AFR Article 19 December 2021.

Housing market With many suburbs already hitting record highs, investors need to conduct thorough research to avoid paying above market value. Nila Sweeney highlights 11 areas with potential.

The housing market is predicted to slow significantly in the year ahead and even contract once interest rates start rising later next year, but there are plenty of opportunities for investors looking to cash in on the next wave of growth, experts say.

The rapid rise in home prices also forced many aspiring homebuyers back into renting, fuelling a surge in demand for rental accommodation.

During October, the vacancy rate fell to a decade low of 1.6 per cent nationwide, SQM Research data shows.

‘‘I think it’s a good time to invest because money is still cheap and people have a lot of disposable income,’’ says Victor Kumar, a buyer’s agent specialising in investment property at Right Property Group.

‘‘The greatest catalyst for growth is yet to come – the reopening of the border and restarting immigration. So if you’ve bought the right property in the right area, you’d do well. You just need to be careful as to what and where you’re buying.’’

With many areas already hitting record highs, investors need to conduct thorough research to avoid paying above market value, says Peter Koulizos, program director at the University of Adelaide’s School of Architecture and Built Environment.

‘‘The main risk is paying too much for a property, with so many people paying ridiculously high prices for property at the moment,’’ he says. ‘‘Once this boom is over, property prices will flatten, and in some locations may dip slightly. You don’t want to be in negative territory when the market slows.’’

It is also important to focus on the long term, not on small price movements as they tend to be immaterial over a decade, says Doron Peleg, co-founder of buyer’s agency BuyersBuyers. ‘‘Try instead to think about where prices will be 10 years from now.’’

So which areas offer potential for strong capital growth and rental returns? Here are the experts’ top picks.

Wynnum, Brisbane: Pete Wargent, cofounder of BuyersBuyers, picks Wynnum for its good transport links and city access, proximity to water and desirability for buyers and renters alike. ‘‘Rental vacancy rates are very tight in Wynnum, at just 0.5 per cent, and we expect rents to rise strongly in 2022 and beyond,’’ he says.

Carrara, Gold Coast: ‘‘The rental market on the Gold Coast is very tight due to strong internal migration. With rents rising quickly, the market is attractive for landlords,’’ says Wargent.

‘‘Rental vacancy rates are extremely tight in Carrara, at just 0.3 per cent – as close to zero as you’ll likely ever see – and we expect rents to rise strongly in 2022 and beyond.’’

Buderim, Sunshine Coast: ‘‘Buderim has a fine, elevated position yet is still relatively close to the beaches,’’ says Wargent. ‘‘The centre of Buderim has a strong community vibe and attractive small-town feel.’’

Rental vacancy rates are tight, at just 0.6 per cent, and rents are set to rise strongly in the near to medium term.

Croydon, Melbourne: ‘‘The suburb has strong connectivity and transport for the city with its bus and rail links, and has homes on attractively spacious blocks of land, which will appeal to families,’’ says Wargent.

Rental vacancy rates are tight, at just 0.5 per cent.

Campbelltown, Sydney: Affordability will begin to bite for houses in Sydney’s top-performing suburbs next year, but there are still suburbs and pockets where prices have not yet soared out of reach, says Wargent.

‘‘Campbelltown to the south-west of Sydney covers a large area, and buyers need to choose their asset carefully, but there are still potentially attractive entry points for buyers looking for detached-house investments,’’ he adds.

Burleigh Waters, Gold Coast: Units are not cheap, with the median at the end of November touching $650,000. But demand is high relative to supply, says Jeremy Sheppard, research director at Select Residential Property. ‘‘Units spend about a month listed for sale before being snapped up. That’s about three times faster than the long-term, national average advertising period,’’ he says. ‘‘Median rents have climbed an impressive 25 per cent in the last 12 months taking the typical yield up over 5 per cent. A tight vacancy rate of 0.2 per cent should lead to even further rent rises,’’ he says.

Fairy Meadow, Wollongong: More than 40 per cent of units listed for sale are to be sold by auction, indicating strong demand from buyers.

‘‘There is a strong probability this suburb is about to enter its next growth phase,’’ says Sheppard. ‘‘Searches made online for property in Fairy Meadow are around 1300 per property listed for sale. This is a reflection of strong demand relative to supply.’’

Tweed Heads, Gold Coast: The vacancy rate for units in Tweed Heads at the end of November was 0.3 per cent. Rents have increased by 12 per cent over the past year, leading to a healthy yield of 4.6 per cent. Growth in neighbouring suburbs over the last year has been a lot higher than Tweed Heads. That growth should flow over into Tweed Heads, says Sheppard.

