I’m often asked for my thoughts on where we are in the property cycle or the ‘property clock’ as investors look to identify those areas where to invest to maximise their returns. My response is a question: ‘Which market?”
A common misconception when looking at property in Australia is to talk about ‘the Australian market’. The reality is that each State has significantly different factors in play impacting property prices, vacancy rates, and rents. Keep in mind also that each State’s management, laws, taxes, budgets and treatment of property is quite different. State based economic drivers also create disparity.
A tale of two cities
The best way to explain this is a quick comparison between Melbourne and Brisbane. Based on median prices, in the 12 months to October Melbourne has achieved over 15% growth while Brisbane has not seen any growth at all so, for those who like to promote property in the hype of what ‘has happened’, Melbourne looks like the ‘easy sell’. The reality is the rest of the data paints a very different picture of where they sit on the property clock.
Supply & Demand
Over the last 10 years, even given last year’s results, Brisbane has outperformed Melbourne. Melbourne is now the most unaffordable capital city in Australia while Brisbane remains one of the most affordable. Victoria has the lowest constraints on supply and continues to build more dwellings now than pre GFC with an undersupply start position half that of Queensland. In Queensland the decline in new dwelling construction was far greater and while there has been some improvement it remains well below GFC levels further adding to undersupply. Rental yields in Melbourne are the lowest in the country for a capital city while Brisbane’s are one of the best.
So with low affordability, strong supply, low yields and results well in excess of the long term trend the indicators are that Melbourne is at the top of the property cycle while the opposite is apparent for Brisbane.
It’s also important to note that historically the Brisbane market cycle (peak through trough) has followed the Melbourne and Sydney trend by 18 months to two years. There are a number of factors for this including immigration, migration and economic trends and cycles, yet one of the key reasons often over looked is the regionalisation of Queensland.
In Victoria approximately 80% of the State’s growth occurs in Melbourne. Similarly in NSW over 70% occurs in Sydney while only approximately 45% of Queensland’s growth occurs in Brisbane. The effect of the economies of scale is significant, but also shows the importance of the regional centres in Queensland.
Understanding the Property Clock or ‘cycle’ in regions in Queensland is also important in trying to identify those areas that have strong fundamentals for growth going forward. For example, understanding the differences in growth stages between the Gold and Sunshine Coasts and being aware of the varying economic drivers in regional centres such as Cairns and Townsville in the north as well as the many different factors influencing mining centres.
It goes much further as the drivers of a market in a particular suburb or estate can also change over time so the need to get beyond just the ‘timing’ and raw data to gain an intimate understanding of an area’s capacity to provide opportunity for growth and yield is just so important in maximising your returns and minimising your risk.
Ask the right questions
When looking to make any investment don’t try to just pick the timing or what looks good on the surface, always try to start with the outcome you want to achieve and work backwards from there by getting intimate with the areas you are looking to invest and investigating the fundamentals before you jump in.
The next question is ‘what is your model and methodology for doing that?’ … but more on that later.