Pinpointing where house values are rising and where they are falling
EXPERT OBSERVER
The core task for investors is to find the growth locations, preferably before values rise significantly.
It’s not an easy one because there’s a shortage of helpful information. Mostly the media and the research companies give us historical information and usually in a generalised way.
This means they tell what’s happened recently, which doesn’t necessarily inform the future, and usually with a single growth figure to describe an entire major city.
But something that came recently from CoreLogic was a little more helpful, because it provided some segmentation of sub-markets. Rather than simply tell us that Sydney and Melbourne prices are falling, it acknowledged that this is only true of some market sectors – and that others are still rising.
There are some patterns with this data which are handy to observe and useful in deciding what happens next and where.
One of the things I know to be true, from a scary number of years of experience, is that up-cycles often/usually begin in the inner-city areas. Over time they ripple out to the middle-ring suburbs and latterly to the outer-ring areas.
Why is it so? One reason, probably the biggest single one, is that real estate markets are largely driven by local economic conditions – not by national factors like interest rate levels or taxation policies, but by what’s happening in the economy at a local level.
This helps to explain why Sydney and Melbourne, underpinned by the No.1 and No.2 economies in the nation, have had booms while the cities afflicted by the weakest of the state/territory economies, Perth and Darwin, have had markets in reverse.
When economies rise, the first people to notice are those in the business community – the ones earning the most money. They react before anyone else does and they tend to live in the millionaire suburbs. Those markets rise first and others follow over time.
When you get towards the end of the cycle, those early adopters have passed their peaks and it’s the cheaper areas on the fringes that are experiencing the busiest markets and the strongest annual price growth.
So, according to the recently-published CoreLogic figures, it’s overly simplistic to claim that Melbourne house prices are falling. CoreLogic’s analysis says that prices in the upper end of the market are down 3.5 percent (generally speaking), but prices at the affordable end are up more than 10 percent.
This correlates with Hotspotting research which indicates that the outer-ring precincts in the Greater Melbourne area – suburbs in LGAs like Hume, Whittlesea, Casey, Melton and Wyndham – have strong sales activity and price growth. And this is what we would expect at this point in the Melbourne cycle.
There’s a similar scenario in Sydney – the upper end price levels generally are falling but there’s still some growth in the cheaper outlying areas.
The pattern for Hobart is interesting and informative, because it suggests that the Tasmanian capital is still pumping but that the peak might be near. The top end of the Hobart market is still rising (up almost 10 percent) but the cheaper end is up a lot more (around 18 percent, according to these figures).
That suggests the market overall is still strong but the lower end is the strongest.
In terms of how all this informs the future, Perth is a good case study. When I recently looked at all the numbers for Perth, one of the things that stood out was that many of the million-dollars suburbs had recorded good growth in their median house prices but elsewhere this was not the case.
The CoreLogic figures would tend to confirm that, because they find that the upper end has risen but the cheaper end is still slightly in the negative.
This, taken with other information, confirms for me that Perth is moving into a recovery phase in response to improvements in the local economy – and, as I would expect, the upper end areas are the first to react.
I’ve seen evidence of a similar scenario in Adelaide, with many of the top end suburbs showing good annual price growth, ahead of what I expect to be a strong showing by the Adelaide market generally in the next 12-18 months.
Terry Ryder is the founder of hotspotting.com.au
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