Recently, there has been a lot of media speculation over the Brisbane market becoming oversupplied. The media, in typical fashion, are making a meal of oversupply concerns, however, as is always the case – they are more focused on attracting an emotional response than bringing into consideration the facts – so, here are some things to consider and to help put things into perspective.
- Following the GFC there was little construction of new residential dwellings from 2008 to 2014.
- Population Growth still continued and in most cases in excess of government projections.
- Housing Industry Association (HIA) figures suggest that Queensland housing is well under-supplied overall and that the state needs another 10,000 more dwellings constructed per year.
- According to HIA research, dwelling construction has averaged around 30,500 per year in Queensland over the last five years – but it requires at least 40,000 new homes annually to keep up with demand.
- The current development pipeline only fills a portion of underlying demand.
- There are some suburbs experiencing relative oversupply and these areas are temporarily drawing prospective tenants from other suburbs.
- The highly anticipated strong upswing in demand, mostly based on the significantly higher affordability compared to almost all other capitals, seems to have been delayed partially by the recent APRA lending changes, election uncertainty, plus the more recent bank withdrawal from international lending to foreign investors.
- When interest rates reduce there is downwards pressure on rents, but at least the reduced cost of interest offsets most of any reduction in rent.
The Medium to Long Term Outlook is Still Excellent
In property investment, we should always try to keep a medium to long-term outlook as the market will almost always behave in line with the principal market fundamentals over that time frame. Brisbane is one of the most livable cities in the world; its infrastructure is probably 10 – 15 years ahead of Sydney’s, yet it is currently one of the most affordable cities in Australia – close to 80% more affordable and less than half the price of Sydney property. This will drive a significant upswing in demand, partially driven by interstate migration, but mostly driven by international migration, at the same time that supply is forecast to significantly decline mostly as a result of tighter development funding.
Brisbane gross rents have been around 20% plus higher than Sydney’s. Added to this, the growth forecast for Brisbane from BIS Oxford Economics is 6.5 times higher than Sydney for the next 3 years. Also, the depreciation benefits are about twice as high due to the amount of property you can buy for the same price.
Based on this, a property in Brisbane would need to be vacant for 30-40% of the year (almost indefinitely) or the rent would need to be reduced by 30-40% for the net yields to be the same as Sydney. While either of these scenario’s or a combination of the rent reduction and vacancy is nearly impossible this year, that would still leave Brisbane’s growth forecast to be 6.5 times stronger than Sydney’s and still 3.5 times stronger than Melbourne, the second best capital city forecasted.
Supply & Demand
Part of the issue seems to be that the expected uplift in demand has been slower to materialise than the anticipated supply, however, it’s almost impossible for this to continue for the medium term, as Sydney’s property is double the cost of Brisbane’s.
Sydney usually oscillates between 20%-100% more expensive than Brisbane, so Brisbane would need to grow by about 70%, while Sydney stopped growing, to reach the typical peak in price difference. In our recent eNewsletter, we demonstrated with some in-depth graphs how this scenario is very similar to the 2003 occurrence. Click here copy of this article.
That newsletter article also highlights the forecasted sharp decline in supply, largely as a result of banks significantly tightening lending requirements for developers.
Growth & Yields
We appreciate that in the past year or so, Sydney has grown by more than Brisbane, while having a lower vacancy rate, however, our strategy is always to focus on medium to long term growth and higher yields.
In property, short-term (1-2 years) trends are much harder to forecast than medium-term (3-8 years) to long term (8+ years), but ultimately, the fundamentals will almost always drive the medium term to behave in a similar fashion to the forecast unless something very unusual happens.
inSynergy prides itself on sourcing and providing the best independent research we can find. BIS Oxford Economics are trusted by QBE Mortgage Insurance, so much so, that they also make BIS Oxford Economics forecasts publicly available on their website. QBE Mortgage Insurance has more at risk than any other company in Australia other than the only other significant mortgage insurer, Genworth (Part of GE).
QBE has hundreds of billions of dollars at risk in the Australian property market, so we should take comfort that the BIS Oxford Economics research is of a very high standard, and better than any we have been able to find in 25 years of detailed searching.
Use Your Buffer
In a strategic and structural sense, this is partly why we recommend a buffer – to help manage any short-term fluctuations in cash flow. After tax, and especially compared to any other capital city, the equity growth of your portfolio, after deducting any use of the buffer, should be considerably better than what it is likely to be from any other capital city.
Rental Guarantee Most of our clients who purchased in Brisbane in recent times has been offered a rental guarantee to overcome any shorter term vacancy issues. This combined with the buffer and having the correct insurances in place are all important factors in mitigating any risk.
A Buyers’ or Sellers’ Market?
The other thing to consider is when is it a buyers’ market and when it is a sellers’ market. A buyers’ market is typically at the start of the upswing and when supply is higher than demand, this is usually when the best buying is – and that is now!
The current level of supply comes with the benefit of what many are calling the biggest urban renewal Brisbane has ever undertaken. These urban renewal programs will significantly improve many Brisbane suburbs (including West End), so we expect to see values improve in these urban renewal areas well above area’s that aren’t part of the revitalisation plans.
Richard Sheppard is the Managing Director of inSynergy Property Wealth Advisory. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 425 595.
Important Note and Warning: This information is general in nature and should not be considered personal tax advice. We highly recommend you discuss these concepts with your accountant, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.