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Real Estate Industry

September 28th 2012

PROPERTY REPORT - October 2012

It all looks positive - if only we could find some leaders.

by Terry Ryder.
creator of hotspotting.com.au

Introduction:
It all looks positive – if only we could find some leaders

The consumer confidence index published by Westpac shows most Australians absolutely insist on being pessimistic, despite everything.

Yes, we know interest rates are low, that wages have risen strongly, that unemployment is low, that the Federal Government is handing out money and that we live in the lucky country, blessed with resources coveted by the rest of the world … but, no, we refuse to be optimistic.

In one sense, we all need a kick in the proverbial and short, sharp lecture on counting our blessings and understanding how good we have it.

On the other hand, why would a nation with such ordinary political leaders be anything but downcast?

This situation presents the theme of this report: leadership – and how it impacts on property markets.

For a detailed analysis of markets nationwide, click on the topics below ...


National Overview How leadership is hurting confidence – and why it matters to real estate.
Adelaide SA’s prospects solid despite Olympic Dam delay.
Brisbane Regional Qld getting on with business, despite government brain explosion.
Canberra The ACT remains solid, again, as usual.
Darwin One place that’s buzzing – but still they tossed out the government.
Hobart Low prospects made worse by an austerity government.
Melbourne Melbourne burns while the government fiddles.
Perth No problems for WA, which leads in every important measure.
Sydney Sydney running on the spot but the regions are stretching out.
 

National Overview:
How leadership is hurting confidence – and why it matters to real estate

Has Australia ever had a more volatile electorate? I don’t think I’ve ever seen voters so angry with their political leaders.

The last five state or territory elections have resulted in the incumbents being dramatically tossed out. In the cases of New South Wales and Queensland, the results were landslide defeats for the people in power.

In each case, the losers were ALP governments. But I don’t believe the outcomes were a backlash against Labor. They were an act of revenge against double-talking, back-stabbing, promise-breaking politicians, whatever their political leadings.

Julia Gillard has a tragic approval rating as Prime Minister (27% in mid-August), yet she’s level pegging with Tony Abbott as preferred Prime Minister. Abbott’s approval rating is only marginally better than the PM’s. Voters dislike not only the incumbent but the alternative.

Ted Baillieu has been in charge of Victoria for 18 months. All those who preceded him as Premier, including John Brumby and Steve Bracks, increased their approval ratings in the first year and a half in office. Baillieu, on the other hand, has seen his popularity go through the floor, with an approval rating down to 36%.

Campbell Newman has been Premier of Queensland for only five months, after a landslide election win, but already his popularity has dived. In a mid-August poll, primary support for the LNP dropped from 56.4% to 44.2% in the space of a month.

People are fed up with the poor performance of politicians and the cynical ease with which they promise one thing and deliver another.

This country is crying out for positive leadership and it’s not getting it. And it’s the single biggest reason why consumer confidence is so consistently low.

Australians should be optimistic. We have one of the world’s strongest economies and we remain one of the few nations where the economy is growing, unemployment is low and incomes are rising.

But there is nothing coming out of Canberra or any of the state capitals – on either side the political divide – to inspire Australians.

Julia Gillard has failed to build a rapport with the people, while Tony Abbott has lost support by constantly talking down the nation and overseeing a further deterioration in parliamentary behavior.

The state governments in our three biggest states are pursuing austerity policies. Public service jobs and spending programs are being cut back, while public assets are being sold. At a time of prosperity, they’re sending a recession message to Australians.

Queenslanders who voted in Campbell Newman and his LNP team in a March landslide must be wondering what hit them, particularly as little of what’s happened since was foreshadowed in the election campaign. The new state government has devoted most of its energies to destruction and little to construction.

Around 20,000 jobs are being cut, dozens of government programs have been killed off, and growth projects like the expansion of the Abbot Point export facility have been snuffed out – it’s almost as if LNP politicians are taking revenge on the electorate for keeping them so long in Opposition.

In their first five months in office, nothing constructive has been done to inspire confidence or create jobs. Queenslanders voted out Anna Bligh and her Labor team emphatically  - and expected Newman to come in and live up to his reputation as “can do” kind of leader. To date he has disappointed his constituents.

