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The good news is the national house price decline is finally easing, as the latest CoreLogic Hedonic Home Value Index shows.
The better news is that more than half of Australian SA3 regions didn’t even go through a price decline, our recent data review reveals.
So, what’s the magic with these growing regions? In today’s blog, we are going to discuss some features these regions share that cause them to keep growing.
Which regions shall we look at? Let’s use the top performers in the CoreLogic HVI report:
• Top 5 Capital city SA3s with the highest 12m value growth
•Top 5 regional SA3s with the highest 12m value growth
After reviewing the market indicators of each region, we find that their growth is backed by a combination of the below features.
Relative Affordability
After 8 cash rate rises, property buyers’ borrowing capacity has decreased significantly, which quickly impacted the markets where buyers need to maximise their borrowing capacity to get a house. Affordability, or relative affordability, to be more precise, has become the most significant influencer on house prices this year.
Relative affordability is the relationship between income and house price. A house is usually deemed affordable if the buy spends up to 30% of their disposable income on loan repayment.
InvestorKit uses an “overvalue/undervalue” method to measure a region’s relative affordability, where we compare the repayment of an 80% LVR loan for a median-priced house to 30% of a 2-earner family’s income (with the region’s average income). If the loan repayment is higher, we call the region’s houses “overvalued” (unaffordable); otherwise, they are “undervalued” (affordable).
The table below lists the top performers’ median house prices and relative affordability. Greater Sydney and Greater Melbourne’s figures are listed at the bottom for comparison as they lead the price downturn.
Most of the top performers enjoy affordable house prices, indicating the importance of affordability to price growth this year. However, two top-performing regions are “overvalued”. That is why we need to look at the following indicator –
Low or Lowering Inventory (Supply-Demand Relationship)
While affordability significantly influences market growth amid interest hikes, price growth is essentially determined by the relationship between demand and supply: demand exceeding supply tends to push prices up, while supply exceeding demand tends to weaken growth.
We use inventory to measure the relationship between supply and demand:
The lower inventory, the tighter the market, and prices are more likely to grow.
The table below lists the top-performing regions’ inventory with Greater Sydney and Melbourne as a comparison.
It’s interesting to see that Greater Sydney and Melbourne’s inventories are still relatively low, indicating that the 2022 property market downturn is not caused by oversupply but primarily by low sentiment, so it’s likely to bounce once consumer sentiment is back up (Find more information on consumer sentiment trend in our lately released a whitepaper: 7 Trends Savvy Investors Don’t Want You to Know in 2023).
Low Rental Vacancy Rates
The rental vacancy rate reflects the demand-supply relationship in the rental market as well as the region’s housing demand. One of the features our top performers share is extremely low vacancy rates (table below).
Although vacancy rate is not a sales market indicator, it has multiple links with the sales market:
– Low vacancies would push some renters to the sales market due to high competition and/or rising rents, especially when purchasing a house is affordable.
– The rising rents would attract more investors, increasing demand in the sales market.
– If the low vacancy rates are caused by large numbers of migrants (internal or overseas), many of them would need to buy their own houses in a few years after settling down.
A combination of relative affordability, low inventory, and low vacancy rates have helped many SA3 regions’ house prices keep growing even after 8 back-to-back interest rate rises. Besides these common features, each region has multiple other factors supporting its growth, including population growth, economic recovery, infrastructure investments, low incoming housing supply, lifestyle attraction, and more.
InvestorKit buyers’ agency adopts a market pressure analysis methodology that takes all the above factors into consideration to identify markets with solid growth potential not only in booming times but also against headwinds.That is why most of our frequently purchasing regions have made the top performer lists in the CoreLogic HVI report, such as Greater Adelaide, Wagga Wagga, Armidale, Barossa, Bundaberg, etc. Want to work with us and buy your next investment property in one of the top-performing regions? Talk to us today by clicking here and requesting your 45-min FREE no-obligation consultation!