Runaway Bay, Gold Coast: The median unit price at the end of last month was $636,000. And while selling times are a bit sluggish, a 100 per cent auction clearance rate suggests there’s heat in this market from buyers, says Sheppard. ‘‘The vacancy rate is just 0.4 per cent leading to some good growth in rents and a yield of 4.5 per cent,’’ he adds.

Maroochydore, Sunshine Coast: Units are going for $670,000 and achieving a 4.4 per cent yield, says Sheppard. ‘‘Yields had climbed with rents rising 19 per cent in the last 12 months, but they could go even higher in the coming year with a vacancy rate of only 0.2 per cent,’’ he says. ‘‘Demand is ahead of supply, indicated by one in two properties listed for sale being sold via auction.’’

Lake Macquarie East, NSW: The three suburbs of interest are Tingira Heights, Cardiff Heights and Macquarie Hills, says Kent Lardner, research director at Suburb Trends.

‘‘There’s a lake on one side and beaches on the other, with plenty of national parks and hills to capture views,’’ he says.

‘‘It’s an easy commute to Sydney once or twice a week and buyers are flowing up from the Central Coast and down from Newcastle.

Weekly rents for houses have increased by $50 in the last 12 months with vacancy rates for the area currently 0.66 per cent.^SI

AFR Article 9 July 2021. Page 10

The pressure to cool the booming housing market has intensified as the growth in lending to buy a home almost doubled over the past year, and investor loans accelerated by more than 30 per cent in the past three months, ANZ’s economists warn.

With housing credit growth expected to surge further and threaten to outstrip income growth by a significant margin, the Australian Prudential Regulation Authority could be compelled to step in with harder measures by the end of the year, said ANZ senior economist Felicity Emmett.

‘‘I think the rate of growth in overall housing finance is really very strong at the moment, and I think it will accelerate quite sharply in the coming months,’’ she said.

‘‘Once those credit growth numbers start sprinting at these higher rates, I think that the regulators are going to become concerned.’’

While the Reserve Bank of Australia and APRA have pointed out in recent months that they do not target house prices, they were worried about the level of household debt relative to income, Ms Emmett said.

‘‘The May data shows that credit growth is already outpacing income and the gap is likely to widen,’’ she said.

‘‘Our expectation is that credit growth will lift above 7 per cent by the end of 2021 and will grow above household income by a significant margin for the next few years.’’

ANZ’s forecast already assumes house price growth will slow in the coming months as slightly higher mortgage rates feed through and macroprudential policy is implemented by the year’s end.

The bank expects home prices to rise between 15 per cent and 20 per cent in capital cities through 2021.

Ms Emmett said APRA was already using a soft-touch approach to tame the housing market, but harder limits looked likely in the next few months. ‘‘We already know that APRA has written to the banks to question them about their lending standards to make sure they’re lending responsibly.

‘‘This is generally the first step that tells us that APRA has a fairly soft touch approach to start with,’’ she said. ‘‘But I think it’s clear that the regulators are thinking about what sorts of measures they would include. So while they might not be ready to pull the trigger just yet, they are certainly planning for a potential intervention, later this year potentially.’’

RBA governor Philip Lowe on Tuesday flagged measures such as increasing the buffer banks use to calculate the size of home loans people can get from the current 2.5 percentage points above the advertised mortgage rate.

The RBA is also looking at putting a limit on the number of high debt-to-income ratio loans and low-deposit mortgages the banks could write.

Curbs on investor lending and interest-only borrowing were also an option, but probably further down the track, Ms Emmett said.

‘‘The strongest likelihood is that more than one measure is introduced, and the choice will depend on how the data evolves,’’ she said.

‘‘At this stage, I think it’s unlikely the regulators will target investment lending and interest-only loans as they are not at [concerning] levels … but it doesn’t mean in four months’ time they may not use those measures if the rate of investor lending accelerates further.’’

AFR Article 3-4 July 2021 Page 28

Economic forecast A key government report warns that the biggest drivers of residential real estate growth could be starting to weaken, writes Duncan Hughes.

Property buyers will be caught in ‘‘machine gun alley’’ if predictions by an influential government study into future economic growth that flag sharply rising interest rates and falling population growth turn out to be true.

The new Intergenerational Report calls time on the 25-year property boom – fuelled by falling interest rates and undersupply – which has driven up prices and made it increasingly difficult for first-home buyers to enter the market.

