Australian property market outlook | Q3 2021 & beyond

Australia remains firmly embedded in a property boom that is expected to extend across 2021 and beyond. But beneath the headlines, many interesting trends are emerging this quarter as we continue to explore the post-pandemic world. 

The upswing in the housing market over the three months to May 2021 has been the strongest in over 30 years, encompassing both houses and units in 97% of regions nationwide. This was analysed by CoreLogic, in a synchronised surge that research director, Tim Lawless, describes as an “absolute rarity’’. 

In the industrial market, yields are becoming highly compressed, while other sectors, such as retail and office, continue to shift after 2020’s recession. 

 

Residential property market 

CoreLogic’s national Home Value Index shows house prices rose 2.2% over the month of May, a stronger result than April’s 1.8% but weaker than the 32-year high recorded in March, when values leapt 2.8%. 

Despite rising house prices, residential properties are selling rapidly. Those listed on realestate.com.au (REA) and sold in May had been online for an average of 32 days, compared to 37 days over the previous month and 62 days at the same time in 2020, REA’s latest Housing Market Indicators Report reveals. 

Australian property market outlook | Average views per 'for sale' listing | Trilogy Funds

Increasingly, buyers are looking for more expensive homes. REA online searches in May for homes priced over $1 million made up 41.6% of the total in capital cities, up from 33.5% a year ago. Just 16% of these searches were for properties priced below $500,000. 

Low mortgage rates, high consumer confidence and fear of missing out are supporting strong demand for residential property that most experts believe will last beyond 2021. SQM Research says this is because many households are awash with cash for property investments. 

A Reuters poll of property analysts conducted in May foresees home prices rising by a more moderate 10.5% on average this year. This is expected to ease to 5.0% next year, influenced by affordability, rising interest rates and the end of stimulus programs such as HomeBuilder to possible macro-prudential and credit market tightening. 

Despite this, investors are due to provide a ‘second wave’ of demand, stepping up their activity across the housing market, motivated by expectations of capital gains and low interest rates, says CoreLogic. 

The eventual opening of international borders could provide a further shot in the arm for house prices as the flow of migrants, foreign students and workers into Australia resumes. 

Australian property market outlook | Change in developer enquiries | Trilogy Funds

What does this mean for residential development? 

Statistics from REA reveal that enquiries from property developers have shifted dramatically since the pandemic, with the HomeBuilder program boosting interest in land estates. 

Although HomeBuilder ended in March, land estate enquiry in May 2021 was still 69.5% higher than it was a year earlier, while apartment project enquiry was 64.5% higher. 

Developers are likely to continue to take advantage of buyer demand and fast-track new projects wherever they can access land or infill sites at financially-viable prices, says Clinton Arentz, Trilogy’s Head of Lending and Property Assets. 

“We anticipate the strong sales results in our existing developments will continue in the coming months.

“We expect there may be further growing pains of the rapidly changing market but that equilibrium will return in time, providing confidence in the mid-long term prospects for the residential sector,’’ says Clinton. 


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Where do retail, commercial and industrial property stand? 

Australia’s post-pandemic CBDs are very different from what they were before, and this has impacted businesses located in city centres. In Brisbane, for example, not all shoppers have returned to CBD retail facilities such as the Queen Street Mall, where only 66 per cent of pre-COVID traffic has returned, and only 63 per cent of Brisbane offices currently occupied. 

Australian property market outlook | Trilogy Funds
Queen Street Mall, Brisbane

All cities have been similarly affected, in particular Melbourne, where inner-city offices were just 45% full in May compared to pre-pandemic levels. 

A decline in the popularity of working from home would help CBDs to recover from the pandemic faster, but experts are divided on when or if this will happen. Meanwhile there has been an uptick in demand for flexible workspaces in shared offices in suburban and regional areas. 

City centres aside, CBRE reports that most shopping centres are now reporting foot traffic higher than pre-COVID levels and rent collections almost on par with those prior to the pandemic. 

With that being said, the online share of retail spending in Australia reached an all-time high in 2020, growing 57% year-on-year. As a result, property assets such as data centres and modern hi-tech warehouses are benefiting from trends such as e-commerce and the upsurge in data usage. 

Australian property market outlook | Trilogy Funds

According to CBRE, take-up of industrial space from the e-commerce sector reached an all-time high in 2020 with the absorption of 1,000,000sqm of logistics facilities, and an additional 2,500,000sqm will be required over the next five years to support the growth of online shopping in Australia. In the face of this strong demand, the capitalisation rate for quality industrial buildings is trending towards 4.5 per cent. 

Industrial and logistics buildings have been described as “the hottest property class around the world’’ at the moment, and strong foreign property investment inflows are helping bolster prices domestically. 

 

Key points to takeaway 

Most experts agree that the high growth rates in national home values that Australia experienced in the three months to May cannot be sustained for much longer. However, they do foresee continued, steady price appreciation at more moderate levels over the second half of 2021 and beyond. 

The way Australians work and shop is changing, making the outlook for property values in the retail, commercial and industrial sectors far more mixed than that for residential property. The economic disruption caused by the pandemic has yet to play out in full, leaving both opportunities and threats in this space for some time to come. 


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This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425. This advice is general advice only and does not consider your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision. 

As with all investments, there are risks as well as potential rewards associated with investing in property. A licensed financial adviser can help you better understand the pros and cons of different investment types. We always recommend investors obtain, read and understand the relevant offer documents and seek advice from a licensed financial adviser before investing.