A year ago, housing values in Sydney and Melbourne were surging upward, but now both markets are in decline. In their place, the sleepy Tasmanian city of Hobart has become one of Australia’s hottest housing markets, showing tremendous value growth in sharp contrast to every other capital city in the nation.
The numbers are stark. The month of May marked the first annual decline in Australian national dwelling values since the market peaked last year and began showing signs of weakness, according to CoreLogic figures, with a 0.4% fall over the preceding 12 months. But Hobart returned a solid annual gain of 12.7%.
Real estate brokers in the city’s most expensive suburbs say they can’t get their hands on enough homes to sell. A wave of renovation or rebuilding is taking place in central waterfront suburbs like Sandy Bay and Battery Point, with solid homes built three or four decades ago being demolished and replaced with sumptuous mansions.
In the first quarter of 2018, Hobart's home prices increased 14.1% year-over-year, the eighth highest growth rate among 150 global cities Knight Frank tracks, according to data released Wednesday.
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Rents, too, are rising fast. House rents rose 10.7% over the 12 months to May, while apartment rents climbed 13.6%, according to CoreLogic.
So what happened to cause demand to skyrocket? A combination of low housing supply, inward migration levels being the highest they have been since 2009, and improving economic conditions in Tasmania are driving the boom, says Tim Lawless, head of research at CoreLogic Asia Pacific.
"Relatively inexpensive housing prices are another factor," Mr. Lawless said. "With a median house value of A$452,000 (US$331,000), Hobart house values are less than half of Sydney’s at A$1.019 million ($US750,000)."
In addition, low vacancy rates are causing rents to rise almost as rapidly as home values, providing a solid rental yield for investors averaging 4.9% for houses and 5.2% for units. When annual capital gains are combined with the annualized gross rental yield, the city’s overall total return for investors is 19.3% for houses and 13.9% for units, far above any other Australian capital city.
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What You Can Get
Local agents say buyers are coming to Tasmania from the Australian mainland, drawn not just by the city’s beauty, but by its comparatively low housing prices.
Petrusma Property senior property consultant Mike Speakman sells homes in the suburbs of Battery Point and Sandy Bay, two of the oldest suburbs in Hobart. Both rise steeply from the waterfront, giving a lot of their homes views over the Derwent River and close access to boat moorings.
In Sandy Bay, a budget over A$1.8 million (US$1.32 million) puts a buyer in the game for some of the most luxurious properties Hobart can offer, Mr. Speakman said.
"When you compare us with other states, it’s still good value for money to live in the most premium suburb of Hobart," he said. "You probably sold a mediocre house in one of the better suburbs of Melbourne or Sydney to come down here and buy in our best suburb for the same price."
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In February last year, Sentosa, a five-bedroom Sandy Bay home, sold for A$6.5 million (US$4.8 million), setting a new record for the suburb. Built in 1917, it sits on Blinking Billy Point and has a 200-degree view over the river that can be enjoyed from most rooms.
Mr. Speakman is marketing a seven-bedroom home on Lipscombe Avenue, Sandy Bay, seeking expressions of interest above A$2 million (US$1.5 million). It has expansive indoor and outdoor entertaining spaces and sweeping views over the city from an elevated position.
An exterior view of the seven-bedroom mansion on Lipscombe Ave, asking for $1.5 million.
Petrusma PropertyAround half of his inquiries now come from interstate buyers, he said, and there is "a huge amount of renovation" going on.
He said Churchill Avenue in Sandy Bay, for example, has probably about eight houses under renovation or being re-built from the ground up.
The city itself has a lot to offer, not to mention the natural beauty and vast national parks of Tasmania. Hobart’s various markets sell high quality produce from the surrounding farmlands, and holds a range of festivals through the year.
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The city pulls tourists from far and wide for the sublime Museum of Old and New Art. Known as MONA, it is built on a headland jutting out into the river, and is mostly underground. Hobart is home to the acclaimed Tasmanian Symphony Orchestra, which holds concerts throughout the year. The city’s international arts festival MONA FOMA draws an eclectic range of artists, particularly in contemporary music.
Hobart has a population of around 225,000 and is Australia’s second oldest capital city, after Sydney. A bus network is the main form of public transport.
Entrance of MONA FOMA Ferry Terminal at Hobart, Tasmania
Mlenny / Getty ImagesA Good Investment?
But while few dispute that Hobart is a lovely place to live, some market commentators worry its periods of capital growth are few and far between, making its homes an inferior investment to other cities.
Homeowners from vastly more expensive cities such as Sydney and Melbourne are lured in by how much more they can get for their money in Hobart, said Charles Tarbey, chairman of Century 21 Australia. But he believes the market is nearing its peak and may not offer the sustained capital growth or rental demand seen in bigger Australian cities.
Hobart "is an area where capital growth will probably slow down more rapidly," Mr. Tarbey said. Rents have climbed so sharply he worries they can’t go much further, he says.
Buyers agent Catherine Cashmore, director of Anderson Cashmore Real Estate Advocates, said Melbourne and Sydney will still ultimately be better choices for long-term capital growth.
"Sydney always peaks early in the cycle, and then it starts to lose on interstate migration," Ms. Cashmore said. "And that interstate migration floods a little bit into Brisbane but…mostly it goes into Melbourne."
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"So you can speculate on other cities, but if you’re looking for a good long-term hold then go for a good piece of real estate in Melbourne and either sit on it or develop it."
Mr. Lawless, too, believes the capital growth rate in Hobart is likely to slow due to affordability constraints for locals. Tightening credit conditions nationally, due in part to an ongoing Royal Commission into lending practices in the banking sector, will also have an impact as it is reducing funds available to investors.
But while capital growth will probably slow from its current high level, it is likely to remain strong relative to other Australian cities over the next year or two, Mr. Lawless said.