Chris Richardson, a partner with Deloitte Access Economics, warns property developers will be under pressure as population growth slows and the risk of oversupply rises, particularly in traditional hubs such as Melbourne and Sydney.

‘‘At face value, it is not a pretty document for developers and buyers,’’ said Richardson about the federal government’s latest Intergenerational Report on the big-picture economic issues of the future.

Key issues affecting property buyers and developers include slower population growth and lower levels of migration because of restrictions on travel caused by COVID-19. The report assumes 10-year bond yields will increase over time back to levels consistent with nominal gross domestic product growth of about 5 per cent. Bond yields are currently about 1.5 per cent.

‘‘That would be machine gun alley for property buyers and should have them quaking in their boots,’’ Richardson said of a trend that could more than double average 30-year variable mortgage rates to about 7 per cent.

The accompanying chart shows the relationship between the benchmark 10-year Australian government bond yield and home loan rates.

‘‘If the long-term expectation for the benchmark is 5 per cent – or about 3.5 per cent higher than today’s yield – it is a reasonable expectation that loan rates for owner-occupiers and investors would also be around 3.5 per cent higher over the long term than today’s low rates,’’ Canstar financial commentator Steve Mickenbecker said.

That would result in the average variable rate of owner-occupier loans doubling from 3.59 per cent to 7.09 per cent, or adding another $2000 to the monthly repayments on a $1 million, 30-year principal and interest loan.

‘‘A 5 per cent, 10-year bond yield will also mean that inflation has taken off so that salaries will have increased. But with today’s escalated loan amounts, there will be stress attached to the higher repayment,’’ Mr Mickenbecker added.

Interest rates are already beginning to creep up, particularly for four- and five-year fixed rates as funding costs rise.

Shane Oliver, AMP Capital’s chief economist, said the convergence of economic growth and bond yields is a reasonable assumption consistent with ‘‘long-run historical relationships’’.

‘‘If migration levels only get back to pre-pandemic levels by 2024-25 and don’t make up for lost ground through the pandemic, then the population in five years will be nearly 1 million smaller than previously assumed, and this will mean a net loss in demand for homes of around 350,000 over five years compared to what might have been expected pre-pandemic,’’ Oliver said.

‘‘If dwelling construction continues around its current pace, this will see the property market move into oversupply in the years ahead.’’

Two key drivers of the long-term property boom that began in the mid-1990s – low interest rates and undersupply of property – will come to an end, he says.

‘‘It would be good – or at least better – news for new home buyers,’’ Oliver said. ‘‘But it may not be so good for property developers – particularly those in cities like Sydney and Melbourne – who have become dependent on rapid property price appreciation.’’

Borrowing commitments by investors are at an 18-year high, having increased by nearly 13 per cent to nearly $8 billion in the three months to the end of May, according to government statistics.

The nation’s home-building pipeline is full, with demand for supplies and labour exceeding availability even as the sugar hit of the government’s HomeBuilder stimulus drops out of the system, according to economists.

Critics of the Intergenerational Report contest some of the underlying assumptions about the size of any rate rises and suggest strategic responses for property investors and developers.

Deloitte’s Richardson argues weakness in the economy, weak wages growth, low inflation and structural changes will keep a lid on rates.

Andrew Wilson, the chief economist at My Housing Market, adds: ‘‘We are continuing to find factors hampering any return to long-term normal, particularly income growth.’’

Wilson said the types of property investors were seeking had also changed, with demand for fringe developments and high-rise being replaced by more competition for bigger townhouses. Circumstances were changing, he said, and the past may not be an accurate guide to future events.

Simon Pressley, a buyers’ agent and head of research for Propertyology, said population growth was ‘‘way down the list of influences on property prices’’ after interest rates, jobs and economic confidence.

‘‘Given that all overseas migrants rent property, it is the rental market – as opposed to property values – that is likely to be more affected by border closures,’’ Pressley said. ‘‘Also, regions have very little reliance on overseas migration. Further, an increasing number of people are relocating from capital cities, especially Melbourne and Sydney.’’

Mickenbecker said the prospect of higher rates meant buyers should start paying off their loans while rates remain low.

‘‘There is time now to build a buffer through making extra repayments while interest rates are low. But as rates rise whether two or three years away, that will get tougher,’’ he said. ^SI

AFR Article: Tuesday 22 June 2021. Page 30

Office workers in Australia’s two largest cities are not the most cramped in the world, but they are tighter than the global average, putting employers and landlords under greater pressure than others to spread people out in a post-COVID-19 environment, a new report by JLL shows.

