New research reveals Geelong’s median house price is “overvalued” by 7 per cent for local buyers on a typical household income.
Geelong’s property market is unaffordable to local buyers as rising interest rates and high demand stretch budgets, a new report shows.
The research from InvestorKit revealed the city’s median house price is overvalued by 7 per cent when compared the average annual income of Geelong residents.
The report shows strengthened market pressure in the past year, including declining stock and shortening days homes spend on market, lead to a 3.6 per cent annual increase in house values.
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But the study revealed relative affordability was improving in Geelong, as annual growth was low compared to other regional and capital cities.
The report shows the city’s $649,000 median house price was overvalued at the present standard 6.5 per cent interest rate, and would need to drop by 7 per cent to meet the local affordability threshold.
The research was based on a dual income household, paying 30 per cent of their net income on a 30-year loan, with an 80 per cent loan-to-value ratio.
InvestorKit senior research analyst Junge Ma said while the report found prices were high for people purchasing on the average annual income in Geelong, the city remained affordable to buyers coming from other parts of the country.
InvestorKit senior research analyst Junge Ma said Geelong is seen as an affordable market. Picture: Tim Hunter.
“We can’t ignore the relative affordability, especially if we compare Geelong with Melbourne. We also have relocators from Melbourne and also we have investors from both Melbourne and other states, for example, Sydney,” she said.
The report doesn’t factor in the impact of the recent federal budget, which has removed negative gearing and changed capital gains tax (CGT) discounts for investors who buy existing homes.
The changes were extended in parliament this week to block people from borrowing to purchase property for a self-managed superannuation fund (SMSF).
Negative gearing against investors full income remains available on new homes.
Ms Ma said there is little evidence showing a rush of investors to build new homes.
“There will still be a portion of investors that would prefer to buy established properties, partially because new builds are expensive,” she said.
“Market knowledge is more accessible to investors in the long-term established market. Established properties still tend to perform better than new builds, so despite the loss of (tax) benefits, they will still stick to the fundamentals.”
New versus sold: Investors are torn between following negative gearing incentives to new homes compared to the relative affordability of existing dwellings. Picture: Alan Barber
Ms Ma said modelling showed indexed capital gains tax discounts will build up the longer a property is held.
“I actually think the indexed capital gains tax discount is actually very fair if you are genuinely a long-term investor, where you have held that probably for eight, nine or 10 or more years.
“I did a calculation: if we assume 2.5 per cent per year inflation, it will take 16 years of holding to get through a 50 per cent CGT discount.
“But we can’t just look at the discount amount or discount rates to decide when we sell or how long we hold. For investors is it is still important to prioritise the strategy instead of holding time.”
Ms Ma said Geelong and Melbourne were at an early stage of their next growth cycle.
“For Geelong, the advantage is its affordability and better rental yield levels and so Geelong now is growing faster than Melbourne,” she said.
“It’s both at a favourable cycle position and also looking at higher near term growth potential, so I do believe it’s still a good time to enter Geelong.”
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