PEAKS HEAD NORTH?

Aug 24, 2016
Michael Matusik

This is how the story goes…

The price gap between Sydney and Melbourne is at a 13 year high, with Brisbane property 50% more affordable than Sydney and 33% cheaper than Melbourne. 

There has never been a better time to buy in Brisbane.  As Brisbane moves through the property cycle, there is a great opportunity to reduce this price gap and deliver strong returns to Brisbane investors.

In short, peaks head north.

So is this true or false?

We have included three charts in this Missive.

Chart 1 shows the differential in house prices between our three major capitals; and that this difference does fluctuate over time.  Yes, the housing price differences between Brisbane and Sydney/Melbourne are at a 13 year high.

All three charts also show the last three, five-year time periods before the peak difference in house values.

Missive 85 - chart 1

Chart 2 breaks down the annual rate of change in house price growth for Sydney, Melbourne and Brisbane.

Missive 85 - chart 2

Chart 3 shows the same data set, but this time depicting the annual change in house values.

Missive 85 - chart 3, replacement

Some observations

Chart 2 shows that in the past – during the late 1980s and during the early noughties, peaks did head north, especially between 2001 and 2004.  However, this time around, there appears to be very little price momentum in Brisbane.  The rate of price growth in both Sydney and Melbourne is in decline, yet nothing much is happening in Brisbane.  Is something different going on?  If not, what is keeping Brisbane back?

Chart 3 shows that whilst the rate of growth in Brisbane in the past has been strong, the actual change in values has been much milder.  This is especially evident over the last four to five years.

My comments

This is no ‘peaks heads north’ cycle.

That never was going to be the case.  Much of the price growth in Sydney and Melbourne has been caused by localised factors, which are not transferable elsewhere.  Here, I am talking about overseas buying – and much of it illegal.

What drove the ‘peaks head north’ phenomena during the late 1980s and in the early 2000s, were very strong employment opportunities in Queensland and especially during the last cycle.

The state’s resources boom attracted a lot of economic rent and higher paid workers.

This time around, things are stacked up against the Sunshine State.  Looking forward – over the next five years – four out of five new jobs are expected to be in our capital cities.  Two thirds of these new jobs are anticipated to be created in Sydney (36%) and Melbourne (30%).  The Brisbane region is expected to hold just 14% of these new jobs.

Back when ‘peaks head north’ was working, Brisbane attracted over a third of the new capital city jobs.

Yet, these new jobs – regardless of where they reside – are changing.

Gone are many of the $100,000+ new permanent positions.  They are being replaced with two new $25,000 casual jobs.  Yes, more jobs are being created, but the economic impact has halved.

Increasing automation, robotics and digital disruption will accelerate this trend, driving further deflation.

Peaks head north?  More like ‘troughs head north’, if you ask me.

End note

How about we just stop this spruik!

Instead of promoting some make-believe future, the FIRE industry should be focusing on the merits of the project in question and the product within it; rather than hypothetical value transfer, fantasy forecasts and inflated locational promises.

We are often at real pains to explain that is the better way forward.

Nobody is buying a suburb; they are buying a property within that suburb and more importantly, within a particular estate or project.

The same applies when buying in another investment class.  Take the share market for example, it is paramount to buy the right stock (i.e. company) rather than make decisions based on wider indices.

Ditto when it comes to investing in property.

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