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Soaking up supply in the Sunshine state

People often talk about the national housing market, but in truth, there’s no such thing. 

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More accurately there is a collection of markets, impacted by broad trends but also a host of local factors. Even where there are national trends – such as the recent tightening of credit availability – these can play out at a different pace, or with different intensity, in different markets. And sometimes those markets are in close geographical proximity. 

"Surprisingly, Brisbane apartments have performed better than detached houses.” 

Currently, much of the conversation around housing is focused on Sydney and Melbourne. These markets have experienced the sharpest rise in prices, have the most leveraged households, and make up a little less than half of Australia’s housing stock.

Brisbane is a great example of where the dynamics are playing out differently.

Cast your mind back a year ago and there were plenty of warnings about the Brisbane market given the potential for sharply weaker conditions as what was meant to be a glut of apartment supply stormed on stream.

How a year can change things.

The heart of all Queensland

In Sydney, house prices have fallen 3.3 per cent in the first seven months of the year, and Melbourne prices are 2.7 per cent lower. In Brisbane, however, prices are up 0.4 per cent.

Surprisingly, Brisbane apartments have performed better than detached houses.

The construction boom in Brisbane will see the stock of apartments more than 50 per cent higher than in 2011, much of this concentrated in the inner-city.

Interestingly, Brisbane apartment prices fell 3.5 per cent in the year to July 2017, but were up 0.8 per cent in the year to July 2018. Supply came on-stream as expected but what has been surprising is the acceleration in population growth to absorb this supply, and in particular inter-state migration, largely from neighbouring New South Wales.

Net inter-state migration inflow to Queensland in the fourth quarter of 2017 hit the highest quarterly rate since the third quarter of 2007 and has out-stripped inflow into Victoria for the past three quarters, the first such run since 2012.

In large part, ANZ Research believes this reflects relative housing affordability and renewed jobs growth in Queensland. The median house price in Brisbane is $A562,000 compared with $A1 million in Sydney and $A780,000 in Melbourne. 

Another metric of affordability is the monthly mortgage repayment based on the median house price with a 25 year loan and a 20 per cent deposit. This is 42 per cent of income in New South Wales and 38 per cent in Victoria, but only 24 per cent in Queensland.

In the year to June, 84,000 jobs have been created in Queensland, compared with 50,000 in the year to June 2017 and just 8,000 in the previous year.

The Brisbane market, however, is probably not too far away from peak outperformance.

The latest data from CoreLogic shows 29 per cent of apartment resales were at a loss in the first quarter (compared to 2.2 per cent in Sydney and 10.4 per cent in Melbourne).

Moreover, while stronger population growth is encouraging, there is a question mark over whether the supply coming on-stream is as well matched to the new demand as it could be.

Much of Brisbane’s construction has been aimed at the investor segment, with a prevalence of relatively small apartments. The 2016 Census showed nearly 15,000 more people lived in apartments than in 2011 in Brisbane’s centre, and over 27,000 more in one bedroom apartments.

The demand is now rotating from investors to owner-occupiers who typically look for larger homes, which could lead to a mismatch and a two-speed market.

Viva Bris-Vegas

Moreover, with housing prices now expected to fall further in Sydney (ANZ Research expects a 6 per cent fall in Sydney this year, compared to a 1 per cent fall in Brisbane), Brisbane’s relative affordability is likely at its peak. 

In fact, Brisbane is unlikely to be immune to housing price falls in Sydney. ANZ Research’s modelling suggests a 10 per cent fall in apartment prices in Sydney would see Brisbane apartment prices fall by 6 per cent, excluding any migration effects.

From an affordable housing perspective, the population flow from Sydney to Brisbane is encouraging - it shows market signals are working. But there is likely a limit to how far that can go to addressing the affordability crisis.

The connectedness of prices means the affordability dial is unlikely to continue to shift further in Brisbane’s favour, particularly if there’s a supply-demand mismatch. And there is undoubtedly a limit to the number of people willing or able to move states.

In terms of formulating a policy response to ease housing affordability, it’s a challenge to navigate markets which have some degree of connectivity but are far from a single housing market.

Spill overs complicate strategies that are state-based while it’s hard to avoid unintended consequences from one-size-fits-all national policies.

Some level of national over-sight seems necessary, a degree of co-ordination and co-operation aimed at minimising unintended consequences and delivering the best practical outcome for the overall housing market.

No easy task by any measure.

Joanne Masters is Senior Economist & Richard Yetsenga is Chief Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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