The Australian Bureau of Statistics reports that things are improving in the country’s residential real estate market, marked by a second consecutive quarter of rising prices across eight capital cities. Darwin showed the greatest gains over the previous quarter and for the year according to the Real Estate Institute of Australia, and experts are attributing the improvement to lower interest rates and better affordability. Even so, global comparisons show that Australia has one of the least affordable housing markets in the world and increasing rents are likely to assure continued ranking on the list of most expensive places to live. For more on this continue reading the following article from Global Property Guide.
Australia’s housing market is showing signs of recovery, backed by lower interest rates and improving affordability. The house price index for 8 capital cities rose by 2.6% (0.1% in real terms) during the year to Q1 2013, according to the Australian Bureau of Statistics (ABS). It was the second consecutive quarter with a nominal y-o-y increase, after a series of price drops since Q2 2011.
Darwin had the highest price increase during the year to end-Q1 2013 (8%), followed by Perth (6.1%) and Sydney (3.6%). Smaller nominal price increases were also recorded in Canberra (1.5%), Brisbane (1.4%), Melbourne (1.1%), and Adelaide (0.9%). Out of Australia’s eight capital cities, only Hobart experienced a price decline of 1.9%.
As compared to the previous quarter, the house price index for 8 capital cities rose by only 0.1% (-0.3% in real terms) in Q1 2013.
The same conclusion can be drawn by looking at the national figures released by the Real Estate Institute of Australia (REIA). The overall median house price in the 8 capital cities was up by 4% y-o-y to Q1 2013, but it was down by 0.2% from the previous quarter.
Sydney has the most expensive housing in Australia, with the median house price at AU$ 673,681 (US$ 620,353), about 26.2% above the weighted average.
AUSTRALIA‘S EIGHT CAPITAL CITIES MEDIAN HOUSE PRICES (Q1 2013) | ||||
CAPITAL CITIES | Median House Price (AU$) | Median House Price (US$) | Q-O-Q Change (%) | Y-O-Y Change (%) |
| Sydney | 673,700 | 620,370 | 1.6 | 4.2 |
| Melbourne | 545,000 | 501,858 | -0.9 | 4.8 |
| Brisbane | 430,000 | 395,961 | -2.3 | 0.7 |
| Adelaide | 395,000 | 363,732 | -1.3 | 3.4 |
| Perth | 505,000 | 465,024 | 1.0 | 5.2 |
| Canberra | 482,500 | 444,306 | -8.7 | -7.2 |
| Hobart | 360,000 | 331,503> | -1.4 | 2.0 |
| Darwin | 592,000 | 545,138 | 2.4 | 7.6 |
| Average (8 capital cities) | 534,000 | 491,729 | -0.2 | 4.0 |
Source: Real Estate Institute of Australia (REIA) | ||||
The supply side of the housing market remained flat during the first quarter of 2013, as the Reserve Bank of Australia (RBA) decided to hold interest rate at 2.75%, in contrast to an expected rate cut. Housing approvals in April 2013 were up by only 3% on the previous year, according to ABS. Total dwelling units commenced during the year to Q1 2013 was up by 13%. However, q-o-q estimates show that construction activity only increased by 0.5%.
Australia’s economy grew by 2.5% y-o-y to Q1 2013, according to the ABS. The economy is expected to slow in 2013, as a spill-over effect of China’s slowdown. Meanwhile, as inflation remains consistent with the central bank’s target, RBA decided to keep the rates at 2.75% as it was seen as an “appropriate policy for the time being”.
Acquisition of residential real estate by foreign nationals and corporations is subject to Foreign Investment Review Board (FIRB) approval.
Australia’s housing boom; crash avoided
The strength of Australia’s housing market through the great recession has amazed observers, who had predicted that Australia would suffer one of the worst housing market crashes, because of a perceived house price overvaluation.
Australia has avoided a crash for these reasons:
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- There are housing shortages, due to a rapidly growing population
- Strong overseas migration from 2004 to 2007
- Australian household sizes are shrinking
- Lending standards are stricter than in the US
- Mortgage interest rates have been at record lows
- The government helped first-time homebuyers, introducing a AU$10.4 billion (US$7.24 billion) stimulus package in October 14, 2008 – around 1% of GDP – which included the First Home Owner Boost Scheme (FHOB), which raised the First Home Owner Grant (FHOG) from AU$7,000 (US$6,419) to AU$14,000 (US$12,838) for existing dwellings, and to AU$21,000 (AU$19,257) for newly constructed homes. However, the FHOG reverted back to $7,000 in December 2009 in NSW, and reduced it in other states.