Sydney’s white-collar workforce has an average office density of 11.1sq m per person and Melbourne 12sq m, making them more densely crowded than the global average of 13.3sq m, according to the Benchmarking Cities and Real Estate report.

They are not the tightest of office environments – call centre-heavy Manila has that distinction, with an average density of just 6.9sq m per person – but at a time when owners and users of office environments face pressure to reconfigure their space to attract staff and keep them engaged, Sydney and Melbourne are not immune.

‘‘Occupational densities will be part of a widening suite of dynamic ‘metrics that matter’, including those measuring human experience, which businesses and the cities they are housed in will increasingly need to access,’’ said Victoria Mejevitch, head of JLL’s Global Benchmarking Services.

The least-dense offices in the report are in Chicago, with an average density, based on occupied usable floor area, of 22.8sq m per person, followed by Los Angeles with 20.9sq m and Munich with 18.9sq m. New York was the densest US city, with an average 16sq m per person.

Density is not everything, however. Office costs matter, too. Some locations with the densest offices such as Hong Kong (9.1sq m per person) and London (9.8sq m) are constrained in the extent to which they can reduce density because of their high costs – more than $US2000 per square metre each.

Cities with low densities face little impetus to de-densify further, and in New York, with prices close to Hong Kong’s average $US2500 ($2672) per sq m, the pressure not to reduce density any further will be great.

Sydney and Melbourne, by contrast, are in a group of cities with average office costs around the $US1000 per sq m mark (sub-$US1000 for Sydney and closer to $US500 for Melbourne) and can more afford to de-densify because of their comparatively low office costs, the report says.

‘‘There is another group of cities, however, with comparatively tight densities but where relatively lower space costs mean that the opportunity cost of de-densification may be more compelling – Singapore, Sydney, Melbourne, Toronto, Paris, Milan and Madrid,’’ the report says.

It was a consideration for Australian landlords and employers, JLL Australia chief executive Stephen Conry said.

‘‘We have already seen social distancing protocols exerting upward pressure on workspace ratios and companies rethinking the configuration of their office space,’’ Mr Conry said.

‘‘The emphasis has been on creating productive work spaces that have a high standard of health and wellness.’’

Some sectors, such as technology, will be better able to reduce density and work remotely than others, such as healthcare and the legal industry, it says.

AFR Article: Wednesday 16 June 2021. Page 13

The average price of a residential property in NSW surpassed $1 million for the first time on record in the March quarter, while the total value of Australian homes hit $8 trillion.

Australian residential real estate is now four times the size of gross domestic product and about $1 trillion more than the combined value of the ASX, superannuation and commercial real estate.

The total value of residential property lifted $450 billion, the largest rise on record according to the Australian Bureau of Statistics, and prices in capital cities rose 5.4 per cent to be up 7.5 per cent for the year.

‘‘Strong demand for housing was supported by record low interest rates, government initiatives and rising consumer confidence,’’ said Michelle Marquardt, ABS head of prices statistics.

‘‘Price rises were observed in all segments of the housing market, with growth in house prices continuing to outpace price growth in attached dwellings.’’

According to the ABS, about $7.9 trillion of residential dwelling stock is held by households, which means their balance sheets experienced a major bump over the March quarter.

The increase in the property market was particularly pronounced in Sydney and Hobart, which recorded a 6.1 per cent price increase over the quarter, followed by Canberra (5.6 per cent), Perth (5.2 per cent), Melbourne (5.1 per cent) and Darwin (4.7 per cent).

The increase in Sydney was the largest quarterly rise in the ABS residential property price index since the June quarter of 2015, with houses lifting 8 per cent over the quarter to be up 10.8 per cent over the year, compared with 2.6 per cent and 2.8 per cent respectively for units, apartments and townhouses.

While the Sydney median house price has been above $1 million for some time, ‘‘this was the first time any state or territory had seen the average price of dwellings rise above $1 million’’, Ms Marquardt said.

NSW now accounts for $3.3 trillion, or 40 per cent, of the total market.

The price of an average residential dwelling in Australia increased by $39,100 to $779,000 over the reporting period, while an additional 44,300 dwellings were added, lifting the national stock to about 10.6 million.

The Reserve Bank of Australia acknowledged the hot housing market in its monthly board meeting minutes, released yesterday, and said policy-makers needed to keep a close eye on lending standards.

This comes after a sudden return of investors to the market sparked concerns that the Australian Prudential Regulation Authority could step in with macro-prudential measures to curb a possible credit-fuelled boom.

The RBA tweaked its discussion around housing market conditions in its post meeting statement earlier this month, and explicitly called out the greater role investors are now playing in the booming property market.

