Property Markets, Pancakes And Tennis Balls

Right now, the property markets of Perth, Brisbane and Adelaide continue to produce double-digit capital growth and their outlook remains solid for the foreseeable future.

Regional cities such as Townsville, Mandurah, Barossa, Rockhampton, Bunbury, Gold Coast, Busselton, Port Lincoln and Geraldton lead the list of Australia’s hottest real estate.

Conversely, the property markets of Melbourne, Hobart, Canberra, Darwin, Geelong and Port Macquarie are all as flat as a pancake.

Based on naive presumptions that they will swiftly rebound, there seems to be an increasing amount of commentary regarding now being a prime time for investing in a so-called ‘popular’ city purely because the market is flat.

Beware.

History is proof that the time between when an individual city commences its flat period and the beginning of the next growth cycle can be as soon as 2-years, or as long as 15-years.

Property markets are not tennis balls

Regardless of their title or so-called claim to fame, those who assume that the trajectory of real estate prices has something to do with gravitational forces are merely highlighting their embarrassingly poor knowledge about property market drivers.

‘Rebound’ and ‘correction’ are terms which belong to tennis courts. They have no place in any intelligent property market conversation. The outlook of each property market is determined by the combined sum of all pieces to the property puzzle.

Wishful thinking, hope and barracking for one’s hometown are emotional reactions, not growth drivers.

Acting on naive hope of a growth cycle about to commence can become the cause of several years of powerless frustration, regret and buyer’s remorse while the asset value treads water.

For example, across the 10-years ending May 2019, Brisbane and Adelaide produced an entire decade of serious disappoint. The median house and apartment prices increased by just 28 and 7 percent in Brisbane and 31 and 14 percent in Adelaide.

During that same 10-year period, enormous capital growth was produced from houses in Bowral NSW (138 percent), Kineton VIC (104 percent), Wollongong NSW (95 percent), Geelong and Warragul VIC (both 84 percent), Cessnock NSW (81 percent), Sydney NSW (77 percent), Hobart TAS and Melbourne VIC (74 percent) and Bathurst NSW (66 percent).

Brisbane also had 5-year flat patches during the mid-1980’s and the late-1990’s.

A lifetime of studying official evidence has proven that every location is susceptible to having prolonged flat periods.

Beware confirmation biases and vested interest.

Over the years, there are plenty of locations across Australia which had a flat property market at the time Propertyology began investing in them.

But, on its own, being flat is not an intelligent reason to invest.

Any decision to invest in a specific township should always be underpinned by a significant critical mass of quality information which provides confidence that local economic growth is just around the corner, along with the local housing supply pipeline being tight.

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Over the last 3-decades, Sydney’s median house price declined in eight (8) separate calendar years. Many regional locations had just 3 to 6 calendar year declines over the same 30-year period [here’s one example].

Since 1980, Sydney experienced four (4) extended periods when its property market was flat.

From 1981 to 1985, Sydney produced a very mild 11 percent growth ($79,000 to $88,000) while Adelaide boomed (84 percent).

Someone with capital to invest in real estate in 2004 and decided to place it in Sydney would have been frustrated by the ZERO capital growth over the 5 ½ years to late-2009.

Conversely, someone with a borderless mindset and the ability to skilfully assess conditions would have enjoyed more than 40 percent capital growth in cities such as Armidale NSW, Brisbane QLD, Broome WA (75 percent), Burnie TAS, Busselton WA (75 percent), Cairns QLD, Canberra ACT, Darwin NT (98 percent), Launceston TAS (44 percent), Mandurah WA, Murray Bridge SA, Perth WA (70 percent) and Yass NSW.

This pancake-flat period that Melbourne currently finds itself in is very similar to the 1990’s.

Victoria’s economy was in the dark doldrums for a good chunk of the 1990’s. Consequently, Melbourne’s property market endured seven (7) very long years of zero capital growth.

Unfortunately, given Victoria’s current annus horribilis debt level, its awful tax regime and its anti-investor attitude, I think it is likely that Melbourne’s property market will continue to be significantly inferior to the national average for quite some years [here’s why].

Check out the best and worst of the last 3-years:

For conditions to improve in any property market, the actions of major stakeholders must first improve.

Perth has a fascinating property market history.

Imagine owning real estate and seeing just 8 percent capital growth while the combined capital city house price increased by 133 percent. That was Perth during the 5-years to the end of 1974.

Similarly, Perth produced just 33 percent growth ($36,000 to $48,000) over 7-years to 1984 while the national average growth was 94 percent.

Perth holds an all-time national record for the longest period without real estate capital growth (14-years).

Despite having the highest rate of population growth of all capital cities over the particular 14-year period, Perth’s median house price went from $482,000 in October 2006, to $585,000 in July 2014 and then slipped back to the starting value of $482,000 by October 2020.

The most important takeaway from the Perth scenario is not ‘what’ or ‘when’ it happened, but learning ‘why’ it happened.

Perth is a fantastic Case Study to properly appreciate growth drivers, and to be able to differentiate between a naïve person’s perceived ‘risks’ versus legitimate risks within a market.

Rubbish ratios

One of the biggest nonsense statements ever made is ‘market [x] is under-valued’.

Now and always, real estate is worth whatever a buyer is prepared to pay – it is not an index.

The broader market value is determined by the combined sum of all buyers within a chosen location. It is therefore impossible for any property market to ever be ‘under (or over) valued’.

Unfortunately, property markets are littered with factually false myths which adversely influence important decisions.

Anyone who thinks there’s a financial relationship between the population size of two cities and their respective median house prices should consider a career change to comedian.

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For the record, the highest median house price in 5 out of Australia’s 6 states are regional cities. Each of those cities has a significantly smaller population than the state’s capital.

Suggestions that ‘Melbourne is now a bargain that is too good to ignore’ is just gibberish.

The fact that Sydney and Melbourne are both big, global cities with a similar population size but a widening gap between median house prices ($1.3 million versus $850,000) has no relevance at all to future property market performance.

If there was any truth whatsoever to the so-called ratio of ‘population size versus house prices’, how do those ‘geniuses’ explain the fact that, included in Australia’s Top 10 Most Expensive Cities are six (6) locations which each have populations of less than 50,000 people and a median house price above $1 million?

Whether a location is a capital city or part of regional Australia, whether its population is 5 million or 50,000, whether it is coastal or inland, or if it has a warm or cool climate has absolutely zero bearing on property market performance.

All of the evidence proves that.

Hold ‘em or fold ‘em?

For those who already own an asset/s and then realise that the market has become ‘flat’, there can be a temptation to sell up and invest the capital elsewhere.

Of course, each situation should be reviewed on its own merits.

The transaction costs to sell out of one market and then ‘recycle’ the capital into an alternative market can exceed $100,000. Real estate is not a ‘tradeable’ commodity.

In a majority of situations, it is usually more beneficial to HOLD the existing asset.

As mentioned earlier, no location is immune from flat periods. Throwing the toys out of the cot won’t change anything.

While there are numerous variables associated with each city which will determine capital growth rates in future years, investors in Australian residential real estate can take great comfort that house values in almost every location have tripled in value (or more) across each block of 20-years.

Propertyology are national buyer’s agents and Australia’s premier property market analyst. Every capital city and every non-capital city, Propertyology analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

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