It is no secret that we are very skeptical that the current run up in house prices can be sustained. There are a number of obstacle that will limit further house price gains major capital cities with each city facing its own set of issues.
For Brisbane property market, it is one thing to see the increasing upcoming supply in the statistics. It is another seeing all the cranes on the skyline as you drive through Brisbane. On a relative basis the median prices in Brisbane is almost half of Sydney. But we question that the fundamentals can support that much upcoming apartment supply.
The RBA has kept interest rates low which is supporting the current demand for property and mortgage serviceability. However the next move in rates could very be up. We are near the tail end of the boom than the beginning hence our cautious towards residential real estate.
Similar to our Sydney Market Forecast, we see the same risk in Brisbane. However it is more accentuated for this market due to smaller size where it is still an up comer rather than a global city in its own right.
1.Stricter Lending Standards
Banks are raising rates and restricting investment property lending and with a special emphasis on areas where developers heavily reliant on property investors. This means post codes around the Brisbane CBD and in some instances the CBD it self where most of the apartment supply is created.
Although a few banks can break ranks and pare back temporarily, we do see wholesale restriction on credit in future investor lending. This sub segment of investment property Brisbane has been seeing could end badly in our view.
2.Brisbane Apartment Supply verses Demand
Supply is outpacing demand. From the bullish side, it can be argued that the upcoming supply matches the shortfall in housing investment from the last few years. How we disagree, the issue is flood of supply coming onto market all at once which current demand is unlikely to absorb will lead to fall in prices and rents.
3.Lower foreign housing investment in Brisbane
We expect lower foreign investor participation in the Brisbane real estate market going forward. This is the direct result of higher stamp duty and higher bank restriction on lending which will both severely hinder foreign investor purchases. Depending which side of the fence you are on, this could be positive for long term supply as less demand from foreign investors could mean lower future supply. However it will get worse before better.
Reasons why we could be wrong and why Brisbane housing prices could go up
As with everything in investing it is important to understand the counter argument of your position.
1. Interstate migration picks up
One reason we could be wrong is house prices in Sydney are even higher than Brisbane. Given there is limited income differential (albeit Sydney has higher paying professional service jobs in aggregate). The large difference in housing will be the primary driver of inter state migration. If the level of migration from NSW to QLD increase, it could could support house prices going forward.
Chart above courtesy of JLL research present the difference between Sydney house prices verses Brisbane over the last 2 decades and the total level of inter state migration. The right hand side shows the % of Brisbane house price verses Sydney. Historically, when the house and apartment prices between the two cities are relatively close such as 2008 to 2009, the level of migration from NSW to QLD tapers off. Understandably this has remained weak in the last 5 years given the end of the commodity boom and the weak level of employment growth in QLD verses NSW.
However if you go back further to the period between 2000 and 2003, the annual level of migration ramps up to 40,000 a year. Given the current pace is only 10,000 in December 2015. There is still significant risk to the upside which could support dwelling prices in Brisbane. The longer the boom last in Sydney, the more likely the above eventuates.
On a related note, the chart below shows Brisbane housing affordability verses Sydney and Melbourne. Assume average median price and earnings, 75% mortgage LVR. The chart shows how much of ones income is used to service a mortgage debt. Brisbane is hovering around 40% which handily beats Sydney and even Melbourne.
2. Australia Tourism picks up
There is no doubt that Queensland is the tourism capital of Australia. Given its natural beauty, climate and tourist attractions, it is the epicenter of any tourism boom. If there is one. We are bullish on the Australian dollar in 2017 and see it ready for a bounce but right now the weak dollar is good for tourism as it make traveling and spending in Australia cheaper relative to our competitors. Importantly the Australian dollar against Yen and the Chinese yuan is also weak.
Chinese visitors increased in Brisbane by 23% as reported by Brisbane airport and it is the largest arrival market for the gold coast. Their spending pattern is largely service based where 38% of the spend is on shopping, restaurants and accommodation where Chinese tourists spend 4 times as much as New Zealand visitors which is the largest source of offshore visitors to Australia.
3.Commodity price pick up
Just as nothing goes up forever, nothing goes down forever. The commodity prices have been weak for a couple years now and the coal and LNG price in 2017 shows strong signs of life. Queensland is predominately a coal and LNG exporter. Any improvement would support the government coffers. We are actually really optimistic on this front.
We hope we are right in our forecast but if we are wrong, it will be most likely due to the factors above. One important thing you can do to prepare is to deleverage your personal balance sheet so when the price correct you are in a position to actually get a foot on the property ladder but don’t forget. House prices do not go up forever.