2018-19: A year of heavy losses for Australian property

CoreLogic Research Analyst, Cameron Kusher, has released analysis examining total investment returns (i.e. value growth and gross rental returns) across Australia’s housing market in 2019-19:

Over the 2018-19 financial year, total returns from residential property recorded a fall of -3.3%. Returns were down from the previous year and it was the only financial year since at least 2005/06 that total residential property returns were negative. To put that in context, housing returns last year were worse than those recorded during the financial crisis and during the 2010-12 housing downturn. The combination of falling values and historically low rental yields have driven total returns into negative territory.

Looking at the national figures in the context of the combined capital cities and combined regional markets shows that returns have reduced over the year across both regions. However, combined capital city returns have fallen -4.5% while combined regional market returns remained mildly positive at 1.6%. For the combined capital cities it was the weakest returns on record and the first negative annual return, while across the combined regional markets it was the weakest annual return since 2008-09.

Across NSW, total returns fell over the 2018-19 financial year in both Sydney and regional NSW. For Sydney, it was the second consecutive financial year in which returns have fallen however, it was a larger -6.7% fall compared to the previous year and the largest fall of any time since 2005-06. In regional NSW total returns were – 0.5% lower over the past financial year and it was the first time over the period that total returns recorded a decline.

In Vic total returns were lower over the most recent financial year in both Melbourne (-6.0%) and regional Vic (4.5%). For Melbourne it was the first financial year in which returns were negative since 2011-12 and it was the largest fall in total returns on record. Although regional Vic total returns remained positive, the market experienced a substantial slowing from the previous year. Furthermore, it was the slowest growth in total returns for regional Vic since 2011-12 when they increased by 3.5%.

Although total returns throughout the 2018-19 financial year remained positive in Brisbane and regional, Qld there was a substantial reduction in returns across both regions. Over the year, total returns in Brisbane were recorded at 1.7% the lowest they have been since the 2011-12 financial year and it was the same story in regional Qld with the 3.2% return the lowest since 2011-12.

Although returns from residential property remained positive over the 2018-19 financial year in SA, both Adelaide and regional SA recorded a slowing of total returns. Over the year, Adelaide’s total return was 4.1%, which was the smallest return since 2011-12, and down from 6.1% the previous year. In regional SA, returns slipped from 5.2% the previous year to 4.0%, which was the smallest returns since 2011-12.

Total returns were negative in 2018-19 across WA with both Perth and regional WA recording their largest annual falls in returns on record. Over the year, total returns in Perth recorded a fall of -5.3% and
although returns have fallen over three previous financial years, it was the largest decline on record. In regional WA, returns declined -5.0%, which was also a larger fall than over any of the three previous financial years in which returns were negative.

Both Hobart and regional Tas maintained positive total returns over the 2018-19 financial year however, it was a significant reduction of returns in Hobart. Hobart’s return was recorded at 8.1% over the year, down from 17.4% the previous year and its smallest annual return since 2014-15. In regional TAS the total returns was 11.4%, which was slightly lower than the 13.2% the previous financial year however, returns remained higher than the 10.2% over the 2016-17 financial year.

Total returns from residential property have softened over the past year across NT. Darwin recorded a decline in total return of -3.0% over 2018-19 which was a larger fall over the previous year but not quite as large as the -3.6% fall in 2015-16. In regional NT, total returns were recorded at 7.8% in 2018-19, down from 8.5% over the previous financial year.

Canberra recorded total returns of 6.0% over the most recent financial year. The total return in Canberra has fallen over the year from 9.4% and the 6.0% return is the lowest since 2013-14. Canberra, along with Adelaide and Hobart are the only capital cities in which total returns have not been negative over any of the financial years shown.

In closing, Cameron Kusher said, “With early signs that the rate of decline in housing values has slowed in Sydney and Melbourne and rental yields rising across most regions of the country, the outlook for total returns over the coming year looks a little stronger at a national level.

“As always, there will be diversity with most regions of the country outside of Sydney and Melbourne yet to show signs of an improving housing market. We may see an improvement in returns in the two largest capital city housing markets while returns continue to weaken elsewhere.”

I’m not a huge fan of CoreLogic’s total returns methodology, since it ignores the cost of borrowing. Virtually everyone borrows to invest in housing, so I’ve never understood why it counts the yield without  netting-off the outgoings (particularly the mortgage).

Indeed, many new housing investors run a negative carry trade and effectively pay their investment home a dividend in the hope that it repays them with capital growth.

Nevertheless, 2018-19 was a shocker for Australian housing and represents the low point.

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