Winners, Losers And The Impact Of Immigration On The Housing Market
RP Data recently released its report entitled Pain & Gain, a quarterly assessment of realised gross profit and loss based on home sales over the December quarter of 2012. An analysis of the numbers in the report reveals some interesting facts about the Australian residential property market and the benefits of a long term investment horizon. Of particular note was the impact of population growth and immigration. Interestingly these patterns of foreign immigration and interstate migration are reflected in the long term profitability of property as an asset class.
Timing the Market
Whilst the trend in Australian residential property values over the long term has been upward (see diagram below) the market over anything less than the long term has been volatile.
RP data found that Australia wide “of those houses that sold at a loss over the quarter, they had been held for an average of just 4.4 years and units had been held for 5.1 years”. Overall 13% of dwellings sold at a loss. This compares to 13.5% in the September quarter but is well up from the low 2.5% from April 2004.
The table below provides a snapshot of the loss numbers for the quarter.
The Pain & Gain report also looked at the proportion of dwellings that sold for more than 100% gross profit. It found houses which sold for more than double their previous purchase price had been owned for an average of 15.2 years compared to 15.8 years for units.
If we think of these numbers in terms of the economic cycles experienced in Australia over the recent past its clear that home prices reflect underlying economic trends. Homes that were bought approximately 15 years ago were bought before the boom times of the 2000’s and enjoyed significant appreciation in value until 2008. In 2008 the GFC hit, which equates to the average time held for properties sold at a loss in the December quarter 2012 i.e. an average of 4.7 years ago. These properties most likely would have been bought just prior to the GFC at high prices and, except for a few small pockets of Australia, most people who bought homes around this time period would now be underwater.
These numbers are testament to the old market adages that “the trend is your friend” and “it’s the time in the market not timing the market”. The longer investors are in the property market the more likely they are to profit over course of the economic cycle or many economic cycles. Conversely, the shorter the investment horizon the greater the chance of a negative return as investors become susceptible to market volatility.
Capital Cities Winners & Losers
Having looked at the nationwide wide numbers lets focus on the capital cities and the difference in the loss and gain numbers that are contained in the below tables.
There are a few things worth noting here. Firstly there is a large variation between capital city market numbers for percentage of homes sold at a loss: ranging from 5.2% of sales in Darwin to 18.4% of sales in Hobart. The percentage of homes sold at greater than 100% profit ranged from 26% in Sydney to 44.4% for Perth. What is interesting it that the cities with the highest percentage of homes sold at a loss do not also have the lowest numbers of homes sold at more than 100% gross profit. Also amongst sales at more than double the initial purchase price there is a large difference in the average holding period between Darwin and Sydney for example, 7.8 and 17.2 years respectively.
Over the December 2012 quarter, 28% of homes sold had previously been purchased after 2007. Of these home sales, 27.1% sold at a loss compared to just 7.5 percent of those homes purchased during or before 2007. The result highlights the need for investors to maintain a long term position in the market if they hope to make significant returns, or at least returns in line with trend growth in asset prices.
Regional Winners & Losers
Regional areas displayed the same wide range of results, albeit with more extremes on either end. Regional property markets tend to be affected by unique economic factors, this is particularly true during a mining boom where once quiet regions can become busy economic growth centers overnight. The table below shows the percentage of homes sold at more than double their original purchase price for different regions across Australia. What should not be surprising is that 6 of the top 10 markets are in WA, where the mining boom has been the most pronounced.
In terms of the greatest instances of losses we can see in the table that Queensland dominates, with 5 out of the top 10 entries. Most of these regions are coastal areas where property values were hit hard during the GFC and have struggled to come back since. According to RP Data “The regions which have proven to be most susceptible to loss on sale are characterised as generally coastal and linked to the tourism and lifestyle sectors. These regions were also popular with sea changers and retirees in the lead up to the financial crisis and have seen the level of demand fall ever since”. We see here the average holding period of 4.9 years again placing these sellers as people who bought just prior to the GFC at the top of the market.
One important thing to note about the instance of losses in the Gold Coast, Far North Queensland and Sunshine Coast areas is the shear size of the proportion of sellers that are selling at a loss, 38.5%, 35.2% & 35.2% respectively. Over a third of people selling their homes. These high rates are an indication that a large number of home owners and investors in these markets are sitting on negative equity and faced with paying off loans that are of greater value than the asset they will eventually own.
Population Growth, Migration and House Prices
Over the weekend Australia officially became a nation of 23,000,000 people. Late last month, the Australian Bureau of Statistics (ABS) released demographic statistics for the September quarter of 2012, which revealed that Australia’s population had grown by 1.7% (382,500) in the year to September 2012, with 60% (228,000) of this growth derived from net overseas migration.
The below graphic shows net permanent migration into Australia has recently dropped below the long term average. Population growth is an important factor of economic growth and housing demand. To put it simply, all other things being equal, a greater number of people chasing the same amount of available housing will lead to increased prices. Which is a good thing for home owners already in the market but also affects housing unaffordability, which is already a significant issue in Australia (see prior article: Australia’s Housing Affordability Crisis from January).
The topic of immigration receives a lot of negative media and political attention in Australia. Whether it’s the constant debate about the correct way to process asylum seekers, controversy about 457 Visas, or the ‘big Australia’ debate, immigration is always in the news. The fact remains, population growth is a critical factor in generating economic growth and demand in the property market.
The biggest four states account for 92.5% of Australia’s population growth with Victoria growing by 94,837 in the year to September 2012, followed by Queensland (91,389), New South Wales (86,033) and Western Australia (81,694). The graphic below however shows that an increasing population alone is not necessarily enough to ensure strong property prices. Queensland has the highest net interstate migration and the third highest net overseas migration, but it also has the highest percentage of sellers selling at a loss, being 23%. Whereas Western Australia benefits from both high interstate migration as well as high net overseas migration, but only 11.95% of sellers sold at a loss. What this highlights is that there are several other factors at work determining house prices, including: housing supply, economic growth, and consumer confidence.
Queensland and Western Australia have clearly seen significant net gains in population from interstate migration, gaining 12,104 and 11,091 people respectively – a direct result of the mining boom in those states. It is therefore not surprising that 50% of sales in the Pilbara achieved a selling price of more than double their original purchase price. A result combining both increased demand from population growth, and a lack of supply.
New South Wales may have been the least popular state amongst Australians, losing 18,448 people to other Australian states, but it is remains the most popular state amongst foreigners immigrating to Australia. The table below shows that net overseas migration to NSW of 59,432 more than made up for the interstate migration loss. Perhaps unsurprisingly, NSW also had one of the lowest rates of sales made at loss over the December quarter 2012, being 11.5%. Over the past 12 months, 91.8% of all overseas migrants or 209,403 persons have settled in NSW, VIC, QLD and WA – and states with amongst the highest sales at a loss (SA and Tas) received very low numbers of net overseas immigrants.
Overall this data reveals that there is a relatively strong residential property sector in Australia. Home values across Australia’s capital cities increased by a total of 10.1% over the five years to December 2012. The a vast majority selling their homes at a profit and in some regions upwards of 50% of vendors selling for more than double what they paid. In fact, 31.8% of all those who sold over the final quarter 2012 achieved a gross profit of more than 100% on their purchase price. Properties located in the major capital cities, that were held for longer than 5 years, produced the best results. Strong fundamentals of limited supply, and continued robust levels of overseas immigration and interstate migration are expected to remain influential factors into the foreseeable future, meaning the Australian residential property market is expected to remain a solid performer for the medium to longer terms.