• Employment levels continue to demonstrate remarkable strength with unemployment falling to 4.2% nationally and to 3.5% in Qld (representing a 29 year low). Business is feeling the skills shortage and this is putting significant upward pressure on wages which in turn must flow through to inflation (although this flow through has been less than anticipated to date).  Approximately 80% of the workforce are in the categories of “individual contracts” and "registered agreements" - the forecast suggests this massive group can anticipate further increases to salaries in the order of 8% to 11% over the two financial years ending June 2009. This substantial increase in family income will inevitably put extra pressure on inflation, but it will also have the effect of improving housing affordability and confidence, which in turn will help to underpin the next cycle of house price growth.

• The tight labour market / skills shortage is exacerbated in both Queensland and Western Australia where the resource boom continues to have a significant impact. Business and Government are continuing to "import" skilled labour to fill jobs.  This is good news for property investors as the continuing high level of job creation underpins continued migration, which in turn generates further demand for housing.

• Headline Inflation (CPI) fell back from 3.3% in December to 2.1% in June, well within the Reserve Bank target range of 2-3%. Baseline Inflation remained well contained and finished the financial year at 2.6%  The forecast to June 2008 is for Headline Inflation to climb to 3.0% (at the top of the RBA target range) then push higher to 3.3% in December 2008. 

During that same period, baseline inflation is forecast to reflect similar increases causing significant consternation for the Reserve Bank Board and forcing them to raise interest rates again - more on that when we discuss interest rates next.

• Interest Rates are forecast to increase again as the Reserve Bank responds to inflationary pressures – after the latest rise in August, variable housing rates are now at 8.3% but are forecast to rise to 8.6% by mid 2007 then probably stabilising at that level.  But there is an element of uncertainty here.  It now appears the cycle could run longer than forecast previously, and this could see even more interest rate rises before the eventual softening. This forecast softening (now after December 2008) is likely to represent a key trigger for the Brisbane property market.

• Migration to Queensland remains very positive with net international migration of 31,323 and net interstate migration of 26,678 to the year ending March 2007 - giving total net migration of 58,001. It is interesting to note overseas migration is now a more significant contributor to population growth than interstate migration.  The forecast is for it to remain strong (at about this rate) which reinforces the existing high demand for housing.

 

• Queensland Dwelling Approvals totalled 42,603 for the year ending August which is up approximately 5,000 on the previous year.  However, this level remains  approximately 2,500 less than that required to meet demand flowing from population gains.

• Stock Deficiency  To meet current annual demand, it is estimated dwelling supply would need to increase to 45,000 pa. This supply deficiency has been in place and growing for several years and has now amounted to an underlying stock shortage of 21,100 dwellings (representing six months supply). This stock deficiency figure is much more accurate than available in previous year as a result of the recent census.  Although the deficiency is markedly less than estimated in previous reports, it represents a massive build up of demand which is unlikely to be quickly satisfied.  As such, it continues to underpin a huge opportunity for investors.

Okay - that's the "big picture".., let's get closer to the ground...

Now we're talking about "the view from the front line..,"

In our last economic update (April 2007), we pressed the point that the Brisbane market appeared to have shifted up a gear some time around November 2006 - but that shift hadn't been reflected in the statistics at that stage.

Now we have clear evidence of this marked shift in gear.

Detached houses in Brisbane have produced capital gains of 14.6% for the year ending August (and just to hand - 15.5% to September).  These statistics show a significantly more buoyant market than forecast by BIS Shrapnel.  It may be that the market is moving more quickly than expected.

And on the Rental front

On the Rental front, the market has continued to be very tight. This is clearly a response to continued demand underpinned by strong interstate and international migration.  Vacancy rates remain very low and weekly rents have increased dramatically over the year (up 11.86%). 

As a landlord, double check to ensure you've this enjoyed healthy rental increase - there is evidence many landlords are still missing out.

This upward price pressure on rents is set to continue on the back of the stock deficiency and continued strong migration element. Such rental increases add "pain" to renting, and that pain makes the decision to "buy" more attractive. It will add weight to the next buying wave once interest rates retreat - now likely to be after Christmas 2008.

And drilling down to explore suburb level price activity...

Median Prices and Sales Volumes represent good indicators of activity in the local real estate market. The following chart series show example suburbs ranging from 2km to 25km from the Brisbane GPO.  Please note the bar chart doesn't show the current year so we've added a notation of growth for the year to date. It is interesting to note the local price growth pattern for each suburb in comparison to the median lines. Although the suburbs were selected randomly and the sample is very limited, it would appear the further out from the GPO a suburb lies, the more pronounced the cycle is likely to be. The stagnation phase appears longer and flatter than suburbs closer in, and the boom phase is markedly steeper. It magnifies the importance of selecting quality areas during stagnation phases.  The key message here is that the Brisbane market has clearly shifted up a gear and is returning extremely healthy price growth across the board.

The people fight back..,  Psychographics no longer at odds with fundamentals?

Up until very recently, the Brisbane market appeared to be running against the fundamentals. Statistically, there was a strong underlying demand and a substantial housing stock deficiency.  Yet up until November last year, we had seen a relatively soft market.  On face value, this ran against the law of supply and demand.  Strong demand plus short supply should mean price growth. But it was "price growth" was conspicuous in its absence.

Now the fundamentals are pushing through and the pressure cooker has started to boil over.  Result - we're seeing early (and impressive) price growth.  But the real action is yet to come.

One key question to consider is: what makes people buy when they do?

It remains my view that the combined “psychographic” (the reason people do things on mass) is still holding the market back from it's real potential. If we analyse the buyer market by dissecting it into behavioural groups it enables us to draw some possible conclusions. Consider these groups,

• First home owners – plummeting housing affordability has made them reluctant to buy, but they are becoming increasing unhappy with seeing their pennies disappearing in high rents.  They are stuck between "a rock and a hard place".  Over the next year they'll see the skills shortage and tax cuts translating to higher take home pay and, with the the increasing frustration of renting, the First Home Owners will re-enter the market. We're seeing the early signs now. And when interest rates fall back, they will come buy gusto - my guess is just after Xmas 2008;

• Up-graders (buying second or subsequent homes for owner occupancy) – who largely satisfied their needs during the last boom in 2002/03 are now over the “new house honeymoon”. Their kids are now five years older (and perhaps another child has presented in that time) so they're starting to think they really could do with a bigger home. The kids will need one bedroom each - so they are starting to feel an “itch” to upgrade.  My guess on timing: just behind the First Home Owners (say 2009); 

• New Arrivals (interstate and international migrants) – a mixed bag with some choosing to rent and others already buying quite well in quality areas. But the rental market isn't a very attractive proposition - what's left isn't too enticing.  Some former "renters" are shifting into "buying" mode and are finding they have to raise their sights in regard to prices if they're to get what they want;

• Investors – are out of the game. Traders have shifted their funds to equities and are still enjoying strong returns (although some are starting to get a little concerned at the increasing market turbulence), and the “medium term” investors who bought in the boom are happy with the increasing rental yields - so they're out of the market for the moment too. But once the statistics start to flow and the media bandwagon gets going about a new property boom, it will be on for young and old (my guess is about 2010).