The unit market in the Brisbane’s CBD is looking like having a sizeable price correction, peaking towards late 2017/early 2018. This correction is already well under way as unit prices have dropped seven quarters in a row, according to Domain Group data. (see table below)
Changes in Brisbane Unit Prices
Source: Domain Group
Due to a large amount of off-the-plan properties in the construction pipeline yet to be completed, we have only started to see the beginning of this apartment glut horror story.
Some investors, who are yet to settle on these off-the-plan properties will now find there is tougher lending conditions applied to their units. Such as buyers being required to put 30% collateral down. This is becoming increasingly common in Brisbane and many other parts of the country as oversupply risks loom. This is obviously not a desirable outcome and numerous of-the-plan buyers will fail to complete their sale as a result of not being able to supply the additional cash required for settlement.
Unfortunately for those involved in this unit market, the oversupply issue will continue to rise well into years 2017 and 2018. This is a bleak outlook for developers, banks and homeowners involved in these units. As it could take many years for the oversupply to be completely absorbed.
What makes things even worse for the high-rise unit market is vacancy rates are very high. Brisbane CBD has a vacancy rate of 4.7% (August 16). Other suburbs have even higher rates, for example Hamilton has an 8% vacancy rate! When the majority of the construction/approved buildings appear online in 1-2 years, vacancy rates will rise even further. This means there are investors in these areas who are to experience large vacant periods and are not going to see any rental growth on their properties for an extended period of time. As rental prices drop or stagnate, so does the property value to investors.
Some of you may be thinking, with such a large correction in price on its way, is it a good time to purchase a unit once prices are lower? The short answer is no! Once values have dropped in a couple of years, due to high vacancy rates, poor yields, and the forever threat of another oversupply, we would still advise to steer clear of these types of properties. As these same red flags will appear time and time again due to the nature of an inner city property market.
In summary stay well away from the Brisbane unit market, it’s about to get chaotic!
On the other side of all this is the housing market, particularly referring to the established suburbs. Things are looking a lot more positive to say the least. According to CoreLogic-Moody’s Analytics Australia Home Value Index Forecast, Brisbane will grow by 6.1% in 2017. This 6.1% includes the imploding unit market, so to compensate the declining units, houses are looking to have a stellar year. This increase in growth is mostly due to low interest rates, high yields for investors, tight vacancy rates and affordable property prices.
2017 Forecast for All Major Property Markets in Australia
The average vacancy rate for established Brisbane suburbs around 2%, well below the 5% vacancy rate mentioned above for the units. For example, some outer suburbs popular with investors: Redcliff 1.7%, Alexandra Hills 0.8%, Kingston, Woodridge and Logan Central 1.9% and Ipswich 1.9%.
A 3% vacancy rate represents a balanced market, where there is an equal number of renters and properties available to rent. When the vacancy rate is below 3%, you can expect rental growth for your properties. With rental growth comes increasing returns on the investment property. When returns are higher, future investors will show more interest in these returns and they will push prices up as they contribute to an increasing in demand. Looking at vacancy rates is one of numerous ways of predicting future capital growth
Yields in Brisbane are also very high when compared to other capital cities.
See below for the Current Yields for Freestanding Properties in each Capital City
Data provide by CoreLogic 2016
As you can see Brisbane, Darwin and Hobart are the top three destinations for cash flow. However, the Darwin property is a market falling sharply in value and the long-term growth drivers for Hobart are weaker when compared to Brisbane. So this makes the Brisbane yields look even more attractive when you know they will be accompanied by capital growth.
There is one other factor to consider and that is the affordability of the Brisbane market compared to other capital cities in Australia. Brisbane’s closest neighbor Sydney has an average income of Sydney is $88,692, Brisbane is $82,980. This show the average salary in Sydney is only 6.9% higher than Brisbane. Now compare the differences in average property price: Sydney average property price is $880,000, Brisbane is $535,000. That shows Sydney’s average property price is 64% higher than Brisbane’s, and they only get paid 6.9% more!
This affordability will cause many interstate investors and owner occupiers to buy in Brisbane. So as long as the unemployment is low, salaries are high and yields are strong, there will be nationwide investor/owner occupier demand for freestanding houses in Brisbane. This will ensure sales volumes remain high and that capital growth continues.
To recap, it’s a great time to invest in the Brisbane market due to:
1. Affordability – compared to Sydney and Melbourne, Brisbane is ridiculously cheap
2. High yields – third best capital city behind only Hobart and Darwin
3. Tight vacancy rates – for the free standing house market most suburbs are below 2%
Despite the negative headlines in the media focusing on only the unit market, there is a huge opportunity to make money in the Brisbane property market with record low interest rates, and bottom of the cycle house prices. However, take this as a warning, there has also never been such an easy time to lose money in real estate. Very interesting times ahead.