Is oversupply an issue in the Brisbane market?

01-Jul-2016

Over the past few weeks, we’ve had some clients express their concern over the Brisbane market becoming oversupplied. Some are starting to feel apprehensive about the state of the market, with apartments becoming harder to lease out and expected rental prices being lowered in order to secure a tenant.

Luckily for most of our clients who have purchased in recent times, a rental guarantee has been in place to overcome the shorter term vacancy, however, we thought it timely to review the situation.

Here are some points to bear in mind…

  • 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 presure 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 principle market fundamentals over that time frame.  Brisbane is one of the most livable cities in the world; it’s 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 

Economic Fundamentals

Brisbane gross rents have been around 20% plus higher than Sydney's. Added to this, the growth forecast for Brisbane from BIS Shrapnel 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 its 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 last eNewsletter, we demonstrated with some in depth graphs how this scenario is very similar to the 2003 occurrence. Click here to read a 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.  

Credible Research

inSynergy prides itself on sourcing and providing the best independent research we can find.  BIS Shrapnel are trusted by QBE Mortgage Insurance, so much so, that they also make BIS Shrapnel's forecasts publically 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 Shrapnel 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.

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!

Urban Renewal

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 revitalization plans.




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