A new poll says his popularity has plunged. The Galaxy poll in the Courier-Mail found Newman's dissatisfaction rating, only 19% in May, is now 49%. His satisfaction rating has dropped from 64% to 44%.

All this may seem unrelated to real estate. It is not. The single most important ingredient in a strong market is confidence. Without it, sales don’t happen and markets don’t percolate.

It’s the missing ingredient in real estate today. Every other component for a rising market is in place: a growth economy; low unemployment; rising incomes; low interest rates; and improved affordability as a result of incomes, prices and interest rates all moving in the right direction in the past two years.

Optimism is the only component lacking. It was only come when leaders step forward.

Australia’s buyer’s agents have similar views. The Real Estate Buyer’s Agents Association of Australia (REBAA) says the coming Spring property season will be subdued because of low buyer confidence and concerns about job security.

Despite low interest rates and conservative prices, the association predicts buyers will remain cautious. REBAA spokesperson Byron Rose says buyer confidence is a big issue affecting the current market and recent interest rate cuts will not guarantee a flurry of buyers.

“They’re worried if they will have a job tomorrow,” he says. “Many of them are sitting tight and not upgrading, preferring to avoid the risk of increased debt.”


Adelaide and South Australia:
SA’s prospects solid despite Olympic Dam delay

South Australia is one of the few Australian states or territories not pursuing slash-and-burn policies. The state is just quietly going about its business in the post-Rann era. The state administration appears aware that Australia is not in recession.

Media, in its simplistic way, has characterized SA as a place with only one show in town: the $30 billion Olympic Dam expansion. And now that BHP Billiton has pulled back from its original plans and timetable, SA therefore is a place without impetus.

This is simply untrue. SA has a lot more in its repertoire than the Olympic Dam mine. It has massive undertakings like the $8 billion Air Warfare Destroyer construction project, it is building an impressive amount of new infrastructure in Adelaide, billions are being invested in wind farm developments and there are numerous mining enterprises of significant scale.

Infrastructure developments include the South Road upgrade, the new hospital, the extension of rail links to Seaford, the upgrade of the Southern Expressway, the new desalination plant and electrification of the commuter rail system.

The state’s resources sector has been in a significant growth phase for many years and this will continue. Iron ore mines are in various stages of development on the Eyre Peninsula and elsewhere, including several multi-billion-dollar enterprises. There’s a $1 billion expansion of Prominent Hill mine, among other projects, happening near Coober Pedy, and the $2 billion Hillside mining venture on the Yorke Peninsula. There are multiple export port projects in various stages of planning and development around the state.

A far bigger potential for SA than Olympic Dam is the prospect of mining operations in the Woomera Prohibited Area, following last year’s joint federal-state announcement. The resources in this area and the potential investment are far greater than BHP Billiton’s piddling little affair at Roxby Downs.

The other thing likely to overlooked as media over-dramatises the impact of the BHP Billiton decision is that the company isn’t scrapping the development of its Roxby Downs resource. It says it’s going to seek less expensive ways of doing it.

So something major will happen at Roxby Downs, just not as big or as soon as was originally planned.

In the meantime, regional centres like Whyalla, Port Augusta, Port Lincoln, Ceduna and Coober Pedy continue to present good prospects for investors seeking to buy affordably in locations with growth potential.


Brisbane and Queensland :
Regional Qld getting on with business, despite government brain explosion

Queensland ranks as one of the boom states but somebody forgot to tell the members of the new State Government.

Campbell Newman and his team were elected in March in one of the most startling landslide results in Australian history, but have used their mandate to decimate jobs, services and spending programs, with a consequent drop in consumer confidence.

In the most recent consumer sentiment index from Westpac, the nation’s biggest decline was recorded in Queensland.

A new poll says Newman's popularity has plunged, with nearly half of the state's voters unhappy with the way he’s doing his job.

The Galaxy poll in the Courier-Mail on 27 August says Newman's dissatisfaction rating is now standing at 49%, up from 19% in May. His satisfaction rating fell from 64% to 44% in the same period.

