Which capital city will do best this year? The experts have their say

With 2013 well and truly behind us, Property Observer is looking forward to the year ahead. We’ve asked four market experts to weigh in on where we’ll see the best capital growth this year.

Which capital city will perform the best in 2014?

Charles Tarbey - chairman of Century 21 Australia

BRISBANE IS THE NEXT TO MOVE

Brisbane. During the last year, other capital cities moved up in price far more than Brisbane did. And if I look at the three most vibrant ones – Brisbane, Sydney and Melbourne, the last two had the strongest growth. Three years ago, Brisbane and Sydney had very similar prices. But in the last 12 months, Sydney’s median prices have jumped almost 14%. The median price in Sydney is now close to $750,000, while it’s around $445,000 in Brisbane.

Sydney investors used to sell their properties in Sydney to downsize and buy in Brisbane, and still have a quarter of a million left over. That stopped three years ago, but now it’s back on the table.

If you look at discretionary spending, the majority of people who buy in the Sunshine Coast are from Melbourne. And as capital gains in Melbourne have increased, there’s a very big discrepancy in the prices of those sorts of properties in Melbourne and those currently available on the Sunshine Coast.

Brisbane and the surrounding areas have stayed flat in recent times, in part due to the floods, along with other factors. Astute investors will be picking up on those areas.

Victor Kumar - Director and Principal of Right Property Group

BRISBANE IS CERTAINLY ONE TO WATCH AS SYDNEY HEATS UP

Growth in any area generally follows a period of higher yields (annual rent expressed as a percentage of purchase price), if all other fundamentals remain the same. Given that money is fairly cheap, where you can get sub 5% interest rates on loans, the higher yielding suburbs, and indeed states, will and have seen a buying frenzy.

The result of this is that there is excessive heat in the market. Buyers, and indeed first time investors and home owners, are starting to pay over the top in a bid to get into the market, in the hope of not missing out on a good growth spurt.

Adding to that volatility, there are a lot of investors jumping into the market with their super funds, taking a longer term view on their purchases and who are therefore not fazed about paying a few thousand dollars extra to be ahead of the competition. There certainly will be a substantial increase in pricing in most metropolitan areas.

Given that Sydney traditionally has been yielding 6.5% plus properties in areas that show good investment fundamentals, the market is in an absolute frenzy with the lower interest rates, and the added bite of new year’s resolutions and so forth, it is generally a market I would not buy in unless there are notable price points between new and old. Certainly, I would be concentrating more in the mortgage belt and coastal areas, so that when the heat does go out of the market at some point in time, there isn’t such a major correction.

Brisbane is absolutely the other market to watch. Rising prices in Sydney are leading to reducing yields, and Brisbane’s lower priced (in comparison to Sydney’s) properties will be giving the high yields most seasoned investors are accustomed to. There will be a natural influx of out of state investors there, which will and has led to a strong market recovery.

Generally if you are buying here, this year you will see good growth, and yields will decrease. Naturally my preference is on established properties in the mortgage belt area here outside of the flood zones.

Melbourne, in the suburbs where the fundamentals do work, is never going to be a high yielding proposition, yet the growth is likely to be pretty good, given the infrastructure changes and the influx again of self-managed super funds and out of state investors seeking new markets. It’s likely to show good strong growth.

Perth, Adelaide and the other main cities in the country are, in my opinion, likely to lag behind these three areas (Brisbane, Sydney and Melbourne) in terms of growth in 2014.

The point to note in all of this is that whilst the market in each state is being driven by factors such as media attention, lower interest rates, more buyers in the market and good infrastructure, even though a state is highlighted for growth or decline, there will still be pockets within these states which will be bucking the trend. Therefore due diligence is required before jumping into a state or suburb just because everyone else seems to be investing there.

See other expert opinions over page

Tim Lawless - Head of Research, RP Data

BRISBANE SHOWING STRONG FUNDAMENTALS

Brisbane is arguably the best example of a city showing strong fundamentals. Gross rental yields are amongst the highest of any capital city (4.6 per cent for houses and 5.6 per cent for units), housing prices are much lower than Sydney and Melbourne (the median house price in Brisbane is 36% lower than Sydney’s and 24% lower than Melbourne’s). Population growth is strong and there hasn’t been a substantial uplift in new dwelling supply, indicating a persistent undersupply of housing. Rental vacancies are around the 2% mark according to the REIA which is likely to drive rents higher as well.

Perth’s housing market has likely passed peak growth conditions. We are seeing rental rates now tapering as Perth vacancy rates rise, transaction numbers are trailing off and yields are slightly below average. We are also seeing the rate of overseas and interstate migration into Western Australia slowdown, which is likely in response to a wind down in the major infrastructure project pipeline that is evident across many of the resource intensive regions of the state.

It is logical to expect those markets that have been very ‘hot’ in terms of capital growth will naturally start to cool over the coming year, in fact we may already be seeing early signs that peak capital gains have passed in Sydney and Melbourne.

The key challenge for those investing in the housing market over the coming year will be to balance rental income with expectations for capital gain. In our view, investors should be approaching the housing market with a balanced strategy: seeking out homes that will provide opportunities for long term capital gains whilst also returning a healthy rental yield. With typical yields across Sydney and Melbourne now below 4 per cent for houses and slightly higher for units, finding balanced investment opportunities that offer both rental income and prospects for capital gain are becoming more difficult.

Catherine Cashmore - Market analyst

A NUMBER OF CAPITALS TO BENEFIT, BUT A SLOWDOWN IN 2015

There is nothing to indicate any slow down in the market's overall direction in 2014 - but I do think it will come in 2015.

Canberra and Adelaide are likely to remain soft however investors are the main players in this cycle and Sydney (gains of which could be in excess of 10%,) followed by Melbourne, Perth and Brisbane (+ 5-8%) are all set to benefit.

There are potential headwinds for the economy - as most are aware, job security is a factor for many buyers - unemployment is trending upwards and the Government is accentuating the problem with its unhealthy obsession to restore a surplus.

To offset this, money is flowing into the local established markets via strong immigration from China and India, for example, with other factors such as an increasing amount of wealth in self-managed super funds, which is a strengthening trend.

Interest rates are likely to remain low - which will assist mortgage holders and investors and for those entering the market, the concentration is most likely focused on their monthly payment rather than total upfront cost. However it's that upfront cost and the shortage of affordable supply, which will continue to deter first time buyers.

No doubt, the winners in this market have been - and will continue to be - investors and second time buyers - however, a growing and very vocal minority of low income earners and first time buyers, are starting to question the legacy they have been left with.

It won't change the current cycle, or stop the speculation - but perhaps it will inspire a much needed debate on the long term, feasible, and sustainable solutions.

Would you like to add your prediction to the list? Email jrichardson@propertyobserver.com.au