Exclusive White Paper - Top End Property Prices Continue to Rise
Rising demand from upgraders and top income earners
Share Market Helps Boost Wealth
A combination of improving company profits, stronger equity markets and larger dividend payouts has helped boost the wealth of high net worth individuals across Australia. This has in turn seen demand for luxury property markets grow across the country. Recent strong property price growth and record low interest rates have also assisted existing owners to more easily upgrade to a higher priced property. Furthermore, growing demand from offshore buyers and a more optimistic outlook for global economic growth has also assisted the top end of property markets.
The benchmark ASX 200 index, which measures the share price performance of the largest 200 companies listed on the Australian Securities Exchange, grew in value by 12.3% during the 2013/14 financial year. This growth has also been accompanied by an increased tendency for companies to lift dividend payments, which has further improved the wealth position of shareholders.
Company Profits Slowly Improving
After a period of flat growth, post GFC, company profits have increased steadily over the past 12 months. The latest gross Operating Profits data, from the Australian Bureau of Statistics (ABS), shows that annual profit growth strengthened for each quarter over the past financial year. The data showed an annual growth of 10.2% in March 2014 before falling to 1.8% in June 2014. One of the drivers behind the most recent result was falling commodity prices, which saw mining profits fall 15.2%. Company profits are important for top end property markets as they are generally a precursor for dividend payments for shareholders and bonuses for executives at these firms. This boost to income provides these investors and home owners with a greater ability to upgrade or purchase additional properties.
Price Growth and Finance Costs Drive Upgrader Activity
Double digit price growth across a number of property markets over the past 12 months has seen home owners sell up to lock in their capital gain. This has in turn allowed these “cashed up” buyers to upgrade to a higher priced property.
Assisting upgraders has been record low interest rates, which has made a larger mortgage more affordable. The Reserve Bank of Australia (RBA) has kept the official cash rate at 2.5% since August 2013. Its latest monetary policy statement indicates a period of interest rate stability in the short-term. This sentiment further enhances the confidence of buyers that their mortgage repayments budgets will remain steady for the near-term.
Upgraders Bowrrowing to Renovate
Property owners have looked to “super charge” their capital gain by taking advantage of low financing costs to renovate before they sell. The increased worth arises due to two factors; firstly, adding appeal through updating a property. For example; installing a new kitchen or bathroom or adding new features such as an outdoor deck. Secondly, the enovation provides a buyer with confidence that there is less work to do once they move in. This increased confidence creates competition between buyers, which in turn helps lift the final sale price.
Case Study - Erskineville, Sydney
The renovation of a house in Erskineville, inner west Sydney, is a strong example of how home owners have captured additional capital growth. The property on day one of renovation (end 2012) was appraised at $710,000. The owner of the property spent a total of $680,000 to do a full renovation of the property over the course of 12 months. This means at the end of the renovation, the property would have to sell for $1,390,000 to break even. During this period house
prices in Erskineville rose by 15%, according to RP Data, therefore an un-renovated property would sell for $816,500 over the same time. However, at the end of the renovation the property is valued at $1.7 million. This is because it is now near new and requires less ongoing maintenance, ensuring it is more attractive to a buyer which in turns builds competition between purchasers. This result provided an additional $203,500 to the vendor.
|Value of Property on Day One (2012)||$710,000||$710,000|
|Market Price Growth (2012-2013)||15%||15%|
|Value of Property on Completion (2013)||$1,700,000||$816,500|
|12 Month Capital Gain||$310,000||$106,500|
*Results are exposed to many variables including location, market conditions and type of property. Property owners should consult professionals on their individual property before undertaking renovations.
Prices at the Top Keep Growing
The most recent data from Australian Property Monitors (APM) shows the strong performance of the top 20% of the market over this period:
- The median price of the top 20% of house sales nationally currently sits at $1.13 million. This represents an increase of 84% since 2004 and 9.2% in the last year alone.
- Luxury apartments and townhouses have also been popular with the median price of the top 20% of units currently sitting at $629,000. A growth of 58% over the past 10 years and 6% during the last 12 months.
- The number of sales that transacted within the top 20% price bracket has also increased in line with demand over the past 12 months. This saw the number of houses sold in the top price bracket increase by 12% over the 12 months to June 2014 while unit sales increased by 18% over the same period.
Top Price Bracket Varies Wildely Across Capitals
The top price bracket varies greatly across the country. The gap between the price of the top 20% of properties across various capital city markets has grown exponentially over the past 10 years.
As at June 2014, the top price bracket for houses in Sydney was $1.58 million compared to Hobart’s $530,000; a 299% difference.
Sydney’s top price bracket for units was $780,000 while in Hobart it was $376,000; a 208% difference.
$2 Million Plus Sales Highest on Record
The latest data, from RP Data, shows that sales of these high end properties have grown across all capital cities over the past 12 months.
Nationally, the $2 million plus price bracket accounted for 2.1% of all sales in the 12 months to July 2014, up from 1.6% in the 12 months to July 2013. This latest result represents the highest proportion on record and, to put this into perspective, 10 years ago just 0.7% of capital city home sales sold at, or for more than, $2 million.
Sydney was the key driver of growth in this price bracket over the past 12 months with 3.8% of sales falling into this price range, up from 2.8% a year earlier.
Melbourne (2.1%) and Perth (1.4%) also recorded strong uplift in top end property sales.
Brisbane (0.6%) and Adelaide (0.7%) were up over the year while Hobart saw a slight drop to 0.2%.
The growth in wealth creation metrics and the forecast stability of the economy over the next 12 months are set to continue to have a positive impact on the upper end of property markets. Interest rates are expected to remain on hold over this period, keeping mortgage affordability high and encouraging existing property owners to upgrade.