2014 dec property market overview and outlook

publication 10 / 2014

DECEMBER 2014

residential Property MARKET OVERVIEW AND OUTLOOK

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE – DECEMBER 20142

Residential Market Update

Residential property in Australia is the nation’s single largest and most valuable asset class with a total estimated value of $5.6 trillion as at October 2014. The value of residential property is significantly larger than the value of listed equities ($1.6 trillion), Australian superannuation ($1.8 trillion) and commercial real estate ($0.7 trillion). Over the 12 months to June 2014, Australian gross domestic product (GDP) was recorded at $1.57 trillion indicating that the value of residential property is more than three times larger than the annual output of the Australian economy.

Historically speaking, mortgages have generally performed well with low arrears, strong return on equity, consistent earnings, risk transfer benefits from higher risk loans generally insured via lender’s mortgage insurance (LMI), general upward trend in home values and that Australians tend to prioritise repayments of their mortgage. Of course, the high level of mortgage lending has contributed to the bidding up of property values and the subsequent high level of housing debt.

Over the past two and a half years, combined capital city home values have been rising. The level of value growth experienced has been mixed across capitals, however, the two largest capitals Sydney and Melbourne, both recorded the strongest capital growth conditions of all capital cities.

According to RP Data, home dwelling values across Australia’s capital cities fell by -0.3% over the month of November 2014, however, the majority of capital cities experienced modest growth (Sydney +1.0%, Brisbane +0.4%, Perth +0.9% and Hobart +0.2%). Over the last quarter, home values rose on average 0.8% nationally, suggesting the rate of growth is slowing. Over the last year, home values rose on average 8.5%, and whilst healthy, is lower than the peak growth of 11.5% observed in April 2014. All capital cities are now experiencing lower growth than their recent peak, apart from Hobart. Sydney and Melbourne still remain the dominant players in the property market, where

annual value growth peaked at 16.7% in April 2014 and at 11.9% in January 2014 respectively. The two states continue to remain the main driver of value growth over the past 12 months.

The Sydney residential market has continued to be strong over the past 12 months. Over the past year, Sydney and Melbourne home values increased by 13.2% and 8.3% respectively, however, Melbourne’s growth remains higher than the third strongest performing city for capital growth, Brisbane. Brisbane recorded a 6.2% increase over the same timeframe and Hobart (+5.2%) was the only other capital city to record annual value growth in excess of 5%.

Western Sydney has seen consistent growth showing little sign of slowing and demand is continuing to outstrip supply. The main drivers for growth this year have been low interest rates, limited stock and high demand. The suburb of Seven Hills as an example has seen 24% growth in home values in the 12 months to July 2014 according to Australian Property Monitors. However, according to RP Data ,Sydney in recent months has experienced lower rental returns suggesting that investors are chasing capital growth. Investors who purchased two years ago have enjoyed strong value growth, however, investment is now spiking and at a time when the growth cycle is very mature and rental yields are around historic lows. Over the past five years, Sydney has experienced the greatest total housing value growth of the four largest capital cities.

Over the month of November 2014, Sydney yet again posted a +1% rise in home values as the combined capital city home values increased by 8.5% over the 12 months to November 2014, although the market is now showing signs of slowing into the Christmas / Summer period after a peak in growth of 11.5% in April 2014.

We have seen residential property prices go from strength to strength with market demand far exceeding supply. Investor activity continues to be at strong levels, taking advantage of record low interest rates which have been ‘on hold’ for a record 15th consecutive month.

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE – DECEMBER 2014 3

The property price point in excess of $1million is a different story - most areas have experienced between 10% to 15% growth in the past 12 months with most properties under $2 million moving ahead in leaps and bounds as investors are now making up a record percentage of buyers. City fringe suburbs continue to undergo further urban renewal project development capitalizing on zoning changes from industrial to residential, especially high density suburbs such as Botony, Alexandria and Hillsdale, which represent great investment opportunities for first time and seasoned property investors. We have also noticed increased auction clearance rate activity and overall sales closures in the prestige market.

The year 2014 has been red hot in the residential sector of Melbourne. When comparing current median house prices to those in 2013, the results are a staggering $91,000 increase in the median housing price, with an annual growth of 16.34% for the year to date based on recent results released by REIV. Although the Melbourne market is considered second only to Sydney in terms of housing price growth, the results have shaped a well-supported and firming market. For example, the demand in the prestigious suburb of Hawthorn, with an average price of $1.4m was just as strong with 83.3% of properties being sold at auction. Closely following this year was Balwyn North with a median house price of $1.35 million, an annual increase of

27%. There has been major interest in the inner north attracting many developers and investors. With the infrastructure surrounding the universities, these areas are becoming a hot spot for the student markets and young renters. Northcote for example is evident of this trend, with 38% of people living in the suburb aged between 20 and 39. Over the past five years, Melbourne has experienced total value growth of 28%, according to RP Data.