‘‘Members noted that housing markets had strengthened further, with prices continuing to increase in all major markets. Housing credit growth had also strengthened, with strong demand from owner-occupiers, especially first home buyers.

‘‘Given the environment of strong demand for housing, rising housing prices and low interest rates, members agreed on the importance of maintaining lending standards and carefully monitoring trends in borrowing.’’

The central bank acknowledged that higher house prices would be likely to have a positive flow-on effect for household consumption due to the ‘‘wealth effect’’ of higher prices making people feel more comfortable about their finances.

AFR Article: Wednesday 9 June 2021. Page 40

London | The UK property market is heating up rapidly, and a mix of surging demand and double-digit price growth is causing concern an unsustainable bubble is building.

The pace of mortgage approvals is running more than a third higher than its prepandemic level, and housing could be heading for its busiest year since before the GFC as buyers rush to take advantage of a tax cut. But with affordability stretched and lenders easing mortgage requirements, the signs are starting to worry some Bank of England policymakers.

The government’s tax holiday is only temporary, potentially creating a cliff edge and precipitating a slowdown toward the end of the year, just as job support programs end. Bank of England deputy governors Jon Cunliffe and Dave Ramsden both said this week that they are watching the housing market ‘‘carefully’’ amid the boom conditions.

One risk is that banks relax lending restraints because of the wave of demand. Nationwide Building Society has started offering new mortgages that are 5.5 times the incomes of first-time buyers, above the 4.5 ratio commonly used. If others follow suit and tell regulators they need to adjust to the market, ‘‘we do start to see some danger,’’ said Neal Hudson, founder of Residential Analysts.

Still, demand could be propped up after the tax perk is phased out in the coming months as pandemic effects linger, particularly the work-from-home culture that has fuelled a desire for bigger homes outside urban areas.

After more than a year of pandemic restrictions, residential property looks unscathed. Chancellor Rishi Sunak’s stamp-duty cut, which saved buyers as much as £15,000 ($27,300), lit a fire under the market as other parts of the economy suffered.

The surge in demand can be seen in mortgage and transaction numbers, both of which reached multi-year highs. Despite criticism that the stimulus was not needed, Mr Sunak extended the perk to October past its original deadline of March.

In addition to the stamp duty effect, the pandemic also sparked a shift in lifestyle choices, and the desire for bigger properties is creating regional hotspots within the housing market.

That structural shift is happening on a global scale, with the UK one of 13 countries that had double-digit house price growth in the past year, broker Knight Frank LLP says. That’s prompting authorities across the world to pull levers to put the brakes on rampant house price growth. Canada’s bank regulator has tightened mortgage lending requirements in light of its own housing boom, and New Zealand’s central bank is also threatening to act.

Back in the UK, ‘‘there are quite a few people that are worried about what’s going on with house prices outside of London,’’ said Marcus Dixon, head of research at LonRes, a property data company. ‘‘We don’t mind a little bit of growth but we don’t want a crash.’’

The latest figures from Nationwide Building Society put price growth close to 11 per cent. While that may be skewed because of the slump in activity during the UK’s first lockdown a year earlier, values are still on a tear. Statistics office data puts average gains in the first quarter at 9 per cent.

The mini-boom is an issue for those who were struggling to get on the property ladder even before the pandemic. With most lenders requiring a 20 per cent down payment, the average amount raised by new buyers to get a mortgage rose 23 per cent in 2020, Lloyds Banking Group says. Affordability was already stretched, particularly in London. Critics of Mr Sunak’s stamp duty cut say it added to the unequal fallout from the pandemic on younger workers. ‘‘One cannot ignore that housing booms shift wealth towards existing and generally older homeowners and can therefore widen intergenerational inequity,’’ Mr Cunliffe of the Bank of England said last month.

The divergence between those who can and those who cannot afford to buy a home hits at the heart of the Conservative Party’s push to get more people on the housing ladder. Its ‘‘Generation Buy’’ policy appeals to the British dream of home ownership as the main way of accumulating wealth.

But while many people built savings in the pandemic because they couldn’t take holidays, young workers were disproportionately in industries most affected by lockdowns, such as retail and restaurants, leaving them out of pocket at a time when they might be trying to save for a deposit.

The government has introduced a guarantee program for 95 per cent loan-to-value mortgages. But other criteria mean it is not always easy to get those loans. And for those who do, 5 per cent does not give buyers much of a margin above negative equity if home values fall. The program also stimulates demand without doing anything for supply, increasing the risks.