Premium property market’s wild ride

Australia’s premium property markets have had a wild ride over the last three years. In 2007 as most of Australia’s property markets were recording strong gains, the most expensive 20% of Australia’s suburbs increased in value by 19.8% while the broader housing market recorded a much lower gain of 13.7%.

The following year, as the GFC started to bite, values across this same set of premium suburbs fell by 7.4% compared with a 2.5% fall in all home values.

In 2009 premium housing values bounced back up by 12.1% over the calendar year compared with an 11.3% gain across the broader market.

Despite what appears to be a greater level of volatility, over the last five years to February 2010 premium property values have clearly outperformed the broader market recording an average annual gain of 8.0% year on year compared with the middle of the market where values have increased 6.6% and the bottom 20% of the market where values have increased by 5.8% over the same time.

Even though capital gains rebounded strongly in 2009, sales volumes in the premium sector of the market haven’t returned to anywhere near the levels recorded back in 2007. The number of million dollar and over sales in 2009 were 25% lower compared with 2007 (million plus house sales were down 21% and million plus unit sales were down 40%).

In some areas around Australia the number of premium sales remains well below average. These regions are mainly characterised by coastal markets outside the capital cities where conditions remain soft. The number of million dollar plus house and unit sales on The Gold Coast, Sunshine Coast, Tweed Coast and Byron Shire are about 55% lower than what they were in 2007.

The suburbs recording the largest number of premium sales haven’t changed a great deal over the last five years.

Sydney’s Mosman leads the nation with the highest number of house sales priced at $1 million or higher. In 2009 there were 271 house sales priced at or over one million dollars equating to 91% of all house sales in the suburb. Over the last 10 years there have been 3,055 houses sold for at least one million dollars which is the highest number of any Australian suburb.

Sydney and Melbourne featured equally in the top 20 suburbs for $1 million plus house sales in 2009, with nine suburbs in each city making the list. The remaining two suburbs were located in the exclusive Western Suburbs of Perth.

Within the unit market the inner city suburbs of Sydney and Melbourne have recorded the most $1 million plus sales over the 2009 calendar year, with Sydney’s Pyrmont leading the charge at 95 unit sales priced at $1 million or higher (that’s only 22% of all Pyrmont sales in 2009, highlighting the wide variety of unit product in this inner city suburb).

For those that can afford the price tag, premium property markets have generally provided stronger capital gains than the broader market place thanks to the inherently tight supply of inner city, coastal and character properties.

Investors should be aware, however, that most premium markets are also characterised by relatively low rental yields, so cash flow can be an issue in these cases.

Tim Lawless is the Director of Property Research at RP Data.