The sharp decline in popularity, after only five months in office, comes as the State Government slashes public sector jobs and services. Between 15,000 and 20,000 public service jobs are going and big cuts are being made to education, health, cultural and environmental programs.

The election of a new government as the state was moving into an economic recovery phase was a recipe of rising consumer confidence, always good news for real estate. That has been snuffed out with record speed.

Meanwhile, thankfully, regional Queensland is getting on with business. The idea that “the resources boom is over” is difficult to comprehend in the light of projects in the development pipeline in this state.

The emerging new resources province in the Galilee Basin west of Emerald provides a good example. The Federal Government has just granted approval to the $6.4 billion Alpha coal project and its proponent, Indian firm GVK, says the economic climate is “ideal” for it to proceed. Construction will begin in 2013 on the mine and associated infrastructure, including rail links to export facilities.

The Alpha coal venture is one of four mega projects targeted on the Galilee Basin and gives further boost to the Emerald property market, where vacancies are near zero, rents are rising and price growth is expected to be strong.

Generally, Queensland’s mining sector sees a strong long-term future, despite the short-term problems of lower world prices for commodities such as coal.


Canberra and the ACT: 
Canberra remains solid, again, as usual

It’s not only state governments that see a smaller public service as a shortcut to balancing the books: the Federal Government is also pruning staff numbers and that tends to put a dampener on the Canberra property market.

The ACT has consistently recorded the lowest unemployment and highest average incomes in the nation, boosted by well-paid public sector jobs. That has translated into one of Australia’s steadiest property markets, seldom doing anything dramatic but always solid.

And, despite the negative sentiment created by the job cuts, Canberra’s market has continued to hand tough, as it so often does. They reckon good property investment is boring and Canberra supports the theory. It’s so consistent it’s downright dull.

The latest figures from RP Data suggest a steady market. The value index for houses recorded a 0.1% rise in the three months to the end of July. Year-on-year Canberra had a 0.1% fall. That, in my book, means no change. In the current climate, that’s a solid performance.

With apartments, the value index recorded a 1.5% rise over the 12 months to the end of July. And the total return year-on-year was 7.4%, the best result for any of the capital city unit market.

The number of people taking out new home loans in the ACT increased for the third straight month in June. ABS figures show a 1.7% increase in new loans to owner-occupiers.

One thing in Canberra’s favour is the steady ongoing delivery of infrastructure developments. There is always activity happening with improvements to the airport or the road system ro to medical facilities, and expansions at the city’s universities provide steady work.

The $400 million Cotter Dam water supply project is another part of the current economic mix in the national capital, as is the $111 million Centenary Hospital for Women and Children.

Despite the trimming of the federal public service, Canberra remains solid.


Darwin and the Northern Territory:
One place that’s buzzing – but still they tossed out the government

I read a recent comment that if you’re an Australian real estate agent right now, you’d want to be working in Darwin.

Darwin is one place where confidence is running high, buoyed by prospects of an economic upsurge as the city evolves as a hub for the LNG industry.

This has made Darwin the national leader among the state and territory capitals for real estate performance – indeed, Darwin is the only city achieving significant price and rental growth this year.

The Australian Bureau of Statistics recorded a 5% rise in Darwin’s house price index in the June Quarter, easily the best result among the eight capital cities. More recently, RP Data’s report on capital city prices to the end of July gave Darwin a 9% for the previous 12 months, including a 7% jump in the month of July. The index for Darwin apartments was up 6% in 2012 so far.

It is the only city with values above those of a year ago. And it’s similar with rents. Australian Property Monitors finds Darwin’s house rents are 18% higher than a year earlier and unit rents are up 11%. The only other capital city with significant rental growth is Perth.

The primary reason for all this bullishness in Darwin is that the $34 billion Ichthys gas project which will extract gas off the coast of Western Australia and pipe it to Darwin for processing and export.

There are other things happening in the Northern Territory economy – like the $110 million Marine Supply Base, the $110 million Palmerston Hospital and some significant mining ventures – but the Ichthys project dwarfs everything else.

It’s approved, Prime Minister Julia Gillard officially launched itin May and the Darwin business community is buzzing.

