From the bustling streets of Sydney to the sun-kissed shores of Perth, where you invest in Australia’s real estate market can have a profound impact on your financial future. But in a landscape rife with fluctuating interest rates, soaring property values, and forecasts that vary from city to city, how can you identify the top investment hotspots? Is it time to follow the crowd or carve your own path?
In this in-depth analysis, we’ll uncover hidden opportunities and data-driven insights that may just lead you to the next investment hotspot. Whether you’re a seasoned investor or just dipping your toes into the property market, this guide promises to shed light on the cities poised for growth and those that could offer surprising yields. Dive in, and discover Australia’s best place to invest.
Dwelling Price Forecasts
Westpac has made another revision to its house price forecast, now anticipating a 7% rise this year, representing a more optimistic stance on the property market. The surge in migration and constrained rental markets are pivotal elements fuelling this revival. National house prices are forecast to grow consistently at a rate of 4% in both 2024 and 2025.
Westpac has observed that capital city prices have managed to recover a significant portion of the 9.7% decline experienced over the prior 10 months. This insight aligns with a general sense of optimism and confidence in the property market’s resilience and potential for growth.
Meanwhile, PropTrack’s Property Market Outlook Report anticipates home prices will surge by up to 5% across the nation this year. The cities predicted to spearhead this growth are Perth, Adelaide, and Sydney.
According to the above graph, the forecast illustrates a diverse growth pattern across different cities for the coming years. In 2023, Sydney is expected to see a 10% growth, Melbourne 4%, Brisbane 6%, Perth 8%, and Australia overall 7%. When looking at the 2024 forecast, Perth’s performance emerges as the standout, with another 8% growth, compared to 6% in Sydney, 3% in Melbourne, 4% in Brisbane, and 4% for Australia as a whole.
Also, in 2025, the forecast shows a continued pattern of growth, with Perth leading at 6%, compared to 4% in Sydney, 2% in Melbourne, 3% in Brisbane, and 4% across Australia.
Relationship Between Interest Rates and House Prices in Australia: A 60-Year Analysis
Is this the right time to buy, considering the high inflation and rising interest rates? What happens if interest rates continue to rise? Will it lead to negative impacts on the property market?
History often serves as an insightful guide, and by examining what has transpired over the last 60 years with fluctuating interest rates, we can better understand this dynamic.
Australian house prices have displayed a consistent upward trend over extended periods, doubling seven times in six decades, irrespective of whether interest rates have risen, fallen, or remained unchanged.
This complex relationship between interest rates and house prices can be illustrated by examining the history of house price growth and interest rates in Australia over the past 60 years.
Indeed, house prices have witnessed steady growth over the last six decades, at an average rate of approximately 7%, even though the RBA cash rate has fluctuated widely during that time. Historical data, such as the above figure, shows the changes in interest rates during periods when house prices have doubled. For instance, house prices doubled four times between 1960 and 1988 while interest rates were on the rise, and continued to double as interest rates declined between 1988 and 2021. This pattern indicates that house price growth occurs largely independent of interest rate movements over long-term periods.
However, it’s crucial to recognise that interest rates do matter. Analysing recent cash rate changes as an illustration, significant shifts can have a substantial short-term impact on house prices. Nonetheless, the consistent growth trajectory of house prices, even during epochs of high interest rates (such as the 1980s) or stagnant rates (like the 2000s), suggests that a comprehensive understanding of what propels house prices in Australia over the long term requires an examination that goes beyond merely the role of interest rates.
Affordability And Stressed Sales
Although banks and renowned economists have forecast an increase in property prices, the situation is more complex. You might be wondering whether to invest in real estate, given the current economic climate. With rising interest rates and the increased cost of living, we could potentially see stressed sales that might adversely affect the property market. Let’s explore this scenario with the help of various data and facts.
According to CoreLogic, areas in Sydney such as Stanmore (median $1.98m), Forest Lodge (median $2.25m), and Parklea (median $1.21m) have seen a substantial share of investor-owned listings. In particular, Stanmore is facing an alarming monthly deficit of $4100, reflecting a broader concern over a cash flow shortfall.
The same trend is observed in other states’ suburbs with low yield and high mortgage rates. It seems that investors who have made poor decisions based on cash flow in the last few years are now putting their properties back on sale. These examples are especially prevalent in less affordable suburbs characterised by low rental yields and high mortgage costs.
The importance of solid due diligence when investing cannot be overstated, as selected suburbs must meet certain rental yield and vacancy rate criteria to ensure a successful investment.
Furthermore, if a suburb’s growth is driven primarily by investors, it presents a higher level of risk compared to growth driven by owner-occupiers. For example, in WA, suburbs with a high level of investors, such as Highgate (60% investor) and Northbridge (61% investor), have seen a significant number of investor-owned listings recently.
Furthermore, CoreLogic reports that Australian mortgage holders have coped well with rising rates. Their data reveals minimal signs of an increase in distressed properties entering the market, as the flow of new listing volumes stays subdued nationally (trending 14.8% lower than the five-year average). Additionally, APRA lending data indicates that the portion of the mortgage market associated with late repayments is rising, but remains at a low level, around 1%.
This resilience is attributable to the strong savings buffers that many households have built up during the low-interest-rate period, coupled with extremely tight labour markets and record low unemployment rates. Housing market conditions appear to be turning a corner, thanks to low stock levels, increased demand from overseas migration, and a positive shift in consumer sentiment as we potentially approach the end of the rate-tightening cycle.
