbane, they’ve had some interesting times up there. Obviously, we had 200 year events in consecutive years with the floods, which obvious put some damp, sorry to be coy, some dampness on their markets.

MY: Well said.

AM: But Brisbane’s always been, and I think with the growth in Melbourne and Sydney, you get a little more property for your dollar in Brisbane but is starting to experience some good growth to.

MY: Brisbane’s had reasonably good growth with 7% growth over the last 12 months. The challenge Brisbane’s had, with not just its economic issues and the weather related issues, but it hasn’t had the population growth that it enjoyed a couple of year ago. In the past, a lot of the people came from the southern states for jobs in Queensland and a lot of immigrants came from overseas for jobs in Queensland. Not necessarily the mining industry but in the past it was more related to construction industries and to the hospitality industry.

Brisbane isn’t getting the population growth that it enjoyed, and definitely not from the southern states, and that’s one of the reasons why it’s lagged a little bit. But, it is starting to catch up a bit now and now the Brisbane property market has definitely become hot again in those inner and middle ring suburbs, in Brisbane. That’s been helped by the infrastructure that’s been built there a couple of years ago, making some suburbs a bit more accessible to the CBD.

AM: Got some good road networks, and that, now put in, haven’t they?

MY: Government has been very smart doing it, getting ready for the population wave and that’s the right way to do it. The Brisbanites are enjoying much better road and infrastructure facilities, and in Sydney and in some cases Melbourne.

AM: Yeah. I think they have planned it quite well for the future, haven’t they?

MY: Yes they have.

AM: Okay. Just a couple of other markets that we might just touch on briefly, Darwin and Perth each had over 5%, quite interesting markets. I’m not sure whether you do…

MY: Very different markets. Darwin is very much driven by investors so while Darwin was one of the star performers over the last decade, for the last 2 or 3 years it’s underperformed and, to me, it’s not an investment grade market because it’s too small and too much driven by, not owner occupiers or by people wanting to move to Darwin to live, but driven by investors. So, that’s the sort of market…

AM: It’s based more on seasonality.

MY: It is.

AM: It’s interesting that you say it’s underperformed in the last couple of years when our biggest capital cities have now started to perform or outperform.

MY: Perth’s also been the other outstanding market for the last decade, which has performed well because of population growth and the mining boom. It actually has had a good run this cycle but it’s now starting to run out of steam a little bit driven by a lower economic growth, lower population growth so it’s still going to do okay. I think interestingly, most of Melbourne, Sydney, Brisbane and Perth are probably, this coming financial year are, going to do about 5% to 7% in capital growth. We’re not going to get double digit growth in Melbourne and Sydney again this year. I hope we don’t because if we do that’s really unsustainable, Andrew, and it’s likely that the good times are going to end up in difficult times.

AM: That’s with all our so called bubble experts, and if you and I had a dollar for everyone that’s mentioned a bubble we wouldn’t have to work anymore. But, I was going to ask you about the thoughts on the next 12 months. We’re really thinking a little bit more moderate growth rather than the extreme growth?

MY: I believe interest rates are going to remain low, stimulatory, because of the Reserve Bank and, in fact, the government and it’s budget’s now counting on, you and me, consumers to spend a few more dollars and keep the economy going. Manufacturing isn’t. Exports are not doing as well because of the Australian dollar. Mining boom is slowing down and going to the next phase. The economy has to be picked up by something and they’re encouraging us to do that with our spending.

AM: Well, the mining boom’s interesting, isn’t it? Because the mining investment boom might have stopped, where people have spent an enormous amount of money on the infrastructure to put in the mines, but the mines are pulling out as much, if not more or better grade material than they ever have.

MY: They are and that’s going to continue on but what the governments interested in is GDP (Gross Disposable Income)and spending and, I guess, what is going to happen for retailers, shops, for jobs and they’re hoping that’s going to continue on because you and I are going to spend because they’re keeping us stimulated with lowish interest rates.

They’re hoping it’s going to be a construction recovery this time around by new home construction and people like me and you upgrading our homes, buying new homes, renovating, buying carpets, fridges, televisions and what’s likely to keep the economy going.

That’s also going to be pretty good for our property markets so I see another 18 months or 2 years of this cycle before rising interest rates are going to stop this cycle. That’s what’s stopped every cycle, it happened in 2010, happened in 2003 and it happened in the 1990′s. Eventually, our economy does a bit too well and the Reserve Bank puts on the brakes with rises in interest rates.

AM: Yep. Okay. I think that’s a pretty indication and again we’re not telling you that’s what’ll be. There just forecasts.

MY: Andrew…

AM: If we knew, it would be a whole lot easier…

MY: …that’s right.

AM: …to invest.

MY: Exactly right. That’s what our current research shows. When we had this chat 6 months ago we thought interest rates would be very different to what they are today and that they would have been going up even sooner.

AM: Agreed.

MY: That’s on the best assumption today. When we sit down and have a chat on where we are in 6 months time, let’s look back and see how right we are.

AM: Yeah. I think that’s a great guide and that’s why I go to one of Australia’s leading investment property experts. Michael Yardney. Thanks for joining me today Michael.

MY: My pleasure Andrew.