Good news for Queensland house prices

Property investors should forget Sydney and Melbourne and head to Brisbane for the best house price growth over the next three years. The Sunshine State, especially Brisbane, but also the Gold Coast, Sunshine Coast and Cairns, is shaping up as the best market for investors. And apartment markets around the country - including Sydney and Melbourne - are the worst, according to the latest research from economic forecaster BIS Shrapnel.

Everywhere you look in Queensland there is relatively good news, and BIS expects Brisbane to be the only capital city to avoid a fall in median house prices in real terms over the next three years. A forecast rise of 13% will mean real growth of 5% (assuming 8% inflation), reports BIS's Residential Property Prospects 2015 to 2018. After three years of relatively modest growth, Brisbane's median price is still 5% below its June 2010 peak in real terms.

One cloud on Queensland's horizon is Brisbane's apartment market, which, as in most city markets, is moving to oversupply. BIS predicts price growth of 6% - a 2% decline in real terms over the three years.

Despite this, Brisbane apartments enjoy the highest gross rental yields in the country at 5.4%, reports CoreLogic RP Data for June. Brisbane houses come in third, behind Darwin and Hobart, with an indicative gross rental yield of 4.4%. Not surprisingly, rental yields are lowest in Melbourne (3.1% houses and 4.2% units) and Sydney (3.3% houses and 4.3% units).

A long period of weak construction after big price drops means the Gold and Sunshine coasts have housing shortages. Add increased employment from large projects - the Pacific Fair shopping centre and the 2018 Commonwealth Games, on the Gold Coast, and the Sunshine Coast University Hospital - and price growth will total 13% and 12% (5% and 4% in real terms) over the three years to June 2018, estimates BIS Shrapnel.

In Cairns, which experienced a post-GFC collapse in construction, median house prices have grown 6% in 2014-15. And BIS Shrapnel expects a further rise of 11% (real 3%) over the next three years on the back of strengthening local economic conditions and an increase in tourism.

Apartment markets in Melbourne, Sydney, Canberra, Darwin, Perth, Adelaide and Hobart are no-go zones for investors. BIS expects median prices to fall in real terms in all of them. (See chart.) Any investors tempted to buy apartments off the plan in these cities will risk that the value of an apartment will be lower on completion than what they pay for it now.

"Most capital cities are building apartments at record rates, driven by investor demand," says study author Angie Zigomanis. "As these projects are progressively completed, strong tenant demand will be required to support rents and consequently values upon completion.

"However, we are seeing population growth nationally start to ease." Net overseas migration has fallen from a peak of 235,700 in 2012-13 to an estimated 184,000 in calendar 2014. This slowdown is most evident in the mining boom states of Western Australia and Queensland, and the Northern Territory.

Sydney's housing and unit prices are also expected to come off the boil in 2016. After a 45% jump in the median house price to $960,000 in the past three years, further growth of 7% is expected in 2015-16, mainly due to continuing undersupply of housing.

But in the two years to 2018, when interest rates are expected to start rising - predicted to be up by 0.5% - and affordability issues continue to bite, prices will drop. BIS forecasts a fall of 6% in the median house price in real terms over the three years to 2018 and that the median unit price will be 9% lower in real terms. NSW regional centres Newcastle and Wollongong will benefit as Sydneysiders seek more affordable housing. House prices are expected to rise by 15% (7% real) and 10% (real 2%) over the three years.

Melbourne, which has seen relatively strong house price growth of 9%pa over the two years to June 2015, will be hit by both oversupply (particularly of apartments) and fewer overseas migrants. BIS expects house prices will fall by 4% in real terms over the three years to 2018 but this is eclipsed by a 12% fall in real terms of apartment prices. Over the three years house prices will decline in real terms in Perth (10%), Adelaide (7%), Hobart (4%), Canberra (5%) and Darwin (10%).

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