Interest rates have been at a 60-year low of 2.5% for 15 consecutive months, the longest steady sequence since 2003.

New dwelling approvals increased 11.4% over the months, driven by an increase in unit approvals partially offset by a reduction in the level of new home approvals.

ABS’s preliminary estimates show that the price index for residential properties for the weighted average of the eight capital cities rose 1.5% in the September quarter 2014 and the index rose 9.1% through the year to the September quarter 2014. The capital city residential property price indexes rose in Sydney (+2.7%), Melbourne (+1.0%), Brisbane (+1.0%), Adelaide (+1.0%), Hobart (+1.0%), Canberra (+0.3%) and Darwin (+0.3%) and fell in Perth (-0.1%). Annually, residential property prices rose in Sydney (+14.6%), Melbourne (+6.9%), Brisbane (+6.7%), Adelaide (+5.6%), Hobart (+4.3%), Perth (+3.7), Darwin (+3.4%), and Canberra (+2.4%).

Major interest in Melbourne’s inner north from developers and investors.



RBA STATS

ECONOMIC GROWTHAUD BUYS0.8274 USD

2.5% in 1 MONTH0%

0%

CASH RATE

0%2.3%INFLATION

96.6 1.9%in OCTOber

Consumer Sentiment Index Westpac - Melbourne institute

135 pts

WORLDWIDE 2014US, EUROPE & JAPAN 2013 2.2%

3.1%

2.7%0.3%

AUS annual to SEPTEMBER 2014AUSTRALIAN 3rd quarter 2014

Australian Employment UNEMPLOYMENT

PARTICIPATION

6.1%

64.6%

$ 587,500 Median House Price

$ 490,000 Median Unit Price

$ 418Weekly House Rent Rental Yield 3.7%

$ 424Weekly Unit Rent Rental Yield 4.5%

New Dwelling Approvals

11.4%

Australia wide snapshot

Dwelling Values

8.5%

-0.3

%

0.8%

annu

al

mon

thly

quar

terl

y

UPDATED on 12th DECEMber 2014

New Home Sales

3 %

housing finance

$ 29,201

adjusted value of totaldwelling commitments

1%

HIA-COMMBANK HOUSINGAFFORDABILITY INDEX

77.2Property Council/ANZ Property Industry Confidence Index

10.8%

Differencefrom

previous PeakDwelling

Value

NOVEMber 2014

GDP growth2014

Key statistics NOVeMBeR 2014*

Source: ABS, RP DATA, HIA, RBA, Westpac - Melbourne Institute, REIA

* As at 30 November


FutuRe estate capital city RatiNg suMMaRy - NOVeMBeR 2014

STATE CAPITAL CITY

FUTURE ESTATE SCORE

OVERVIEW

NSW SYDNEY Sydney's score declined this month as a result of a weaker than expected Asking Price. All indicators are positive

VIC MELBOURNE Decline in the Asking Price result lead to a decline in Melbourne overall score by -12%. However, all indicators look healthy to excellent

QLD BRISBANE Brisbane score is slightly down on last month with a reduction in the Asking Price as a direct result

WA PERTH Perth’s score remains unchanged this month with all lead indicators looking healthy to positive

SA ADELAIDE Adelaide's score remained unchanged this month

ACT CANBERRA Canberra's score remained unchanged this month with little to minimal movement in overall results

NT DARWIN A spike in the Auction Clearance rate and Asking Price this month lead to an increase in the score rating by more than 20%

TAS HOBART A reduction in Tasmania's Vacancy Rate help elevate the state's overall score this month

Source: Future Estate Research* Score is out of 5 as indicated by out of 5: Higher score indicates a stronger property market with positive outlook, whereas a lower score indicates a softer market with lower growth prospects.