Housing remains “severely unaffordable”
Among the seven developed nations covered by the 2013 9th Annual Demographia International Housing Affordability Survey, Australia ranks third as most unaffordable major market.
The survey uses the Median Multiple to assess housing affordability in 337 markets in Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom, the United States and Hong Kong.
The Median Multiple follows this formula: Median Multiple = median house prices / median household income.
In 2012, Australia’s major market had a Median Multiple of 6.5, compared to the international norm of three times household income. However, this was actually an improvement from 6.7 Median Multiple recorded in 2011. Overall, out of the 39 Australian markets surveyed, 30 of which were rated “severely unaffordable” (Median Multiple of 5.1 and above), while 9 markets were tagged as “seriously unaffordable” (Median Multiple between 4.1 and 5.0).
Sydney continued to be one of the most unaffordable major markets next to Hong Kong and Vancouver, and is the least affordable market in Australia, with a Median Multiple of 8.3. Outside the major markets, the Port Macquarie, located in New South Wales, is the most severely unaffordable market, with a Median Multiple of 8.6.
Yet based on Commonwealth Bank of Australia’s recent Home Buyer Affordability Report in March 2013, housing affordability has recently improved, rising by 1.2% q-o-q to March 2013.
“Overall, the trend across the capital cities is one of continued improvement in affordability, with the capital city index increasing by 2.0 per cent in the March 2013 quarter. However the cities of Adelaide, Perth and Hobart each saw declines in affordability,” according to HIA Senior Economist Shane Garrett.
The highest reductions in housing affordability occurred in Adelaide (-4.1%), followed by Hobart (-3.8%) and Perth (-2.6%). Meanwhile, affordability improved in Brisbane (6.2%), Melbourne (4.7%), Canberra (2.6%), and Sydney (1.2%).
Moderate yields, but rent hikes continue
Rental yields in Australia are moderate. Gross rental yields for houses range from 4.36% in Melbourne, to 5.42% in Hobart, according to the March 2013 figures of Australian Property Monitors (APM). Gross rental yields for apartment units range from 4.83% in Melbourne to 6.03% in Darwin.
In Sydney, smaller apartment units of around 60 sq. m. have higher gross rental yields of 6.26%, according to Global Property Guide Research of October 2012. 100 sq. m. and 150 sq. m. apartments have lower yields at around 4.94% and 3.93%, respectively.
The average asking rent on houses, in the eight capital cities, rose 6.1% during the year to Q1 2013. During the same period, the average asking rent on ‘units’ increased by 5.9%. On a national level, asking rents for houses were up by only 0.4% q-o-q to Q1 2013, while ‘unit’ rents were up by 2.2% during the same quarter.
“Sydney, Melbourne and Perth were the big movers in unit rents over the March quarter with only Perth of all the major capitals recording a rise in house rents. Sydney median asking house rents were again steady over the March quarter at $500 but remained the highest rents of all capitals except Darwin. Sydney house rents have now recorded no growth over the past year,” says Dr Andrew Wilson, APM’s Senior Economist.
The highest median weekly asking rents can be found in Darwin, with houses at around AU$ 700 (US$ 639.59) and units at AU$550 (US$ 502.54). It was followed by Sydney with median rents at AU$500 (US$ 456.85) for houses and AU$ 470 (US$ 429.44) for units. Hobart has the lowest median weekly asking rents at AU$ 310 (US$ 283.25) for houses and AU$ 250 (US$ 228.43) for units.
Continuous upward pressure on rents is expected in Perth, Darwin and Sydney due to the chronic housing shortage. Increased demand for unit accommodation is expected to continue in Sydney and Melbourne, but new apartment supply is predicted to offset rental demand. Canberra, Adelaide and Hobart are likely to have subdued rental growth for the rest of 2013, Due to their under-performing local economies.
Key interest rate on hold
Though Australia’s benchmark interest rate remained on hold at 2.75% as of July 2013, an additional rate cut is most likely to happen, and could be influenced by the future performance of the Australian dollar.
“The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy,” according to RBA Governor Glenn Stevens.
Inflation has been consistent with RBA’s target, and is expected to continue for the next couple of years.