Despite that, the Territory election on 25 August tossed out the incumbent government. It’s the way the electorate is at the moment. Any incumbent, good or bad, is likely to be voted out, given the public’s general dismay with their political leaders.


Hobart and Tasmania:
Low prospects made worse by an austerity government

Tasmania is the state/territory that needs austerity the least. But it’s getting it anyway, as the ALP-Greens coalition seems to have few ideas other than cost-cutting.

The state needs stimulus. It is disadvantaged by its geographical location and it lacks the commodities that drive many of the mainland states and territories. But it’s getting the opposite of stimulus from the State Government.

This comes against a background of almost zero population growth and unemployment at 7%, easily the highest in the nation, with economic growth virtually at a standstill.

So it’s not a surprise that the worst result on house prices among the capital cities is in Hobart. According to the RP Data-Rismark July home value indexes, Hobart’s home values remain 6% lower than a year earlier – easily the worst result among the capitals.

Confidence in Tasmania's property industry is among the lowest in the nation, according to the latest Property Council-ANZ Property Industry Confidence Survey.

Tasmanian small business confidence is the most fragile in the nation, falling again in the June quarter. Report author Christena Singh said sales, profitability, capital expenditure and export indicators had weakened in Tasmania to levels well below the national average.

One of the problems for the Tasmanian economy and its property markets is that there is virtually no infrastructure development happening and few major business ventures.

One of the great hopes was the Gunns pulp mill in the north near Launceston but Gunns has been swamped by “a tsunami of bad financial news” so the $2.3 billion project is unlikely to happen.


Melbourne and Victoria:
Melbourne burns while the State Government fiddles

Victoria has one or two problems – or perhaps more accurately, Melbourne does.

Its State Government, like others around Australia, has a recession mentality and is behaving in a way that could turn that mentality into reality. It’s cutting jobs and spending programs at a time when the state needs spending on infrastructure.

At the same time, businesses are cutting back, with significant downsizing by major enterprises based in Melbourne.

Victorian business has sent out a mayday call, warning that the state's economy is deteriorating. A new business survey reports that conditions have slid to their worst levels since 2009, and are expected to get worse in the coming year.

The 300 or so employers surveyed said conditions were the worst since the global financial crisis. Sales, profits and business investment were all at their lowest level since March 2009. The only growth was in wages and labour costs, they reported.

Forecasts for 2012-13 were even bleaker. For Victoria, only 9 per cent forecast stronger growth in 2012-13, while 61 per cent tipped growth to weaken.

None of this helps the property market. And it’s happening at a time when Melbourne has serious over-supply issues. There are far too many new apartments being built in the inner-city areas and some of the outer suburban areas have a surplus of house-and-land packages.

Developers are seeking buyers in Asia and/or trying to attract local buyers by offering incentives – anything from free tropical holidays and cars to furniture packages and big rebates on the purchase price.

Ironically, the one area of the economy the State Government is seeking to stimulate is the property development sector. They have lots of friends in the development industry and the government is freeing up land releases and the approvals process, moves likely to add to the over-supply problem.

It’s looking a lot brighter in some of the key regional areas. Cities like Ballarat and Bendigo appear rock-solid, boosted by the diversity in their economies, their proximity to the state capital and the affordability of their housing stock.


Perth and Western Australia:
No problems for WA, which leads in every important measure

The one state government that doesn’t have issues is WA. And why would it? It has the No.1 growth state and the resources revolution has been firing up revenue and jobs.

Population growth? It’s WA first, and daylight second.

Unemployment? WA has taken over from the usual leader, the ACT, as No.1 in the nation.

Economic growth? WA is so far out in front it’s ridiculous.

Housing finance for owner-occupiers? WA, once again, is a long way in the lead.

You get the picture. The easiest job in government is running WA.

One of the consequences of all this prosperity is a sharp lift in residential rentals in Perth. Australian Property Monitors records a 10.3% rise in median house rents for FY2012 and a 10.1% for apartment rents. Apart from Darwin, Perth is the only Australian capital city to deliver meaningful rental growth in the past year.

