Are We Seeing a Change in the Property Market?

Have you ever watched the British TV show Top Gear?

In the show, the three hosts test drive cars in extreme situations and different locations around the world. In one of the episodes, the show takes place in Southern Spain.

Top Gear chose a Ferrari 458 Spider, a McLaren MP4-12C Spider and an Audi R8 Spider. The three hosts drove these supercars from British Gibraltar to Madrid, Spain’s capital.

Their tests, to say the least, are unconventional. They drove them to touristic Puerto Banus, to determine which one was the most inconspicuous by seeing which car was photographed less. They tested the supercars in the snow, and raced as they raised their convertible roofs.

Yet the most striking thing about this show was not how the cars performed. The real interesting thing was that it showed the impact and aftermath the property boom and bust in 2008 had in the country.

You see, the three cars drove around ghost towns, even drag racing in an abandoned airport.

They commented on this as they reached one of the zombie developments:

‘These are all brand new flats. There is nobody here, I mean nobody at all.’

It’s got all the infrastructure. Street lights, pedestrian crossings but there are no people…at all. Look at it, it’s the scene of a horror film.

The aftermath of the property boom in Spain was severe. It left an array of empty properties and a horde of For Lease/For Sale signs everywhere.

Something I read recently somewhat reminded me of this episode. From news.com.au:

A record glut of vacant apartments across Sydney suburbs is creating “zombie blocks” where one-in-four flats are now empty.

‘Figures released yesterday showed there are 19,572 properties sitting vacant — with Kellyville in the Hills region the worst hit area.

‘But even the eastern suburbs has [sic] more homes up for rent than ever before.

‘And housing experts said the oversupply was only going to get worse as high-rise projects committed to during the housing boom still only halfway through construction are finished.

‘Property valuation firm SQM Research’s director Louis Christopher said the vacancy rates were no seasonal blip, and landlords would have to get used to the idea that renters now have the upper hand in negotiations…

As you well know, property prices, particularly in Melbourne and Sydney, have increased quite a bit in the last decade.

While high property prices have made some very wealthy, it has had different outcomes for younger generations.

With stagnant salaries and property prices climbing, it is unsurprising to see that the amount of renters has been growing. And, as we found in the latest Household Income and Labour Dynamics (HILDA) survey less people are making the jump from renters to home owners.

According to the survey, people aged 25 to 34 are the most likely to be renters, and so are couples with children. Those aged 55 and over less likely to rent.

The increase in renters was most marked between 2007 and 2011, especially on people in their 30s and 40s. Since then, as you can see in the graph below the trend has somewhat decreased.

Figure 10.2: Percentage of the population living in a rental accomodation by age group 01-08-18

Source: HILDA

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As HILDA explained:

Indeed, renting has declined somewhat since 2011 for the 25 to 34 age group. This is not because they are more likely to be home owners, however. Rather, as with the trend for the 15 to 24 age group, it reflects the trend towards remaining in the parental home, which is often owner-occupied, until older ages.

That is, high property prices have meant that younger people are renting or living with their parents instead of buying a home. 

But things are starting to turn.

The figure below shows rental year on year prices percentage change. We saw a big spike in rents in the four cities in 2007-08. Rental growth has been declining since.

Rental year on year prices percentage change 01-08-18

Source: Business Insider

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Rental growth hasn’t kept up with soaring property sale prices

We are now seeing a fall in property price sales, and are also starting to see rental growth slowing, and even declining in Sydney.

Figures from SQM below show that rent growth has been falling in most capital cities in the last month, with Sydney having the worst fall of all in the last 12 months.

Rent growth has been falling in most capital cities in the last month with Sydney having the worst fall of all in the last 12 months 01-08-18

Source: SQM

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According to Domain:

While the median asking rent for houses across Sydney remained at $550 for six quarters in row, renters in the city and east are now paying $60 less than they were a year ago.

The median house rent in Sydney’s inner city dropped 5.5 per cent year on year to $1,040, according to the latest Domain Rental Report. On the lower north shore it dropped 4.5 per cent – or $50 – to $1050. Asking prices for apartments on the lower north shore also fell by 3.2 per cent to $600.

The pace is changing for the rental market, particularly as a cooling sales market in Sydney is giving landlords less reason to increase their rents,” Dr [Nicola]Powell [Domain Group’s data scientist] said. “We’re seeing building completions peak and seeing a lot of off-the-plan properties sold to investors [in previous years] coming onto the rental market,” Dr Powell said.

And rental prices could continue to fall in Sydney. For one, more apartments are coming into the market.

Also, Sydney has seen many people leaving NSW in favour of Queensland or Victoria. According to figures by ABS, NSW has lost on average 13,539 people per year to other states between 2007–08 and 2016–17. High house purchasing and rental prices have been pushing people out of state, especially as incomes are barely growing.

My suspicion is that there could also be a significant amount of vacant homes that could be coming into the market in the near future, which could add pressure to lower rent and sales prices.

In short, we are seeing the property market turn into a buyers’/renters’ market. And the trend could worsen overtime as more properties come into the market.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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