Welcome to this week’s Property Edge! As the renovation boom sweeps across Australia’s most sought-after suburbs, savvy investors and homeowners are capitalising on the potential to boost property values. We’ve got the latest data on where billions are being poured into upgrades and which suburbs are set to surge next. All this, while the RBA still hasn’t got inflation under control.

Australians Cashing In on Property Sales: A Closer Look at the Profits

As Australia’s property market continues to soar, homeowners are increasingly profiting from selling their properties, with recent data highlighting significant gains across the nation. The Domain Profit & Loss Report reveals that the proportion of profit-making resales has reached multi-year highs in many cities, with Brisbane leading the way, boasting a remarkable 99.5% of houses selling for a profit.

National Profit Figures:

• Median profit for houses: 326,000 (16-year high)
• Median profit for units: 171,000 (13-year high)
• Regional median profit: 245,000 for houses, 196,000 for units (highest since 2009)

National Median Profits for Houses and Units

Dr. Nicola Powell, Domain’s chief of research and economics, notes that more homeowners than ever are walking away with a profit despite high property prices. This trend is closely linked to the property price cycle, with profitability increasing as prices rise. Interestingly, the largest profits are being realized by Generation X and older Millennials, rather than Baby Boomers, as they leverage their established careers and existing equity to upsize and increase their borrowing capacity.

Top Suburbs for House Profits:

Top Cities for House Profits

Brisbane is the standout performer, with Melbourne close behind. Despite Melbourne not yet experiencing a house price recovery, 97.9% of house sales still resulted in profits. Sydney, despite its record median house price of 1.6 million, has the third-lowest proportion of profit-making house sales, at 95.6%. However, Sydney houses still lead in dollar value profits, with a median gain of 655,000.

Proportion of Profit and Loss-Making Sales:

For units, Hobart takes the lead with 96.3% of sales resulting in a profit, while Darwin lags behind with only 68.2%. Sydney, Hobart, and Adelaide lead in unit dollar gains, driven by a shortage of affordable apartments in their CBDs.

Top Suburbs Where Units Outperform Houses:

Long Jetty, for instance, sees units outperform houses by 45.7%, driven by consistently high demand for more affordable housing options. Overall, Australia’s property market continues to generate significant profits, with only a small fraction of suburbs experiencing loss-making sales.

As Powell advises, homeowners should focus on the long-term benefits of holding onto their properties, as the likelihood of making a profit increases with time spent in the market.

RBA’s Inflation Battle: Fresh Threats and Potential Rate Hikes

The Reserve Bank of Australia (RBA) has made it clear that its patience with high inflation rates is limited, and the bank considered raising interest rates at its last meeting in early August. If inflation does not start trending downward, the RBA may decide to increase rates at its next meeting in September.

Key Points:

• Inflation Targets: The RBA aims to bring inflation down to its target range of 2-3% by next year, but current trends indicate that this target may not be met without further intervention.
• Interest Rate Threats: The RBA is prepared to raise interest rates again if necessary, particularly if inflation remains stubbornly high.
• Market Expectations: Despite the RBA’s warnings, some market analysts still expect a rate cut within the next few months due to rising unemployment and a slowing economy.

Factors Contributing to Inflation Concerns:

• Consumer Spending: The RBA is worried about the impact of energy rebates and stage three tax cuts, which could temporarily boost consumer spending and exacerbate inflation.
• Domestic Demand: A rise in domestic demand for goods and services is another factor that could drive inflation higher, slowing down the RBA’s efforts to stabilize prices.

RBA’s Stance on Future Rate Decisions:

• Interest Rates on Hold: The RBA decided to keep interest rates on hold at 4.35% in August, but Governor Michele Bullock hinted that a rate cut might not be on the horizon for at least six months.
• Market Reaction: Despite the RBA’s decision to hold rates steady, the market has priced in a rate cut by the end of the year. However, the RBA’s recent communications suggest they are more likely to raise rates than to cut them if inflation persists.

Consumer Confidence and Its Impact:

• Mixed Consumer Confidence: Recent ANZ-Roy Morgan Consumer Confidence data showed mixed results, with the overall index dropping slightly but remaining above levels from 12 months ago. While the RBA may not be overly concerned with short-term fluctuations, a significant rise in consumer spending towards the end of the year, possibly fueled by tax cuts, could prompt the RBA to reconsider its stance.

Balancing Inflation and Employment:

• RBA’s Dilemma: The RBA is consciously tolerating higher inflation for a longer period to preserve gains in reducing unemployment and under-employment to historically low levels. However, this approach carries the risk of prolonged inflation if not carefully managed.

In summary, the RBA is walking a tightrope between managing inflation and maintaining employment gains. The next few months will be critical in determining whether the bank will need to take further action to cool inflation, potentially leading to higher interest rates

Runaway Construction Costs Plateau

Building material costs have significantly stabilised, with new data showing single-digit growth over the past year, a notable slowdown compared to the double-digit increases seen during the pandemic. Key materials like steel and timber have even seen price drops, with steel products down 6.8% and structural timber down 7.9%. However, despite this easing, construction costs remain elevated compared to pre-pandemic levels, with some materials still up nearly 70% since December 2019. While this price relief brings more certainty to the construction industry, challenges in finding skilled workers continue to pose difficulties for building and renovating projects.

The Hotspot Suburbs Leading The Renovation Boom

Australia is experiencing a massive renovation boom, with billions of dollars being poured into property upgrades across some of the country’s most exclusive suburbs. In the 2023-24 financial year, an astounding $12.8 billion worth of renovations were approved, marking a 6% increase from the previous year. June 2024 alone saw a record-breaking $1.17 billion in renovation approvals, underscoring the scale of this trend.

The driving force behind this surge is largely attributed to homeowners in high-end markets who prefer to renovate rather than move, motivated by the desire to enhance their properties and avoid the significant costs associated with buying and selling, particularly stamp duties. This is especially evident in pricey suburbs in Sydney, Melbourne, and Queensland, where the appetite for major renovations is strongest.

Top among the renovation hotspots is the Point Nepean region in Victoria, where $97.5 million in renovations have been approved across suburbs like Blairgowrie, Portsea, and Sorrento. Sydney’s Manly-Fairlight area follows with $88.5 million in approved renovations, nearly doubling from the previous year. These affluent areas are seeing wealthy homeowners investing heavily in making their current homes “forever homes,” rather than relocating.

Real estate experts point out that the high property values in these areas make significant renovations a worthwhile investment, often leading to further increases in home prices. The easing of construction material shortages and a slight improvement in labor availability have also contributed to this trend, allowing more homeowners to embark on renovation projects with greater certainty.

For those looking to invest or renovate, the top 30 regions with the highest value of approved renovations are listed below, showcasing where property values are likely to surge next:

The suburbs where homeowners are spending the most on renovations:

Source: ABS Building Approvals, June 2024 – Value of alterations and additions including conversions to residential building, FY 2023-2024.

These suburbs, filled with multi-million dollar properties, are seeing record levels of renovation activity, which is expected to keep property values elevated and further restrict supply in these already tightly held markets. With the construction crunch easing and home values rising, the renovation boom in Australia shows no signs of slowing down, making these suburbs prime locations for property investors and homeowners alike.

That’s it for this week’s edition! Keep your finger on the pulse of the property market and stay sharp with Property Edge.

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