Source: RP DATA

Sydney posted a +1% rise in home values in November

CAPITAL CITY HOUSE AND UNIT MEDIAN PRICES AS AT 30 NOVEMbER 2014

State Capital City Median House Price ($)

Median Unit Price ($)

Dwelling Trend YTD* (%)

New South Wales Sydney $825,000 $605,000 12.4%

Victoria Melbourne $633,000 $475,000 5.9%

Queensland Brisbane $487,500 $365,000 4.1%

South Australia Adelaide $421,000 $336,800 2.5%

Western Australia Perth $530,000 $445,000 0.2%

Tasmania Hobart $335,500 $247,000 0.8%

Northern Territory Darwin $564,500 $530,000 2.2%

Australian Capital Territory Canberra $560,500 $410,800 0.1%


Although combined capital city home values were up 8.5% over the past 12months to November 2014, this growth rate has started to slow since the peak growth of 11.5% was recorded over the month of April 2014. Most capital cities recorded positive results including Sydney (1%), Brisbane (+0.4%), Perth (+0.9%) and Hobart (+0.2%)

Source: RP DATA 30 November 2014

13.2%

8.3%

2.8%

1.4%

5.2%

1.7%1.4%

6.2%

Adelaide( SA )

Darwin( NT )

Sydney( NSW )

Canberra( ACT )

Melbourne( VIC )

Perth( WA )

Brisbane( QLD )

Hobart( TAS )

2%

0

4%

6%

8%

10%

12%

14% Dwelling Trend YoY (%)

DwelliNg tReND yeaR ON yeaR

DwelliNg tReND cHaNge FROM pReViOus peaK aND tROugH (%)

Change from Previous Trough* (%)

Change from Previous Peak (%)

Cha

nge

(%)

Change from Previous Peak and Trough (%)

24.6

-0.7 -2.90.0

5.2

-5.7 -11.3

3.8

31.2

4.8

17.517.615.5

7.4

10.6

5.2

Sydney(NSW)

Melbourne(VIC)

Brisbane(QLD)

Adelaide(SA)

Perth(WA)

Hobart(TAS)

Darwin(NT)

Canberra(ACT)

20%

12%

-12%

16%

24%

28%

32%

8%

0

4%

-4%

-8%



Cha

nge

(%)


24.6

-0.7 -2.90.0

5.2

-5.7 -11.3

3.8

31.2

4.8

17.517.615.5

7.4

10.6

5.2

Sydney(NSW)

Melbourne(VIC)

Brisbane(QLD)

Adelaide(SA)

Perth(WA)

Hobart(TAS)

Darwin(NT)

Canberra(ACT)

20%

12%

-12%

16%

24%

28%

32%

8%

0

4%

-4%

-8%



Cha

nge

(%)


21.8

1.4

-3.9

2.2

6.0

-4.6

-9.2

2.9

28.2

8.9

18.818.5

14.5

7.99.4

7.6

Sydney(NSW)

Melbourne(VIC)

Brisbane(QLD)

Adelaide(SA)

Perth(WA)

Hobart(TAS)

Darwin(NT)

Canberra(ACT)

20%

12%

16%

24%

28%

8%

0

4%

-4%

-8%

Source: RP DATA as at 30 November 2014



The most recent auction clearance rates in both Sydney (~70%) and Melbourne (~70%) are broadly constant to that experienced the same time last year

pROpeRty auctiON cleaRaNce Rates: weeK eNDiNg 13tH DeceMBeRAuction Clearance Rates

Sydney Melbourne

71.2%

66%

75%71%

Australian Property Monitors RP Data REINSW*/REIV

*Notavailable

70%

0

10%

20%

30%

40%

50%

60%

80%

70%

capital cities

A preliminary weighted average clearance rate of 65.2% accordingly to RP Data was recorded the week ending 12th December 2014 across capital cities compared to 63.7% last week and 65.1% this time last year.

The market has shown signs of cooling off since the later parts of spring, but this hasn’t prevented the overall clearance rate for 2014 exceeding last year’s result. In 2013 the capital cities clearance rate was 66.2% and with one week to go this year it is 67.9%. With the exception of Melbourne and Perth, the clearance rate has risen in each capital city.

auctiON cleaRaNce Rates

In Sydney, a preliminary clearance rate of 71.2% was recorded, compared to 66.1% last week (7th December 2014), and 72.2% the same week last year. The Sydney auction market has delivered good outcomes to date this year for sellers with a higher clearance rate and number of sales. The clearance rate for 2014 is likely to be close to 74.4% according to RP Data, higher than 72.7% last year.

A clearance rate of 70% was recorded by REIV across Melbourne for the week ending 13th December 2014 compared to 66% the weekend before and 68% this weekend last year. There were 1266 auctions reported to the REIV, with 881 selling and 385 being passed in, 192 of those on a vendor bid. The inner Melbourne region has had the highest clearance rate so far this year resulting in a high 73% and the top auction suburbs so far this year are the suburbs of Reservoir, Richmond, South Yarra and St Kilda - with over 450 auctions held in each suburb.



