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Capitalising on housing growth

Tim Lawless of RP Data talks to Australian Broker about the current housing market and what brokers can be doing to capitalise on it.

Video transcript below:

Reporter:  The current housing market nationally is seemingly in a very strong growth phase. Australian Broker caught with Tim Lawless of RP Data to ask him if he thought this kind of growth was sustainable and what cities are driving it.

Tim Lawless, Head of Research, RP Data
Tim Lawless:
 So a really simple answer to the question is no, you wouldn’t expect dwelling value to continue growing at 12% per annum.  That’s unsustainable, you would expect a sustainable growth rate is going to be broadly in line with household income growth which is tracking around about 5% year on year at the moment.  But a much better way to look at the housing market is not just in the current cycle which is clearly a very strong growth cycle, but it’s over a longer term, because the marketplace does go through growth, it goes through stability, it goes through decline, as it has over the past decade.

And actually over the past 10 years, we have seen dwelling values only increase by 4 1/2% per annum year on year.  So there’s really two cities that are the key drivers of very strong growth at the moment, that’s Sydney and Melbourne and you could even swap those two around, because Melbourne over the last five years has been a much stronger performer than what Sydney has.  So if you look at Melbourne, since 2007 we have seen dwelling values rise by about 65% across that city, at the same time, rents have only risen by you know 25 to 30%.  So we have seen a real destruction of yields in the Melbourne marketplace, typical houses is yielding about 3.3% growth which in my view is quite unhealthy and probably demonstrates that that marketplace is potentially overvalued.  

Sydney is also showing very low yields but hasn’t shown as strong a growth over the previous two cycles, but absolutely over the current cycle, Sydney has seen since beginning of June 2012 when the growth cycle started, Sydney values are up by a little bit more 20%.  So once again looking at the sustainability over the current cycle, values are getting very high and I think we are already to see natural affordability barriers in that marketplace as well as the fact that the deals move very low in both Sydney and Melbourne.

Reporter:  So what cannon should brokers be doing to capitalise on this?

Tim Lawless:  Well I think any broker should be paying attention to all the segments of the marketplace.  It’s broadly you can look at investors and you get owner occupiers and of course you can start drilling down the segments like peeling back layers of an onion, but really seeing the premium end of the marketplace firing now so much more so than the more  affordable end of the market.  

We also seeing the fact that because values have risen so much, we are really seeing an equity level being built up in key cities like Sydney and Melbourne which brokers probably need to start targeting a lot more, identifying where those properties are that have a substantial equity build and speaking to those owners about how they can leverage the equity that they have accumulated in their property either through, leverage them through either investments or refinancing looking to improve their asset base, that’s how I think is probably the key, the key thing that brokers could be looking at.  

Investors I think are probably around peak levels at the moment with the fact that yields are so low in Sydney and Melbourne, I wouldn’t be surprised we start seeing investor demand really migrating away from those cities and towards potentially say Brisbane or even Adelaide, where yields are much better and those markets are much earlier in the growth cycle as well.  So for brokers to understand those trends and understand where the changes in demand levels are likely to be flowing from and to, I think that should also be a key part of their strategies that lead to a very high level.