Off the Plan Buyer – May 2016

Off the Plan Buyer is a monthly update of all information that affects new property buyers and off the plan projects around Australia.

Interest rates drop to historical lows

With the most recent cut to the cash rate by 25 basis points to 1.75 per cent, interest rates are currently at the lowest recorded level. Comparing to the highest level in the last ten years of 7.25 per cent, rates are four times lower. Majority of the major banks have passed on this cut CBA (-0.25%), NAB (-0.25%), Westpac (-0.25%), St George (-0.25%) and ANZ (-0.19%). An off the plan property with a loan size of $500,000 with a -0.25% reduction works out to be savings over $1,200 per year. Currently many of the major banks are offering home loans between 3.90%-4.50%. The main reason for the rate cut range is ‘unexpectedly low levels of inflation’.

19 new councils in NSW

On the 12th of May 2016 it was announced by the NSW Premier that 19 new councils would be created in NSW. The minister plans to create further 9 new councils subject to legal proceedings. Benefits to new councils include up to $15 million to invest in community projects, up to $10 million to speed up administrative processes and ratepayers will have their rates protected against future increases for 4 years. The key argument in favour of these amalgamations is reducing waste and red tape would free up close to $2 billion over the next 20 years. This supports the argument larger amalgamated councils have more resources to perform their jobs and become more equal partners with other tiers of government and the private sector. This should benefit the off the plan market as councils resources are more efficiently used towards achieving faster outcomes.

Vacancy rates remain stable

Majority of capital city vacancy rates around Australia are remaining strong according to recent SQM data. Hobart (0.9%), Canberra (1.4%), Sydney (1.7%), Adelaide (2%), Melbourne (2.1%), Brisbane (2.8%) and Darwin (3.4%). Generally 3% is considered to be equilibrium i.e. a market in balance. This is positive news for off the plan buyers as stable vacancy rates means there are plenty of renters for new properties.

Home values continue to rise around Australia

Residential dwelling values have increased by 3.3% over the first 4 months of 2016 according to CoreLogic. Total gross returns over the previous year were highest in Melbourne (13.6%), Sydney (12.7%), Brisbane (11%), Canberra (9%), Adelaide (8%), Hobart (6.5%), Perth (1.9%) and Darwin (1.7%). During this current growth cycle which started in June 2012 dwelling values have increased by 34.4% with Sydney (52.7%), Melbourne (37.1%) and Brisbane (18%) experiencing the strongest increases. If this trend continues new properties under construction in some of these high growth areas could experience capital growth during the construction period.

Negative gearing could be the decisive vote

A key point in the upcoming federal election will be negative gearing. It will be a key deciding factor for many Australians. The Liberals are sticking to the current system while Labor believes negative gearing should be abolished. Various industry experts have outlined their views with some linking the removal of negative gearing with price falls and or potential rental price changes. The off the plan market is forecast to be relatively unchanged as any changes are likely to be enforced on established property. Leaving new off the plan property to benefit from negative gearing as a way to continue to encourage growth in construction and the broader economy.

Federal budget 2016/2017

The budget has focussed on transitioning jobs from the mining sector to the broader economy with a goal for more jobs and growth. Over 2015/2016 there were over 300,000 new jobs created which is the largest number of jobs created since 2007. The government has committed $50 billion for infrastructure investment between 2013/2014-2019/2020. A commitment to lower tax rates for companies over time to become more internationally competitive. Support innovation in Australia through $1.1 billion National innovation and science agenda. The Australian economy is forecast to grow by 2.5 per cent in 2015/2016 and 2016/2017 and increase to 3% in 2017/2018. All these measures are very positive for the off the plan market. Namely infrastructure investment increases convenience for property buyers. Whilst innovation can create new industries which increases Australia’s current income earning potential, this has many positive flow on affects for the off the plan market.

Building approvals are coming back to normal

Building approvals have reduced over the last quarter in every state around Australia besides the ACT. These record levels experienced in 2015 seem to coming back to normal levels, which is positive news for buyers and current owners. Lower levels of building approvals reduces potential future supply of new property. This means if demand increases above current levels, we could experience further competition for available property. Typically associated with increasing prices.

Foreign investment grows in Australia

Foreign investment in Australia grew by 8% over 2015 tolling $3,024.4 billion. The countries leading investment in Australia are USA (28%), UK (17%), Belgium (8%), Japan (7%) and Singapore (3%). Australians invested $2,080.7 billion overseas. The preferred markets USA (29%), UK (17%), NZ (5%), Japan (4%), China (3%) and Singapore (3%). Growth in foreign investment shows Australia is a reliable destination for overseas investor funds.

Strong Chinese real estate investment in Australia

Chinese investment in real estate accounted for 45% of all Chinese investment made in Australia over 2015. In total Chinese investors, invested $11.1 billion over 2015. Two major real estate deals accounted for nearly half of the entire Chinese investment volume. Australia remains the second largest recipient country of direct Chinese investment behind the USA between 2005-2015. Inflows of overseas money is typically associated with increasing prices and higher competition for available opportunities in the off the plan market.

Investment property loans continue to grow versus owner occupier loans

Investment loans are categorised by either new construction or purchase of rental or resale properties. Investment loans made up 33.4% of all loans in November 2015. This was the lowest level since January 2012. Since then they are on an upward trend nearing levels experienced in early 2015. Currently sitting at 37.2% of all loans. This upward trend shows confidence is coming back into the investment segment of the Australian property market.

Wages are growing

According to recent ABS statistics, some of the strongest performing industries in terms of wage growth are Education, Health Services, Finance and Insurance services, Arts and Recreation and Retail Trade. Increasing wages are usually associated with higher borrowing capacity to fund and invest in new property opportunities.

Unemployment rate is dropping

Since highs of 6.2% in early 2015, the unemployment rate has trended downward to the current rate of 5.7% in April 2016. Low unemployment rates are very positive for the off the plan market as more residents working and earning in secure jobs means greater economic stability for the broader property market.

Research of the month: why property prices rise?

A paper released by the RBA and authored by Koeller and Merwe analysed ‘long-run factors influencing Australian house price growth’. They concluded during the 1980s houses broadly followed inflation in the economy. With the advent of financial deregulation in the late 1980s, cheaper and easier access to finance resulted in increased debt-to-income ratios and high housing price inflation from the early 1990s to mid 2000s. Over the previous decade strong population growth (high immigration) and smaller household sizes (affordability and demographic shifts) led to increases in underlying demand exceeding the supply of new dwellings. Strong population growth is forecast to continue. Many new off the plan projects will need to be built to counteract this increased demand with limited supply.