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Co-founder & CEO of AllenWargent property advisory.
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Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
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Wednesday, 18 September 2013
Labour market snapshot and the property markets
Experienced investors in real estate have always been well aware of that the labour markets on a macro and micro level impact the property markets. Ultimately, people are going to live close to where their jobs are and they need well-paid jobs to afford to buy houses. Thus, it makes sense to invest where there are a range of industries, strong jobs growth and real wages growth.
It's something Margaret Lomas highlighted in her book Investing in the Right Property Now:
'We are more than a decade into the 21st century and it's high time we began to act and think like we live in this century, rather than the last!' says Margaret. Investors today need to understand the dynamics of how macro and micro economies operate and how they affect the property markets."
This is very much true. I look through a wide range of factors when choosing a location to invest in. On a macro level, strong population growth is one. Jobs growth is another. I want to see real wages and household income growth and a diversified range of industries.
I want to invest in land-locked areas of cities where there is no land available for release so that the market cannot easily be flooded with new supply (which distorts median prices but does nothing positive for the value of existing dwellings). Additionally, I want there to be a wave of speculative investment capital hitting the location and property types I own in order that prices are forced up.
The thing to be wary of is experts selecting data to support their own previously held convictions about which is the city with the strongest fundamentals, growth prospects and so on. I know a lot about this, because I sometimes do it myself.
The Northern Territory only had a small absolute population growth at 4,200 persons in the year to December 2012 according to the Australian Bureau of Statistics (ABS), although with a state population of under 237,000 this actually represented growth of 1.8%. Darwin's median prices have been pumped up from around $200,000 to around $600,000 due to a cripplingly short supply in a remarkably short period of time.
Personally, I absolutely loved living in Darwin when I worked in the NT - it's one of my favourite cities - but the housing market is a law unto itself. From an investor's perspective, it's a case of 'dabble at today's prices at your own risk' for mine.
Tasmania's population, as noted, is essentially flat, increasing by 400 persons in the year.
The population of the ACT increased by 8,600 in 2012 to 380,000, but unfortunately jobs cuts make Canberra's property markets an unappealing prospect, as I discuss in more detail below.
Australian population growth of 394,200 persons or 1.8% in 2012 makes the country a potentially appealing prospect for property investors, but where are all those persons heading? To four states in particular:
With the exception of South Australia, these are very significant numbers. The population growth does not all occur in the respective capital cities, of course, although a large proportion of it does.
Weak labour markets
Sadly, Tasmania's labour market has been weak. The unemployment rate is very high in Australian terms at 8.2% and population growth is essentially non-existent. There are, therefore, few drivers for growth and the property markets are likely to remain weak.
Canberra is another example of a labour market which is expected to weaken. Unfortunately, thousands of jobs are likely to be cut. The numbers vary depending on the report and the source - the Canberra Times reported this week that 4,500 jobs may be cut in the city, which is a large number for a small city (population of only 370,000) with a small workforce.
Accordingly, SQM Research forecasts property prices to fall in Canberra through 2014.
I've already noted the existing and forthcoming unemployment issues in Canberra (ACT) and Tasmania. According to the Australian Bureau of Statistics (ABS), elsewhere unemployment rates are:
Western Australia's unemployment has been the lowest in recent times with mining activity and employment attracting thousands of people to the state each year. South Australia's elevated unemployment rate is becoming a worry.
Over the last 12 months, the following jobs have been added per the ABS:
It's all about New South Wales over the last few years, although the growth has actually slowed to 64,000 jobs from previously higher levels.
Western Australia's employment growth has been impressive, but has also slowed of late as the mining construction boom passes its peak and we shift towards the production phase.
South Australia, on the other hand, is now losing jobs at quite a rate for a relatively small population, and that is worrying for the outlook in that state.
The above numbers do not explain the disparity between NSW and SA clearly enough. The below chart from the Reserve Bank of Australia, however, does show the massive gap in employment growth between NSW (+200,000 jobs) and Tasmania/South Australia (flat) over the last three years.
Wrapping it up
As I said, we all need to be wary of people providing data supporting their own viewpoints. But with a booming population, thriving jobs growth, lower unemployment and a inadequate supply of appropriate dwellings, it's patently obvious to me that Sydney has by far and away the strongest fundamentals of any of the major city capital markets.
And that's before we even mention that around 50% of housing financing activity is now for investors. Investors from Australia and overseas (mainly China, reportedly) are snapping up properties on average in well under 30 days 'time on market', while auction clearance rates are hitting staggering levels.
Don't take my word for it, by the way: read SQM Research's Boom and Bust Report where they forecast growth of 15-20% next year in Sydney...and 20-30% if the economy recovers.
Photo: Louis Christopher of SQM Research explains to Kochie why Sydney may have a bumper 2014
On the flip side, South Australia is shedding jobs, has high unemployment at 7.1%, weak population growth, and has seen promised mining investment both shelved and scrapped. Therefore it is unsurprising that the market prices have barely budged since the Adelaide market was picked by some commentators as the city markets 'hotspot' capital of Australia five years ago. Melbourne, and now Sydney, will prove to have been comfortably the best selections over that timeline (Darwin also would have been a better pick).
I find it really odd that few commentators seem to ever discuss this apart from me (or maybe I just don't see the commentary?). I still can't see where this expected so-called booming property price growth in Adelaide is going to come from? Am I missing something? Can anyone enlighten me? Cancelled mining expansions and projects in the state are hardly going to help. Please explain?