The following article was taken from Harbour Asset Managment's latest Harbour Navigator newsletter.
Harbour Asset Management's Shane Solly was in Australia last week meeting with Government agencies and residential developers.
The objective of his visits was to gauge the ‘temperature’ of the Aussie residential property market.
The parallels between the Sydney and Auckland housing markets are striking.
Headlines suggest conditions are ‘hot’.
Average Sydney house prices are up by more than 20% over the last 2 years, new residential housing starts are running at an all-time high of 200,000 plus per annum, new State Government taxes have been introduced aimed at foreign investors, and banking regulators are heavily scrutinising residential lending – all of which might lead you to believe the Aussie housing market is overheated.
While these high level statistics suggest conditions are ‘hot’, they hide the fact that the strength has been led by Sydney and Melbourne with other capital cities not participating to the same degree - over the last 5 years property prices have fallen in real terms in 6 out of 8 Australian capital cities.
The Sydney market is ‘hot’ and may stay ‘hot’ in the near term, driven by four factors:
- significant under-build since the tax break driven boost to construction activity in 2008-09,
- consistently positive net migration trends which are expected to remain supportive for NSW,
- lifestyle changes whereby owner occupiers are favouring the amenity of inner ring (10km radius from the CBD) locations, and
- in an environment of low interest rates investors are favouring direct residential property (despite falling rental yields) particularly given its tax advantaged status.
But there is a supply side response occurring with new development picking up strongly.
Government bodies and private owners are releasing urban regeneration land for development around transport nodes.
Infrastructure is planned to open up land locked locations.
New, well capitalised, global residential developers have entered the Australian market to increase supply.
These factors mesh well with a growing acceptance of higher intensity of living.
Local council intransigence may continue to hamper the pace of development.
While Sydney is hot, there are indications that other locations are cooling as new supply meets or in some cases exceeds demand.
Significant new supply in Melbourne is slowing price appreciation.
In the resource states, such as Western Australia, house prices continue to decline as major resource expansion projects are completed or curtailed, and interstate migration slows.
APRA, the Australian Prudential Regulation Authority, is due to announce further macro-prudential initiatives including stronger capital requirements for Australian Banks.
An increase in mortgage risk weights or (following New Zealand’s lead) the introduction of macro-prudential policy targeted at a specific city, may supress some speculative Australian housing demand.
Such a policy change could set the stage for the RBA to reduce its official cash target just as the RBNZ recently did.
While the Aussie residential cycle may have further to run, volatility is increasing reflecting the mature phase of the cycle and increased scrutiny from Federal and State authorities.
After a strong positive performance Harbour has reduced exposure to listed Australian residential property developers.
• Shane Solly is a director and portfolio manager at Harbour Asset Managment, a Wellington-based investment management company.
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