21st May 2011
By Michael Matusik of Matusik Property Insights.
This article is reproduced with the permission of Matusik PropertyInsights.
In early 2009 we authored a paper arguing – against popular belief at the time – that it was, then, a good time to buy. Over the last two years, residential property values across much of Australia have risen considerably - and in many cases by over 20%.
According to the official ABS statistics, rents have also risen - on average, by 8% since late 2008.
Towards the latter part of last year we advised buyers to wait, as prices and rents were starting to stall.
But the Queensland floods (and now Cyclone Yasi) have changed the game, presenting astute buyers with a "buy now" opportunity – this time around, not because we see substantial price growth over the short-term, but because prices have bottomed,with asking prices at present representing great value for money – perhaps even unrepeatable value.
Around 29,000 dwellings have been affected by Queensland’s recent weather, of which 6,200 are, at present, uninhabitable. The 6,200 dwellings ruined by either flood water or storm damage represent just 0.35% of the state’s total housing stock.
Yet this damage, and that inflicted on Queensland’s infrastructure, is likely to have a significant multiplier effect on the state’s economic well-being – and for the better.
Before the flood Queensland had an adequate supply of rental dwellings, with a vacancy rate over 4%. The 6,000-odd displaced households, plus the annual New Year influx of tertiary students, have seen the vacancy rate plummet. We estimate it at close to 1%.
Rents are starting to rise –making front page news in several Australian newspapers – and are likely to continue to do so.
Attitudes towards buying property in Queensland have also changed. Recent polling suggests that while two-thirds are not put off buying property in Brisbane by the recent flood, nine out of ten wouldn’t now buy a dwelling in a flooded area.
This change in attitude alone has reduced the saleability of much of the new apartment stock, in particular, for sale across Brisbane.
New residential development across Australia has been restricted in recent years by a range of factors including difficulties in obtaining development finance, long time-frames in securing town planning approval and construction costs. Getting pre-sales will be even harder now for many new developments affected by the flood, further drying up new supply. We estimate that the new Australian market is already 10% under-supplied.
Well-credentialed firm of quantity surveyors Mitchell Brandtman is forecasting an overall 3-4% lift in building costs as a result of the flood over the next two quarters. This relates largely to the reconstruction of damaged houses.
There are a variety of views on the flood’s impact on the cost of higher forms of construction, with some suggesting a substantial lift. Some are citing what happened after the 1974 flood as evidence, where building costs rose by a third, against an estimated cost increase of 20% at the time.
An analysis of house prices in those suburbs heavily inundated on the northern side of the Brisbane River in 1974, and again last month, paints a telling story. Until Wivenhoe Dam started being actually built, there was little movement in house prices in the flood- affected suburbs. Interestingly, values didn’t fall, yet sales volumes did, suggesting that most stayed put.
Between the late 1970s and last year, values in these flood-prone areas lifted 9.5% per year (on average). The median house price across our 15 selected suburbs was $28,000 in 1974; last year it was $725,000. Over the last ten years, dwelling values across the wider Brisbane area rose 10.6% per year.
Investors continue to remain interested in Queensland real estate. Unique browser traffic through realestate.com.au (Australia’s largest online real estate provider) shows a 11% increase in Queensland traffic over the last 12 months. Interest has further lifted since January’s flood.
We believe investors will start to buy as the positive economic impact of the flood becomes clearly evident. This might not occur until the Australian spring. Between now and then, listings are likely to tighten – limiting choice – and rents could rise by as much as 10%.
Queensland, and especially Brisbane, has always had strong property fundamentals. Queensland is a growth state and most of its annual population gain settles in its south-east corner.At present, the state’s population is increasing by 250 per day.
Inner-city apartments are increasingly popular, supported by strong underlying demographics and the city’s increasing traffic congestion. Two-thirds of Brisbane’s households support two or less people. One-quarter of the city’s inhabitants live alone.
At present there are 41 new infrastructure projects worth $39 billion under way across Brisbane, three-quarters of which (based on dollar value) are situated within 5km of the Queen Street Mall.
Unlike other western countries, Australian dwellings have not dropped in value in recent years. In contrast with those countries that saw residential values decline after the global recession, Australians have strong equity in their homes, are obliged to repay their home loans and, somewhat due to our tax laws, continue to favour real estate as an investment vehicle.
Moving forward, Australia faces low interest rates and strong employment prospects, removing the risk of a rapid rise in mortgage defaults and a residential market crash.
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