-2.2% -5.7%-2.4%-2.0%-0.4% -0.9% -1.1%-3.4%

2.0%

3.4%

-0.2%

1.5%

-1.2%-1.6%

0.6%

-1.7%

Unit Price Trend Over Quarter (%)

House Price TrendOver Quarter (%)

1%

0

-1%

-2%

-3%

-4%

-5%

-6%

3%

4%

2%

Melbourne( VIC )

Sydney( NSW )

Adelaide( SA )

Perth( WA )

Brisbane( QLD )

Canberra( ACT )

Darwin( NT )

Hobart( TAS )

quaRteRly capital city HOuse aND uNit pRice tReND

Gross Rental Yields

1%

0

2%

3%

4%

5%

6%

7%

House GrossRental Yield (%)

Units GrossRental Yield (%)

Darwin( NT )

Hobart( TAS )

Brisbane( QLD )

Canberra( ACT )

Adelaide( SA )

Perth( WA )

Sydney( NSW )

Melbourne( VIC )

4.2%

3.5%3.3%

5.4%

4.2% 4.1%

4.7%4.4%

4.2%

5.0%

4.5%

4.9%

5.4%

5.9%6.0%5.7%

capital city HOuse aND uNit gROss ReNtal yielDs

Median dwelling price is $559,000 as at November 2014, with Sydney the most expensive capital city ($705,000) and Hobart the most affordable ($315,000)

Highest gross rental yields for November 2014 were recorded in Darwin for houses (6%) and units (5.9%), while Melbourne recorded the lowest across both houses and units (3.3% and 4.2% respectively)

Gross Rental Yields

1%

0

2%

3%

4%

5%

6%

7%

House GrossRental Yield (%)

Units GrossRental Yield (%)

Darwin( NT )

Hobart( TAS )

Brisbane( QLD )

Canberra( ACT )

Adelaide( SA )

Perth( WA )

Sydney( NSW )

Melbourne( VIC )

4.2%

3.5%3.3%

5.4%

4.2% 4.1%

4.7%4.4%

4.2%

5.0%

4.5%4.9%

5.4%

5.9%6.0%5.7%




KEY INVESTMENT THEMES

Theme Summary Future Estate View Comments

Key growth opportunities

§ Ongoing capital growth cycle

§ Capital cities set to drive the growth this year, supported by the larger regional centres especially in Queensland emerging from the dip in activity in early 2013

§ Sydney offering continued above-trend growth in the Inner Western and Eastern Suburbs

§ Melbourne market continues to grow steadily

§ Population growth likely to be one of the key drivers of property market growth

§ Dwelling undersupply is a subsequent factor with critical influence; state building restrictions play a role

§ Long term affordability; cash rate set to expansionary setting on record lows

§ International investor interest with lower AUD and overseas restrictions

Key value opportunities

§ Discounts to comparable properties; new areas to demonstrate growth

§ Melbourne offers greater affordability when compared to Sydney

§ Adelaide and Hobart continue to demonstrate high affordability and potential of longer term growth

§ Outer South and North Western Sydney seeing strong fundamentals; infrastructure upgrades will drive growth

§ Value continues to be demonstrated at the asset level, rather than capital city level

§ Pockets of opportunities as lifestyle trends emerge – i.e. inner city former industrial suburbs emerging as residential growth hubs

yield growth § Rental income and sustainable above market yield

§ Darwin, Brisbane and Perth, along with Canberra remain high yield markets due to affordability constraints and dwelling undersupply

§ Regional centers and Gold Coast showing improving yields, which are generally a leading indicator to dwelling price increases

§ Yield compression has not been material in the major capitals however will occur if prices continue to trend above rental growth rates

§ Higher housing approval levels likely to mean less upward pressure on rents in some areas

§ Rental growth currently not likely to outstrip dwelling value growth


KEY CYCLICAL THEMES

Cyclical Outlook

Summary Future Estate View Comments

global economy and policy

§ US Federal Reserve has plans to curtail QE policy

§ Chinese growth is slower § US economy is growing at an

estimated 2.5% p.a.

§ Indirect impact on residential property market via consumer confidence, access to credit and changes to price growth areas

§ No negative impacts currently, due to current RBA policies

§ Global negative impacts on local property markets are easing, given favourable exchange rate and local cash rate changes

§ Weaker AUD is leading to international investor interest

Domestic growth and policy

§ Australian annualised GDP growth of 3.2% which is above trend

§ Economy remains healthy however the recent tough budget had a dampening effect

§ Lowered cash rate and improved affordability is assisting in housing market growth

§ Unemployment, at 6% and a lower participation rate is starting to become an issue for the RBA

§ Interest rates low and forecast to remain stable until the end of 2014 which is having a strong impact on property investment activity

