Brisbane fundamentals provide baseline for recovery
Property market headlines around Australia right now are full of doom and gloom. They are usually based on a worst-case scenario, which includes a long and drawn out economic downturn on the back of the COVID-19 pandemic, but is this what we now expect?
Here we explore property market fundamentals in Brisbane, which is a very different property market to others around Australia.
Brisbane is the third most populous city in Australia behind Sydney and Melbourne. Brisbane’s property market is a very different beast to the larger capital cities as well.
Additionally, the way Queensland has tackled the COVID-19 pandemic has been remarkable and the number of active cases is now just 12 across the entire state, four of which are currently hospitalised, while one is in intensive care.
Prior to COVID-19, the momentum in the Brisbane property market was strong, with upwards price pressure evident in many investment grade locations. It was a dominant seller’s market with very high buyer demand and historically low levels of stock.
It was also common for quality properties to be listed for sale, and within just days being in a multiple-offer situation, purely due to the depth of buyers looking to position themselves in the market.
These buyers were made up of a balance between owner-occupiers and investors. For many investors, Brisbane is appealing on the basis of its affordability.
Brisbane’s median house price is just 55 per cent of the comparative median house price in Sydney, and the gross rental yields achievable in Brisbane are greater than 4 per cent, according to market analysts CoreLogic. Gross rental yields in Sydney are 2.9 per cent, CoreLogic said, and 3.2 per cent in Melbourne.
Brisbane’s market has been through a period of tight supply for more than 12 months, so buyers have had limited stock to choose from. Supply is the result of new listings (ie: properties brought to the market for sale) as well as new dwellings being built and in Brisbane these numbers have been down across the board.
Even before the pandemic, stock levels were low but improving, however, by April there were further falls in new listings in Brisbane according to SQM Research, down by 10.1 per cent from 12 months ago.
The low supply looks likely to continue on the basis of new building approvals which were down 2.7 per cent year-on-year in Brisbane to the end of March. These numbers were announced off the back of falling construction commencements over the last 12 months.
According to this data, future potential supply could be subdued for a long time.
In our opinion, it is unlikely that we will see an increase in listings due to distressed selling at the end of the current repayment pause period during Covid-19. According to Domain, the number of distressed properties listed for sale has fallen in Brisbane from February to mid-May.
Additionally, based on the number of Commonwealth Bank customers who have applied for mortgage pauses to date (4 per cent of their customer base), as a percentage of the number of overall properties in Australia (10.4 million as estimated by Corelogic), and remembering that according to ABS Census data only 37 per cent of the estimated total dwellings in Australia actually have a mortgage, it is just under 1.5 per cent of the total dwelling stock that may be brought to the market, assuming all of those who currently have mortgage freezes in place go on to be distressed sellers – which in itself in unlikely.
This is just not enough distressed selling pressure to materially impact supply or property values.
On the demand side of things, there are a lot of things to consider in the current environment. Yes, we will see an increase in unemployment and yes, the economy will slow down for a short sharp period as predicted by most economists.
However, these are not the only things that impact on the demand for property, so while we need to consider their potential impact, we also need to consider other factors that contribute to the demand side of things.
Right now in Australia, we have record low interest rates and according to the RBA, we can expect interest rates to remain low for a long period of time.
Access to credit also contributes to the demand for property and it is an historically significant time in history at the moment, because it has never been cheaper to borrow money to buy a home or an investment property in Australia.
For those with secure incomes and good financial buffers, it makes perfect sense to invest for the future when funds are so cheap to borrow.
Also, population growth contributes to the demand for property. Basically, as more people move into a location, more dwellings are needed to house those people.
Currently, due to COVID-19, the borders are shut, so population growth has stalled. With international borders closed, and likely to stay closed for a long period of time, the property markets to be impacted the greatest by this slowdown in international migration are Sydney and Melbourne.
On the other hand, Brisbane typically expands its population through interstate migration, being a large recipient of those looking to move to the sunshine state for a more affordable way of life.
We expect the trends in interstate migration to South-East Queensland to continue to be strong once the borders reopen between the states.
Perhaps also, on the back of living through a pandemic, even more interstate migrants may decide to take a lifestyle change and move to sunny Queensland, putting further upwards pressure on demand for Brisbane property.
Of course, there are many other drivers of demand including the desirability of a location, school catchment zones and accessibility to employment hubs to name a few. These demand drivers are less impacted by the broader economic environment as they relate more to lifestyle choices that people consider when looking to purchase a home or an investment property in Brisbane.
We also know that a large volume of those who have lost their jobs due to COVID-19 are in the younger age groups with the youth unemployment rate increasing to 13.8 per cent.
While this in itself is not good news, it’s impact on the property market may be negligible due to the fact that the youth are typically not property owners, but rather renters.
So let’s explore the rental markets as this does have an impact on property investors.
Vacancy rates in some parts of Brisbane have indeed increased due to the impacts associated with COVID-19. The data confirms that those suburbs that have seen the greatest increase in rental vacancies are those in which high density unit developments have been built over recent years.
These areas are in and around the Brisbane CBD as well as areas around the university precincts.
When we look at vacancy rates in other suburbs in Brisbane over the last few months, they have remained largely unchanged. There are still many investment grade locations in Brisbane with vacancy rates of less than 2 per cent, which indicates a very tight rental market.
And finally, what about rents? The media might have you believe that rental arrears are significant across Brisbane and that many tenants simply cannot afford to keep up with their rent payments.
While there may be some evidence of this, especially in those areas where the demographic group who are now unemployed may rent, it is not the case across all locations in Brisbane.
When we examine the rent roll of a number of property managers in Brisbane that we have been communicating with (with predominantly suburban properties outside of the Brisbane CBD), the current rate of rental arrears seems to be consistently below 1 per cent of their entire rent roll.
This means most residential tenants can indeed afford to keep up with their rental repayments.
In terms of asking rents in Brisbane, analysis by SQM Research showed while there has been a slight reduction of 2.7 per cent across all houses over the last quarter (largely due to the impacts of the pandemic) we are now seeing an increase of 1.3 per cent week on week so things seems to be improving in this space as well.
From our own experience, we have found that properties that we purchased for our clients prior to the pandemic, that were settling at the peak of the outbreak towards the end of March and early April 2020, all secured a quality tenant within a couple of weeks after settlement.
Again this provided us with reassurance that people always need shelter – despite what is going on around us and if you focus on buying desirable quality assets, then there will always be demand from tenants and buyers alike.
Right now in Brisbane, we are experiencing strong buyer demand once again. Since a week or two after Easter, there has been a lot of competition for quality properties that come to the market. We have also observed that many properties again are going to receive multiple offers.
This is, of course, very low listing volumes.
Until recently, sellers in Brisbane were sitting on the sidelines taking a wait and see approach. Early market indicators from Corelogic, as well as on-the-ground conversations we are having with sales agents across Brisbane, confirm that we may start to see some more listings in the coming weeks. These are not distressed sellers, but those who always intended to sell their property during March, April or May, but have simply had their plans on hold until the uncertain period passed. We may see conditions return to a new normal in the coming weeks.
Looking forward, while I am not an economist, I see very little negative price growth in Brisbane over the coming months in investment grade locations.
There may be some impact in the inner city high density unit market which seems to be the market segment that has been most significantly impacted in our city.
If the current imbalance between supply and demand continues, then quality properties in investment grade locations are likely to see some positive growth. Time will tell.