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Australia’s Luxury Residential Market

Author: Mark Courtney, General Manager – Queensland.

Australasia has been identified as a strong-performing region for luxury house price growth, with Auckland, Sydney and Melbourne regarded as some of the hottest luxury markets in the world.

The Knight Frank Prime International Residential Index (PIRI), tracks the value of luxury homes in over 100 locations worldwide including the performance of the world’s leading cities, coastal and ski luxury property markets.

The latest PIRI results for the period December 2015 to December 2016 were released this year and the following table shows the results for the top 20 ranked locations.

The PIRI100 2016 Top 20 Locations

Source: Knight Frank PIRI 100 2016; MacroPlan

Over 2016 the increases recorded by the top performers are quite pronounced with growth approaching 30% for China’s megacities of Shanghai, Beijing and Guangzhou. Research conducted to evaluate individual candidate performance suggests that local economic activity has a strong bearing on price performance, with all this year’s top 10 reporting 3% or greater annual GDP growth. Notably, economic growth is firmly concentrated in the world’s cities (22 of the top 25 PIRI rankings are occupied by cities). Analysis also showed that the value of a city-based luxury homes increased by 2.4% on average while ski homes by comparison rose 1.9% and a beach or coastal property slipped marginally by 0.5% during 2016.

The PIRI index shows that the cities in China, New Zealand, Canada and Australia dominate the top tier. Meanwhile oil dependent markets such as Lagos bring up the rear of rankings in growth. A breakdown of prime residential property by region shows that Australasia (+11.4%), Asia (5.1%) and North America (+4.5%) represent the engines of growth. Europe and the Caribbean occupy the middle of the range with shifts of 0.5% and -0.3% respectively. Latin America (-2.7%), the Middle East (-3.3%), Africa (-3.4%) and Russia/CIS (-5.5%) all recorded negative growth, due to a mixture of factures including depreciating currencies, stalling economies, increasing inflation, falling oil prices and rising political risk.

It is notable that on a worldwide basis, 61% of prime markets recorded flat or rising prices in 2016, which is down 5% from the year before. Along with a slight drop in average price growth, this indicates a slight slowdown in the performance of global luxury residential markets.

Drivers of the Luxury Residential Market

As in many cities throughout Asia, Sydney and Melbourne’s luxury residential markets appear to have benefited from wealth creation over recent years. Rising security concerns, currency movements, education and healthcare have also emerged as important market drivers at the residential markets top end. The following table provides some definition to assist in what may be regarded as a luxury price point in an Australian context.

Luxury Residential Market Price Thresholds

Source: MacroPlan

In Australia, there has been much discussion about the relationship between foreign investment and the general residential property market, of which the luxury market is a small part.  The Australian Foreign Investment Review Board’s (FIRB) 2015-16 Annual Report details that the total number of foreign investment approvals grew to 41,445 compared with 37,953 in 2014-15, largely driven by residential real estate transactions (the Board is a non-statutory body established in 1976 to advise the Treasurer and the Government on foreign investment matters). This represented $247.9 billion of proposed investment in comparison to $191.9 billion in 2014-15. Notably, for three consecutive years, China was the largest source of approved investment ($47.3 billion), driven by continuing approvals in the real estate sector. The report notes that 5,877 approvals had been given for established dwellings which is a decrease of 36% from 2014-15 period. The decrease can be attributed to a shift to investment in new dwellings, housing market conditions, state and territory changes and the introduction of fees and processing changes.

In 2015-2016, real estate remained the largest industry by number and value of approvals increased by $25.1 billion as depicted in the following pie chart. Manufacturing, Electricity and Gas (23%) and Commercial property (20%) completed the top three positions.

Share of total approvals by industry sector in 2015-16, by value

Source: Foreign Investment Review Board Annual Report 2015-16; MacroPlan

The table below shows the breakdown of FIRB approvals by number and value by industry over the past five years.

Total approvals by industry sector: 2012-13 to 2015-16

Source: Foreign Investment Review Board Annual Report 2015-16; MacroPlan

The data shows a significant increase in the number and value of residential real estate approvals rising from 11,668 approvals worth $17.2 billion in 2012-13 to 40,149 approvals valued at $72.4 billion by 2015-16. Notably, this represents all residential product including that in the luxury category. With such large increases in the value and number there has been conjecture that this has been a driver of increased property values. However, in December 2016, Treasury published a working paper which explored the relationship between foreign demand for residential real estate and dwelling prices. The paper, which used foreign investment approvals data from mid-2010 to early 2015, found that the effect of foreign investment on residential property prices was small. It also suggested that supply constraints contributed to high dwelling prices in Australian capital cities. This is likely to be particularly relevant for the luxury market segment which is relatively limited in supply.