Housing affordability

§ REIA reporting 28.5% (26% in QLD) of household income is spent on mortgage payments, lowest in a decade

§ The median house price/income ratio is about 5, which is low compared to Asia & Europe

§ Lower interest rates have translated to strong auction clearance rates of over 80% in the major capital cities, areas with high employment

§ Affordable inner city suburbs are experiencing growth

§ Increasing house prices likely to be off-set by lower interest rates

§ Housing price growth, besides Sydney, remains at or below trend, which when combined with low interest rates is not having a major impact on affordability just yet

population growth

§ 1.8% for 2013 and showing an accelerating trend

§ Over 400,000 people migrated to Australia in 2013

§ Population growth is a major driver of demand for housing and is forecast to underpin a positive housing price outlook

§ Population growth trends are rising throughout 2014, driven mainly by overseas skilled migration

§ Migration to Australia concentrated in the capital cities Sydney and Melbourne, which has resulted in home value growth

§ Impact on housing demand /supply imbalance substantial – housing shortage too from reduced construction activity and investment

§ Victoria is the largest beneficiary of population growth, with nationally the capitals being major recipients of new migrants given greater employment prospects

Dwelling construction

§ Below-trend dwelling development continues

§ Recent spike in approvals still below demand levels

§ Housing approvals have increased throughout 2014

§ New Home Sales are increasing

§ 25,000 fewer homes built in 2013 compared to a decade ago

§ Higher construction levels has not yet met underlying demand largely driven by very high net migration and population growth trends

consumer confidence

§ Consumer confidence emerging, with stronger market fundamentals

§ Investor confidence remains above long term trend levels

§ Consumer confidence subdued, however property investors confidence is high

§ RP Data is reporting 250 suburbs around Australia tipped to double property values in 10 years

§ HIA reports hotspots are emerging

Household savings / demand for credit

§ Household savings ratio remains elevated at ~10% of income – back to 1980’s levels

§ Demand for housing credit still comparatively low

§ With confidence emerging, it is anticipated that demand for housing credit will emerge, especially given substantial buffer to mortgage repayments after recent savings

§ Demand for housing credit is still in line with greater investor interest

§ Investor credit demand is leading owner-occupier demand



BRISBANE

DARWIN

Future Estate Capital City Rating

PERTH

3.56Future Estate Capital City Rating

2.66

State Auction Clearance RateState Days on Market (days) State Discount RateAsking Price Index ChangeCity Vacancy RateState Property Market Score*




36.8%1277.1%1.3%2.2%2.85

67.7%1345.6%2.0%2.1%2.25

37.0%856.1%-0.1%2.4%2.25

SYDNEY


CANBERRA


HOBART


MELBOURNE


ADELAIDE

71.3%865.9%0.8%1.6%4.05


3.86

45.1%865.1%1.1%1.8%2.10


Future Estate Capital City RatingFuture Estate Capital City RatingFuture Estate Capital City Rating

3.23

67.1%1036.8%-0.1%2.5%3.30

3.23

20.8%1899.1%0.9%1.3%2.40

2.55

53.7%1467.0%0.2%1.5%2.55

3.04

DARWIN

BRISBANE

SYDNEY

CANBERRA

HOBART

MELBOURNE

ADELAIDE

PERTH

NSW

ACT

QLD

NT

SA

WA

VIC

TAS


3.11

* The State Property Market Score, which is out of 5, takes into account several factors, including demographic factors that indicate Future Growth, Quarterly House and Unit Median Price Growth Rates, Annual Dwelling Growth Rates and the Median Mortgage Payments as a proportion of the Median Household Income.

Sources: Australian Property Monitors, Domain.com.au and SQM Research.

FutuRe estate capital city RatiNg


This document contains general information and does not contain personal advice or financial product advice. This information has been prepared without taking account of your objectives, financial situation or needs. Accordingly, before acting on this information and making financial decisions, you should consider whether this information is appropriate for you and are recommended to seek independent financial, investment, tax and/or legal advice having regard to your own objectives, financial situation and needs. This information may contain material provided to Future Estate Group Pty Ltd by third parties. While such material is published with necessary permission, Future Estate Group Pty Ltd and its related entities accept no responsibility for the accuracy or completeness of this information, nor endorses it. To the maximum extent permitted by law, Future Estate Group Pty and its related entities disclaim all liability for any loss, costs or damage which arises in connection with the use or reliance on the information and material contained in this document. Any forward looking statements and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. Furthermore, past performance is not a true indicator of future performance. Any past performance information in this document has been given for illustrative purposes only and should not be relied upon as an indication of future performance.

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2014 dec property market overview and outlook