Nonetheless, investing in booming and affordable suburbs with high rental yields can be a shrewd strategy for creating wealth while mitigating risks. By targeting properties that yield satisfactory cash flow, the impact of escalating interest rates can be neutralised. This method not only trims down out-of-pocket expenses for negatively geared properties but can even pave the way for a property to become positively geared. In this scenario, the rental income surpasses the holding costs, leading to a profit on a monthly basis.
Affordability And Capital Growth: A Comparative Analysis Across Australian Cities
Affordability is a crucial factor that has a direct impact on capital growth in the real estate market. The measure of affordability can be broken down into three different metrics:
- Mortgage Payment to Rent
- Mortgage Payment to Full Time Wage
- Property Prices to Full Time Wage
Analysing these metrics across various cities reveals distinct differences in affordability. For instance, it is much more expensive to buy versus rent in Sydney (196%) or Melbourne (169%) compared to cities like Brisbane, Adelaide, or Perth.
Interestingly, in Perth, buying can actually be cheaper than renting in certain suburbs, reflecting the affordability of the Perth market and hinting at the potential for more capital growth in comparison to other states. Brisbane and Adelaide are also in better positions in terms of affordability compared to Sydney and Melbourne, which can increase the chance of their relative capital growth.
Furthermore, the mortgage payment in Perth constitutes only 29% of the average wage, which is significantly lower compared to Sydney (81%) and Melbourne (56%). This data indicates that the current growth trends in Sydney and Melbourne may not be sustainable as affordability becomes a looming crisis. Talk to a Melbourne buyers agent to explore your investment opportunities in Melbourne or regional Victoria.
The Property Price to Wage metric also underscores that it takes a significantly longer time to save up to purchase a property in Sydney compared to other states, particularly Perth, which emerges as the most affordable property market with promising prospects for growth due to its relative affordability.
Population Growth
WA is the fastest-growing state with relative population growth, at 2.3%. This growth can exert a profound impact on WA’s property market due to the heightened demand for properties.
This effect becomes more pronounced when considering the market size. Imagine throwing a stone into a lake; the wave created would be small. But if the same stone, or even a smaller one, is thrown into a bathtub, it can create significant waves. This analogy aptly illustrates the story of relative population growth in Perth, which, when compared to Sydney or Melbourne’s population size, resembles a bathtub. The relative population growth in South Australia and Queensland is also remarkable.
The strength of Perth’s property market appears to be linked to its population growth, which is mainly driven by owner-occupiers. This growth, rooted in real demand and affordability, stands in contrast to a speculative bubble that could be created by investors. Such growth may indicate a more sustainable and promising future for the property market in Perth. Interestingly, this reasoning can be extended to the property markets in Queensland and South Australia as well.
In addition, the data suggests that the state population growth percentage forecast in the short term for WA and QLD is higher than the Australian average, while NSW, TAS, and SA perform below average, and VIC performs well above average.
Employment Growth Rate & Unemployment Rate
Data reveals that projected employment growth in various regions of Australia will vary, with NSW at 8%, VIC at 9%, QLD at 8.1%, WA at 6.4%, SA at 5%, and TAS at 4%. Notably, NSW, VIC, QLD, WA, and SA are all expected to see decent predicted employment growth.
In addition, the unemployment rate in all states is very low, which is a powerful indicator of a solid labour market. This positively impacts the property market in both the short and long term.
CoreLogic’s Perspective On Ideal Investment Locations
According to Corelogic, investor activity is higher in NSW, despite its lowest rental yields among the states and high buy-in prices. While the prospects for capital gains could be considered less significant due to Sydney’s affordability challenges, investors seem to be flocking to the market. This could be driven by a herd mentality or other less apparent reasons.
One striking observation concerns Perth, the capital city of Western Australia, where investment activity is at one of the lowest levels. Yet, Perth offers the highest gross rental yields among the state capitals at 5.3%, with some arguing that it has the best prospects for capital gains.
A possible explanation for the low investor interest in Perth could be the significant volatility in Western Australian housing values post the mining boom. After a 20% plunge in Perth home values between 2014 and 2019, potential investors may remain cautious.
Queensland’s housing market also appears as a solid choice for investors. With higher yields, lower buy-in prices, and rapid population growth driven by both overseas and interstate migration, both Western Australia and Queensland have the alignment that caters to purchasing demand.
Most of the population growth in NSW and Victoria comes from overseas migration, which initially aligns more with rental demand. This contrasts with Western Australia and Queensland, which have a positive rate of interstate migration that better suits purchasing demand.
Property investors often vary in their objectives, focusing either on capital gains or opportunities to maximise yield for cash flow. While Sydney and Melbourne have a stronger history of capital gains, their relative expense might hinder future growth.
For those seeking the best of both worlds, Perth and Queensland might be the ideal options, considering a balanced housing demand from interstate and overseas migration, along with more affordable housing prices compared to the largest capitals.
Conclusion
The analysis presented illustrates the significance of using data-driven insights for investment decisions rather than simply following the crowd. Western Australia, specifically, emerges as a compelling investment destination along with Queensland and South Australia, all boasting high rental yields and promising growth forecasts, despite witnessing comparatively lower investor activity.
This underscores the importance of understanding underlying market dynamics and potential opportunities that may lie outside conventional investment hotspots. Moreover, long-term affordability plays a crucial role in experiencing sustainable capital growth.
Sydney and Melbourne’s challenges with affordability and higher price points may impede their growth potential, making more affordable states like Western Australia, Queensland and South Australia more appealing for investment due to their lower price points and higher rental incomes. Investors should thus consider affordability and rental yield metrics in conjunction with expert advice, to uncover optimal locations for capital growth.
