Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 16 March 2016

Vacancy rates fall

Race to the bottom

It is almost as if some of the media outlets and bloggers are in competition with each other to write the most hysterically emotive property market beat-ups these days.

Next week, the ABS will release its Residential Property Price Indexes, and sadly the reality of realty is likely to be much more boring. 

Since the thid quarter of 2008 the cash rate in Australia has fallen from 7.25 per cent to 2 per cent, a huge downward adjustment which would obviously be reflected in rising dwelling prices sooner or later.

As expected, following years of underperformance and under-construction, Sydney was the first to rip with prices up by 82.7 per cent over the eight years or so since that time, with Melbourne following to a less dramatic extent seeing its prices rising 51 per cent.

Elsewhere, the increase in prices has been far more subdued to date.

Next week, we might expect to see the ABS index dip moderately in Sydney, not due to a general decline in prices as such, but rather because by December punters had ceased engaging in the maniacal bidding frenzies which had seen prices rise by another 20 per cent in just a year.

More timely indicators including auction clearance rates in the 75 to 85 per cent range and on-the-ground experience suggests that inner Sydney prices are again experiencing robust growth in 2016 in the eastern suburbs, inner west, and lower north shore, though the outer suburbs and Hills District look to be weakening and prices fading.

The other capital city markets presently in a downtrend include Darwin and Perth, with dwelling price indexes down by 2 per cent and 3.3 per cent respectively over the year to September.

Despite a persistently weak local economy, it seems likely that Hobart dwelling prices could have popped higher in the final quarter of 2015, with the rental market having gradually become taut over a long period of time. 

The most interesting aspect of next week's release will be to see the extent to which dwelling price growth has rippled out to Brisbane, Canberra, and Adelaide.

Prices in Brisbane have been rising steadily for 13 consecutive quarters, and in Canberra and Adelaide for 10. 

Markets steady

Despite widespread talk of fragile capital city housing markets, demand for finance generally looks to be fairly solid - if softening - at the moment, with Australian Finance Group (AFG) reporting a surge in lending business share to Commonwealth Bank in February, particularly for fixed rate lending.

In terms of what actually could trigger a significant capital cities housing market correction, the usual candidates are high interest rates, oversupply of dwellings, and high rates of unemployment leading to widespread default. 

Tight interest rates are off the table as a trigger the foreseeable future. Indeed, analysis by the Reserve Bank of Australia (RBA) showed that the majority of borrowers are in extraordinarily good nick, building up solid buffers thanks to low interest rates and reflected in low delinquency rates.

Yesterday, SQM Research released its latest vacancy rates figures, which showed that despite masses of development activity the Melbourne market has continued to tighten, with the reported vacancy rate in February now down to 2.0 per cent, well down from 2.3 per cent one year ago (and 2.4 per cent in February 2014).

This may be something of a surprise given the long and ongoing ramping up of construction and supply, but it seems that with strong population growth the demand for housing in Melbourne has simply remained very strong, while the largest cities are now experiencing a huge influx of international students that is not easily captured by most data series. 

Sydney's vacancy rate has declined from 1.7 per cent to just 1.6 per cent over the past year. 

In February vacancy rates fell from 2.7 per cent to 2.5 per cent in Brisbane, and also ticked down in Adelaide, Darwin, and Canberra, while Hobart remains the tightest market of all at just 0.9 per cent.

Year-on-year vacancy rates have declined in Sydney, Melbourne, Canberra, and Hobart. The result has been upward pressure on rents in Melbourne, Canberra, Hobart, and even pockets of Sydney.

There were also slight improvements in vacancy rates in Perth and Darwin, although these remain elevated, resulting in declining rents over the past year.

Despite high vacancy rates in the 4 per cent range or higher at times, most indices show that dwelling prices in Perth and Darwin haven't really declined that much at all to date.

Arguably this reflects the fact that most households don't readily sell property for less than they bought it for unless the outcome is forced upon them by unemployment, a pressing move, or an inability find a suitable tenant in the case of some landlords.

The one factor which could feasibly trigger a significant capital city housing market correction is unemployment rates heading towards double digit levels.

Although both Adelaide and Hobart have had dalliances with unemployment rates in the vicinity of 7 per cent or above, generally unemployment rates have fared better than most forecasters expected.

Even in the face of the inevitably huge resources construction downturn, the trend national unemployment rate sits at a 27 month low of just 5.84 per cent.

The Reserve Bank of Australia forecasts the unemployment rate to decline steadily over the next few years to 2019, with confidence intervals suggesting that an unemployment rate beginning with anything higher than a '6 handle' is an unlikely outcome, if not remote.

The February Labour Force figures will be released tomorrow.