As yet, prices haven’t moved to the same degree in Perth. Both APM and the Australian Bureau of Statistics recorded small rises in median house prices in the June Quarter but no significant movement.

It’s outside Perth that we’ve seen the major shifts. The median house price in South Hedland has risen 8% in the past 12 months, while neighbouring Port Hedland has maintained an average of 15% per year growth over the past five years.

The median price in mining town Newman has continued to rise and its 10-year average remains above 30% per year! Another mining town, Tom Price, has seen it median price rise 30% in the past year and its 10-year average is only a little below that of Newman.

Yet another mining location, Kambalda, has had a 17% rise in its median house price in the past year.

Of the regional centres, Broome in the far north has increased 10%, as has Esperance in the far south.

BHP Billiton’s recent jitters may make some punters nervous, but there’s still plenty of bullish go-forward attitude coming from other major mining companies, including Fortescue Metals Group, Hancock Prospecting, Rio Tinto and the big gas companies like Chevron.


Sydney and New South Wales:
Sydney running on the spot - but the regions are stretching out

New South Wales has another of those state governments which appears to believe the only way forward is to go backwards. Cut spending, cut programs and cut jobs. And if you can’t cut it, sell it.

The one positive factor is that the State Government appears to be serious about building the North West Rail Link.

But Sydney has a lot of catch-up to do in terms of building the transport infrastructure that it needs. It’s a sad indictment on NSW that Adelaide has more infrastructure projects under way than does Sydney.

The Sydney property market is trying hard to mount a recovery, but, like most other major cities, is being curtailed by the absence of confidence.

In the June Quarter, Sydney’s median house price nudged upward a fraction and there was small growth in residential rentals. So far in 2012 Sydney’s value indexes, as recorded by RP Data-Rismark, have grown 1.2% for houses and 4% for apartments. So the decline of 2011 has been arrested, but there’s little forward motion.

Auction results remain lukewarm at best and the evidence suggests the upper end of the market is still very soft.

Once again, the best options are outside the state capital.

The Hunter Valley continues to be one of the nation’s strongest local economies, boosting towns like Muswellbrook and Singleton, which have had healthy price rises in the past year. East Branxton, a local well-placed to benefit from the $1.7 billion Hunter Expressway (well advanced in construction), has had a 16% rise in its median price in the past year.

Other strong regional markets include Tamworth, Wagga Wagga, Goulburn and Dubbo.

Dubbo is an interesting case. No one ever seems to expect much to happen in Dubbo, but it’s one of the most vibrant regional cities in NSW. Its population is rising, business is growing, new things are being built and mining ventures are starting to evolve on its doorstep.

Dubbo’s hospital is undergoing a major expansion, other infrastructure is being upgraded and there’s an NBN rollout happening. With typical houses in the mid-$200,000s, affordability is an attraction for investors.

 


Conclusion:
Yes, resources are a fundamental factor – but don't rush to mining towns

Mining and associated infrastructure is the strongest of the pistons driving the national economy and its property markets – but don’t rush out and buy real estate in a mining town.

That’s unless, of course, you understand the risks and are willing to trade that for the prospects of high rental returns and capital growth.

Recent events at Dysart in Queensland’s Bowen Basin provide the perfect illustration. Dysart has averaged annual growth in its median house of 31% per year – yes, 31% a year – over the past decade. Double-digit rental returns are available on houses because rents are so high, thanks to demand from mining companies and their workers.

But then, in April, everything took a surprise turn. BHP Billiton, after 18 months of disputes with unions, spat the dummy and announced it was closing down the Norwich Park coal mine. If it’s serious (rather than using the threat as a negotiating tactic) 1,400 people will lose their jobs – although some may be re-assigned to other mines in the area.

That seriously changes the market dynamic in Dysart. Anyone who recently bought a rental property in Dysart at the median price (close to $500,000) would be feeling a little sick right now.

The safest way to exploit the Resources Revolution as property investors is to buy in substantial regional centres that benefit from the mining sector but don’t depend on it – places like Toowoomba and Mackay in Queensland, Muswellbrook in the Hunter Valley of NSW, or Geraldton in WA.

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