Before arriving at this record low figure of the Official Cash Rate, the Reserve Bank of Australia (RBA) made seven rate cuts from November 2011 to May 2013. The rate cut started due to Australia’s overall moderate economic growth in 2011, and a more neutral stance of monetary policy would be consistent in having a sustainable growth and lower inflation of around 2% to 3% over time.
Slight improvement in the mortgage market
The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 87% of GDP in 2012. Outstanding mortgage loans rose by 4.8% in 2012, down from 6% growth in 2011.
- 67.6% of outstanding housing loans to households are for owner-occupied homes.
- 32.4% of outstanding housing loans are for investment homes.
According to ABS figures, new home lending in Australia slightly improved in May 2013. Housing finance commitments for both new and established owner occupied dwellings were up especially in the Northern Territory (4.7%), Queensland (3.9%), and Western Australia (3.4%). In contrast, the Australian Capital Territory had a decline in the total number of housing finance commitments by around 0.5%.
The mortgage market is highly concentrated. Australia’s “big four” banks—National Australia Bank, Commonwealth Bank of Australia, Westpac Banking Corporation, and ANZ—accounted for about 85% of the country’s housing loans in May 2013, according to the Australian Prudential Regulation Authority (APRA).
Weak residential building activity
In April 2013, housing approvals rose 37% higher to 13,202, but this was only 3% up on 2012’s monthly average of 12,792.
The lack of affordable housing has driven those at the bottom of the market to become renters instead, struggling with high rents. Australia’s affordability problem is also attributed to insufficient construction of new houses.
Australia has been under-building new residential dwellings in the past years, for several reasons.
- Stringent urban planning policies and land use restrictions (called ‘smart growth’, ‘urban containment’, etc.). “An increase in state government zoning regulations is a significant factor driving up the cost of housing”, said Reserve Bank of Australia Governor Glenn Stevens.
- Tax burdens on builders and developers. In New South Wales, government taxes and other charges are estimated to account for about 30% of the price of new houses.
- Due to the global credit crunch, developers continue to struggle to secure finance.
In 2012, housing starts fell by 2.2%, compared to the 11.3% drop in 2011.
A mild recovery was expected in 2013, driven by interest rate cuts, new home incentives in some states, and focus on policy reform in New South Wales, according to HIA chief economist, Harley Dale. However, it was observed in Q1 2013 that there was no growth in the residential construction industry. “In seasonally adjusted terms, the volume of investment in new homes increased by 2.2 per cent over the quarter, as the modest recovery from very weak levels in the first half of 2012 continued. Meanwhile, the on-going decline in alterations and additions investment provides a weak update on the mindset and appetite for spending on the part of the household sector,” says HIA Economist, Geordan Murray.
The weaker residential building activity was attributed to the RBA’s decision to keep its Official Cash Rate on hold at 2.75%. According to HIA’s Senior Economist Shane Garrett, lower interest rates were badly needed to help the industry.
Slower economy is expected in 2013
Australia experienced economic growth of 3.6% in 2012, an improvement on 2.4% growth in 2011. The economy expanded by 2.5% during the year to Q1 2013, according to the Australian Bureau of Statistics (ABS).
One of the main reasons for the economic slowdown observed in Australia since the second half of 2012, is the slow growth of China, Australia’s biggest trading partner. China had its slowest growth in 13 years in 2012, with a 7.8% GDP increase.
In 2012, around 29.5% of Australia’s exports went to China.
"The surge in mining investment, which is likely to peak in 2013, is gradually losing its stimulatory effect on activity, while new drivers of growth are taking time to emerge," according to the OECD. Exports and Australia’s terms of trade will likely be affected by China’s slowdown, which could result to slow mining investment and more interest rate cuts.
Thanks to China’s economic growth in the previous years, Australia’s mineral exports, dominated by iron ore, increased from AU$ 1.4 billion in 2001 to around AU$ 44 billion in 2011. This also enabled Australia to avoid recession during the global financial crisis, and it enjoyed an economic expansion of 2.7% in 2008, 1.4% in 2009, and 2.6% in 2010.
Unemployment n Australia was at 5.7% in June 2013, its highest level since September 2009, based on the ABS figures. From 2004 to 2013, the country’s jobless rate was stable in a range of 4.3% to 5.6%, according to the IMF.
Consumer prices rose 2.5% in Q1 2013 from a year earlier, slightly up from 2.2% recorded in the previous quarter, but still consistent with the central bank‘s 2%-to-3% target. RBA’s CPI forecast by end-2013 is at around 2%.
This article was republished with permission from Global Property Guide.