Foreign investment in residential real estate was concentrated in Melbourne and Sydney over the period of the study. While Melbourne received more foreign investment approvals than Sydney, price growth in Sydney was much stronger than in Melbourne. The research found that that foreign demand increased prices by between $80 and $122 in Melbourne and Sydney in each quarter. This is modest when compared to the average quarterly increase of $12,800 in Australia’s two largest cities during the period.

Location of Foreign Investment approvals (1 July 2010 – 31 March 2015)

Source: Foreign Investment Review Board Annual Report 2015-16; MacroPlan

Outlook

Since assuming the role in 2015, the Australian Taxation Office has worked to increase compliance with and enforcement of the foreign investment rules for real estate. In 2015-16, divestments were issued in 39 cases for residential properties valued at $48.7 million. This compliance emphasis may have some minor overall influence on the Australian residential property market, however it serves more as an example of the numerous attempts by State and Commonwealth authorities to be seen to be doing something rather than materially altering the market dynamics, particularly in the luxury market segment.

Earlier in this article there was evidence of slowdown in the prime residential market. In more recent research also prepared by Knight Frank additional evidence of this slowdown is now available. In the March Quarter 2017 Prime Global Cities Index Report price growth slowed slightly in the luxury housing markets of Sydney and Melbourne. Both have slipped in global rankings of the world’s fastest-growing luxury housing markets as their slower growth rates were outpaced by strengthening demand in key Chinese cities.

Nonetheless, the strength of demand within the luxury markets of both cities kept them in the top 10. Prices for the top 5% of Sydney homes increased 10.7% in the year to March 2017, as Sydney took out the sixth spot on the list, down from third place a year ago, when the market’s growth was running at 12.3%. Melbourne’s luxury market growth also slowed notably to 8.6%, from 12.1% over the same period a year ago as the city dropped to ninth spot in the rankings, from fourth.

It may be that in an Australian property market context that this slowdown in the Australian luxury residential property market shows that the top of the cycle has been reached. It is notable that CoreLogic data for the month of April 2017 did show that across the whole Sydney market a slight fall in values was recorded.

However, MacroPlan considers that given the elevated levels of political and economic uncertainty globally the safe-haven nature of Australia translates into continued investment flows into Sydney and Melbourne’s luxury housing markets.

Sydney and Melbourne and to a somewhat lesser extent Brisbane where a recent luxury property sale achieved more than $18 million, are expected to see demand for luxury property continuing to outweigh the limited supply.  Foreign interest and investment in Australian prime residential property has remained relatively strong throughout 2016, with many currencies holding an ongoing purchasing power against the Australian dollar.

However, pressures on the easing side include the fact that in 2017, the $A has appreciated against a raft of currencies including the Yuan, Yen and $US. Tighter controls on Chinese citizens moving cash overseas with an annual limit of $50,000 per person in place since January may also have an ongoing effect.

Anecdotally, according to some agents active in the luxury market lending practices and regulatory changes, along with the State Governments stamp duty increase for foreign investors, have caused a dramatic drop in the number of Chinese buyers in the high-end market.

For purchasers accessing domestic funds, it is worth noting that the current cash rate set by the Reserve Bank of Australia, is 1.5 per cent, and has been since August 2016. With no increases expected in the near term, bank lending rates may remain at or around historic lows. However, for potential purchasers in the luxury market it is questionable whether bank lending rates are really that relevant.

Finally, it is also insightful to make some observations about some other performances recorded in the PIRI rankings. Vancouver was last year’s front runner and again performed well with another top performance.  However, it was a year of two distinct halves with sale volumes growing even higher leading up to the summer, before cooling off after British Columbia imposed a 15% tax on foreign buyers in August. Prime prices ended the year 15% higher, notably lower than the 25% increased recorded in 2015.

Meanwhile London slipped down the PIRI rankings with prime prices declining by 6.3% year-on-year. Analysis of the data appears to show that it was the 3% hike in stamp duty for additional homes, introduced in April 2016 which led to a pickup in sales volumes and improved sentiment as the market readjusted to the new tax.

And in New York, the strong US dollar is negating some overseas interest and the delivery of many new luxury projects supply was boosted to create some overall challenges at the luxury end. However, the prices proved resilient while volumes slowed. President Trump was expected to embark on a programme of fiscal stimulus, infrastructure investment and reduced regulation, however those expectations are rapidly fading.

Overall, it is possible that the start of an overall cooling is happening globally which will serve to moderate price inflation in property markets, and to some extent influence the luxury market during the remainder of 2017 and into 2018.


Get in touch:

MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities.  Contact Mark Courtney, General Manager – Queensland, today to discuss your property research requirements.

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