By Steve Waters
As we say goodbye to 2016, the multimillion-dollar question of course is what’s the market going to do next year?
I believe the property market next year is going to depend on consumer confidence – although I admit there are some caveats to that insight including the laws of the fundamentals, such as supply and demand.
Monetary policy is likely to be a big player in the market in 2017 because we’ve already seen the big banks sneak up rates – technically from a funding perspective.
The thing is I don’t think higher rates are necessarily a bad thing. The RBA is trying to slow down the markets in Sydney and Melbourne but they can’t do so without impacting the rest of the country so they’re relying on lenders to do the heavy lifting for them.
Higher interest rates will probably get rid of the peripheral investor, as will the oversupply of new units in some of our capital cities, which is likely to result in softer prices as well as settlement problems.
But buyers need to also have some perspective around interest rates because even though rates have increased recently, they are still lower than they were at this time last year.
Investors need to also consider the wider market conditions as well as the economy to better understand whether the RBA has the motivation for putting the rates up further.
If rates do increase one or two basis points, I think what we’re going to see is those people who always invest are going to start to look for areas that offer the best yields as well as the right fundamentals.
Some investors, for example, are considering Tasmania for improved cash flow and I believe over the next 12 months there will be some sporadic good deals to be had – albeit very few. There may be some steady growth there, but it will be based on the perpetuation of increased transactions by investors chasing yield rather than true capital growth fundamentals.
In Melbourne, we’re already starting to see people struggling to complete contracts on off-the-plan inner-city units and I believe it will only get worse. That said, the affordable corridors will continue to provide value, especially around detached dwellings.
The difference between quality stock and investor stock will create a two-tier market, but as we all know the Melbourne market is not about yield, it is about capital growth prospects.
Western Australia will continue its price slide. There’s still a lot of construction that’s halted, especially in Perth’s CBD commercial sector. Commodity prices have rebounded a little but I think property prices will generally continue to soften in metropolitan areas.
However, RPG will be looking more closely at the Perth market next year because it could potentially have some value there, but it requires very close inspection before taking any action.
We’ll be looking for good yield and purchasing at below cost of construction, because if we can buy below value, and we’ve got the yield to support it, then we’ve got time on our side.
The Northern Territory is not a market that we invest in because it fluctuates too much.
In Far North Queensland, there are some property pundits that will continue to push that region, specifically Cairns, because of the casino and tourism, but I don’t believe it has the fundamentals to warrant investing there for a solid long-term result.
Southeast Queensland is still my number one pick for investing in 2017, because if interest rates do potentially increase to a more historically average level then investors will be chasing yield and affordability.
This will result in more investors buying in and around the southeast corridor, which is that 30 to 40-kilometre ring around the CBD, because it’s got infrastructure, affordability and cash flow – and growth follows yield, of course.
Also we haven’t started to see that net migration flow from the southern states from people who can get bigger bang for their buck by cashing out in Sydney and Melbourne and buying twice the property in the southeast corner, but I believe it will happen as it has in previous market cycles.
In New South Wales, there are still some pockets of value on the South Coast and the Central Coast but buyers need to understand that it’s not necessarily about yield, it’s about growth in those locations. The trick in these two markets is to buy under market value or at the very least buy something that you can add value too via a renovation or refurbishment.
In Sydney, auction results are still very strong in some inner locations but next year we’re likely to see the market splinter further, driven by the changing demand of owner-occupiers and investors.
In 2017, I believe we’ll start to see investors continue to withdraw from the Sydney market, looking for better value in more affordable locations such as Brisbane. Demand from homeowners will remain robust in Sydney but the market is likely to stabilise generally.
Investors also need to understand that there will be some areas of Sydney that are going to under perform due to oversupply issues and there will be little pockets that still represent good value but they are few and far between.
In South Australia, again, there are some pockets of opportunity in and around Adelaide but investors should steer clear of some areas that may offer reasonable yield but are likely to experience some pain such as around Elizabeth.
Closer to the city, if you can pick the right areas, you can achieve some good results, as we have done over the past year. At the end of the day, next year, you’re going to see the investor and the homeowner look for value and where they can find it – and with a combination of relatively good cash flow as well – you’re going to see price growth follow.
So, in 2017, the market is going to be a year of value proposition, and opportunity if you can find it, which will also be underpinned by consumer confidence and rate adjustments.
All in all, across the country, there will be markets that offer solid growth and yield prospects as well as markets that you should steer well clear of – the trick, of course, is to know which ones are which.
By Steve Waters