Great Ocean Report – January 2018

BEING January and the start of a new year, it is natural to be looking forward and trying to determine what may occur in the year ahead.

Making forward predictions is fraught with danger, but in this Great Ocean Report we will help to identify some trends that will give us some likely indicators of what will occur in 2018 in the property markets.

We always say markets (plural) because, as we have said many times in this report, Australia has hundreds of small property markets that have different influences and therefore different performances.

Many interact with each other and it is this interaction that we feel will be the key aspect to watch in 2018. In other words – where is the money moving from and where is it going?

If we firstly look at the greatest source of wealth in Australian residential property, it is obvious to look at the Sydney and Melbourne metropolitan property markets.

The amount of wealth and equity created in these markets over the past five years is significant by any measure. By the latter stages of 2017, we can see that Sydney has peaked for this cycle and Melbourne had seen its rate of price appreciation slow.

The difference between these two markets is that Melbourne is more affordable than Sydney and Melbourne attracts significantly more skilled migrants than Sydney does. Hence why Melbourne’s price growth has slowed but not peaked like Sydney’s has.

Regardless of their growth status, it is the effects of the capital growth in both these markets that we need to focus on. Given Melbourne directly affects our service area, we will focus on that market for the purpose of this report.

If you are an owner occupier in Melbourne and you are trading properties in the same market place, you are less affected by market movement if you are transacting in a short time frame. The dollar values you are now trading in are higher than you were previously used to, but essentially you are trading like for like. The value of the asset you are selling is paying for all or part of your next purchase.

If you are a first home buyer wanting to buy in Melbourne, however, you are now faced with a median house price in the low $800,000s ($817,000 at the end of the September quarter). Without assistance from family in some form (either an inheritance or gift), you are going to face being saddled with a huge mortgage to purchase your first home – or you look for alternatives.

If you are at the other end of the spectrum and planning for later life or retirement, you now have significant equity created in your capital-gains-free family home, which is too big for you now that the kids have left. You now are looking at all your options including an alternative property or properties to more suit your present and future lifestyle.

Both of the above examples have been significant drivers of money flow out of the metropolitan markets over the past two years and into the regional and coastal property markets, and we expect this trend to continue in 2018.

Like many of the regional areas within two hours of Melbourne, Geelong and the Surf Coast have both seen significant increases in value over the past year. Geelong was up 16.9 per cent to September, according to the REIV, to a median house price of $675,000, which even at that increased level is significantly more affordable to a young home buyer than Melbourne. Torquay with its close proximity to Geelong has shared in this buying demographic and has shared in similar growth.

The lifestyle towns of Aireys Inlet, Anglesea and Lorne have appealed more to the baby boomers implementing their future lifestyle plans, but many have been frustrated by the lack of opportunity.

This lack of available properties for sale has seen increased competition and therefore increased values. There has simply never been a better time to sell in these towns. These purchases are not being funded by debt; they are being funded by money derived from the sale of assets from metropolitan Melbourne, typically the family home.

The interesting thing about both these demographics is that neither of these trends appear fickle and we expect them to continue in 2018.

First home buyers are looking for affordability and are at a stage of their lives and careers where they can be flexible where they live, especially before they have children. They appear to be increasingly prepared to travel longer distances to work in exchange for a smaller mortgage.

Meanwhile, the baby boomers are at a stage of their lives where they want to reward themselves for a long career of hard work and lifestyle is paramount. They are not borrowing anyway, so are less affected by changes to the economic landscape that may occur. They simply want what they want, can afford to buy it, and know that the clock is ticking so want to get on with it.

For rental property investors, the climate will be tougher in 2018 and there are two aspects to this.

Firstly, the banks have tightened their lending standards under pressure from APRA and reduced the amount of interest-only loans on their loan books.

Secondly, rent increases tend to lag behind value increases in buoyant markets. In other words, the rental return diminishes as the values increase and therefore the investor needs to contribute more than they did, especially if you are required to take out a principal and interest loan. This has been a significant contributor to the markets slowing in both Melbourne and Sydney in 2017.

Overall, the performance of the regional and coastal markets will continue to be a reflection of the metropolitan markets for the reasons outlined.

With continued population growth, it is difficult to see Melbourne or Sydney having a hard landing in this cycle, without an unforeseen international trigger event affecting sentiment. They are both sought-after global cities now and when combined with Australians’ innate FOMO (fear of missing out) demand for their real estate, both locally and abroad, should continue in 2018.

We hope you found this report informative and if we can be of any assistance in any real estate matter please do not hesitate to call.