Federal elections kept Canberra in the spotlight for most of 2013, but the issues that will most affect the market in 2014 extend well beyond ballots and political personalities
It’s hard to say anything about Canberra with conviction. Although the ACT property market is unlikely to record a strong year over 2014 – and there are plenty of signs of that – the chances of there being any kind of disaster are remote. And that’s the ACT for you.
The city has a history of modest and consistent performance. If property markets in other states are roller coasters of climbs and falls, the ACT is the toddler train around the theme park. It goes over minor bumps, rattles from time to time and sees a few dips – always at a modest speed – but on the whole it keeps chugging away.
The ACT in 2014 promises much the same experience. In the current environment, there are serious negatives for the property market, but their effect is being dampened somewhat by some positives.
“We will see some steady activity in Canberra, because it is one of those markets that does not have as volatile a housing cycle as some of the other capital cities,” says Australian Property Monitors senior economist Andrew Wilson.
Wilson says the local economy is highly exposed to job shedding in the public sector, and in this regard the ACT economy looks grim. At the same time, Canberra is a major mortgage belt. Homebuyer activity tends to be high, which is a strong advantage within today’s especially low interest rate environment.
As these conflicting forces push and pull against each other, the market is likely to oscillate between strong and weak periods of performance. The end result, from a year-long perspective, is not immediately certain. Economists have been reluctant to describe the market in bad terms, and popular descriptions have leaned towards “flat” as opposed to “falling”. The market’s performance up to and over 2013 explains why.
Canberra past performance
The Mayans may have had some bad things to say about the year 2012, but for the ACT property market it was a good year. The median house price grew by 5.7% and this was, remarkably, at a time when a lot of other capital cities were still recording falls in values.
Despite this growth, Canberra prices in 2013 are still below the price peaks seen in 2010. This means that despite 2012’s increases, the market has been largely flat over the last three years. Numbers by trends forecaster BIS Shrapnel have current ACT house values at 2.4% lower than they were in 2010.
In fact, price growth trends in different parts of the city suggest that 2012’s 5.7% growth was entirely due to an 11.4% rise in the median house price in west and north Canberra. The remainder of the city regions recorded declines.
BIS Shrapnel attributes the flat growth to record levels of new dwelling commencements in 2009 and 2010, particularly for apartments. At the time, first home buyer incentives were spurring demand, and vacancy rates were low. The conditions were a perfect fit for developers to initiate new projects, and the number of off-the-plan sales soared. Those off-the-plan properties have since made their way onto the market and BIS Shrapnel estimates the market was oversupplied by about 2,600 dwellings by June 2013.
Supply and demand in 2014
1. Too many properties
If oversupply had been the theme up to 2013, the Canberra market in 2014 looks far from being a break from that. QBE LMI’s Australian Housing Outlook 2013–2016 report forecasts that oversupply in the ACT will continue to play on the residential property market over the next three years.
“Reduced migration to the ACT will prevent the oversupply being rapidly absorbed … diminished confidence is also likely to reduce the propensity for purchasers to bid up prices,” the report says.
The report further points out weak levels in loans to first home buyers and upgraders. Loans to investors have been at record levels, but only because apartments bought off-theplan years ago are being completed and now require investors to draw loans. Without that investment activity, demand for house purchases is low and far from the levels required to absorb the excess number of houses coming onto the market.
That demand from homebuyers and upgraders has been low is more a reflection of a lack of confidence in the market. This, in itself, is the result of a much larger trend working its way through the ACT economy: growing unemployment.
2. Unemployment to sap demand
In a city where the majority of residents work in the public sector, the housing market is highly exposed to the movements of the Federal Government. This presents something of problem in a political environment in which budget cuts have come into vogue on both sides of the political spectrum.
Long before the Coalition moved into office, the Labor Government had already announced a series of federal job cuts. The new government has promised even more. Some sources have the extent of the job losses at 12,000, although only four in 10 will possibly occur in the ACT.
“The ACT is a vulnerable market at the moment,” says AMP chief economist Shane Oliver. “Performance will depend on how hard the new Federal Government goes in for laying off public service workers. I suspect it will probably announce a further deterioration in the budget outlook in January.”
Residex founder John Edwards is equally wary of how job cuts could affect demand. “It would be best to be very cautious about the ACT market because of the new Federal Government and what it might do,” he says.
One saving grace for the market is that any job cuts are unlikely to come all at once. Numbers released during the Coalition’s election campaign indicated that savings brought about by job cutting would build over time, suggesting the cuts would be spread well into 2016.
APM’s Andrew Wilson says the influence of job cuts on property values shouldn’t be underestimated. In the short term, higher unemployment could result in reduced immigration and, hence, demand for property, he says, but it also restricts the market from moving upwards.
“For homebuyers to have the capacity to pay more for property, they need to be seeing wages growth,” Wilson says.
3. Affordability to the rescue
If unemployment is sapping confidence from the market and there are currently too many properties up for sale in Canberra, why aren’t property pundits bringing out doom and gloom forecasts? Why are expectations merely of a flat market?
The answer may lie in the make-up of the market itself. The ACT is a popular destination for first home buyers and upgraders – an attribute that shouldn’t be taken lightly in a low interest rate environment. Demand may be low at the moment, limiting price increases, but low interest rates remain something of a plug on negative forces in the market. They are keeping prices from going into free fall.
A Business Outlook report by Deloitte Access Economics puts the market into perspective.
“The interest rate cuts of recent times have played a big role in keeping momentum in the ACT economy… In addition, it isn’t merely that interest rates have moved lower, [we] think they will stay lower. That will remain a key positive for the ACT outlook.”
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