Australian Capital Territory
Overshadowed by the doom and gloom that come with ongoing economic uncertainty, the ACT’s market is destined to flatline over the coming year. Despite this, investors with a long-term view might want to keep tabs on the market
Times continue to be tough for the federal capital. Last year it was plagued by the slowdown that comes with elections. This year it has been struggling with the spectre of public sector job cuts and the pall this has cast on both the economic and employment environments.
It’s no surprise that this has impacted on the state of Canberra’s market.
According to the RP Data CoreLogic Home Value Index results for September 2014, growth has been limited. The median dwelling price is currently $500,000, and the market recorded year-on-year growth of 1.7%.
On top of this moderate growth, the market has been struggling with an oversupply of apartments. Given that demand has been dropping, this has contributed to rising vacancy rates.
This means Canberra hasn’t been the most enticing of options for investors over the last year.
Current state of the market
While there has been much ado about the public sector job cuts, to date those cuts haven’t had the degree of real impact many think. According to a recent Deloitte Access Economics Business Outlook
report, the Liberal Government’s first budget didn’t add many cuts to the ones already introduced by the Labor Government. In fact, real spending growth over the next decade looks likely to match the last decade’s, the report says.
However, public sector numbers in Canberra itself are set to fall, with 6,000–7,000 jobs poised to go over the next two years. And the uncertainty which comes with that has left a significant dent in confidence.
The employment environment is simply not that positive, and, as a result, there is weakening demand at a time of rising supply due to a boom in apartment construction, BIS Shrapnel’s Angie Zigomanis says.
“Due to the high income enjoyed by people in the city, many will be able to take the hit [from the cuts]. But there is probably not that much scope for price growth at all: prices are likely to stay flat.”
Housing Industry Association (HIA) chief economist Harley Dale agrees that the market looks set to experience another tough year, as the economy is slowing and – thanks to lots of stock coming on to market in a short space of time – the vacancy rate, which is currently at 4.2%, is rising.
“It’s not a strong property market at the moment and, as such, it doesn’t offer a good proposition for investors right now.”
Outlook: What’s ahead
The current climate in Canberra may be tepid, but commentator predictions indicate it is likely to get worse before it gets better. Despite the attractions of the city, a couple of tough years still lie ahead.
Public sector job cuts may be slow, but they are happening and will have further impact. In addition, population growth is slowing: the ACT now has a net interstate migration outflow as opposed to the net inflow it experienced in recent years.
According to the QBE Australian Housing Outlook 2014–2017
report, the weakening of the public sector – along with slower population growth – will exacerbate the market’s existing oversupply. This means it will take some time for vacancy rates to come down. All these factors will reduce the propensity for purchasers to bid up prices.
Correcting market not exciting
OnTheHouse.com.au consulting analyst John Edwards recommends that investors don’t go into the Canberra market until the government reaches its second term. In his view, there is larger potential for the market to fall in value than there is for any other market in Australia.
His data shows the market is in retreat. In particular, there was a noticeable downturn over the last quarter. Housing values fell by 1.93% and unit values fell by 0.57%.
This market is already in correction, Edwards says. “Given the Liberal Party’s propensity to lay off people, it is more than likely that it will continue to correct over the next 12 months.”
It is worth remembering that Canberra has always been vulnerable to the vagaries of the political cycle and, in turn, their impact on the property market.
AMP Capital chief economist Shane Oliver says that, while Canberra is grinding to a bit of a halt, the situation is not an unusual one for the city. In fact, residents are used to it.
That said, it is still a difficult period in terms of the budget. The situation might even intensify, he says. “Given the failure of some of the budget cutbacks to get through the senate, the government might be forced to undertake more public service cutbacks in the May budget next year.”
Overall, the situation means it is hard to get optimistic about Canberra’s market. Oliver expects very little price growth.
Bright spots for investors
Unexciting as the immediate future of the market might be, there is light at the end of the tunnel.
Zigomanis points out that no government has ended up with less people working in the public sector than when it started. This means the cuts will get soaked up, the market will correct itself, and population growth will start coming through again.
“Also, Canberra is a growing city,” he says. “Not everyone works in government or government-associated jobs. There should be other sectors which will pick up some of the slack.”
He adds that the city’s high incomes mean housing remains affordable, particularly at current interest rates. This relative affordability, combined with the competitive market resulting from the oversupply of apartments, means that investors with a long-term focus could pick up a deal. But they would have to sit on their investment for quite some time to realise its value.
Meanwhile, Edwards suggests that investors should keep their eyes wide open and watch for distressed sellers. They should then bargain hard to buy well and be ready for the upturn when the government gets into the second term.
There is a high level of risk, he says. “However, our average growth prediction for the ACT over the next five to eight years is verging on 6% per annum. So we are looking at corrections now, and then a fairly steep increase in values once we exit the corrections period.”
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