Australia’s national house price increase of 9.8% in the 12 months to December 2013 has been driven by house price growth in the key cities of Sydney, Perth and Melbourne, according to the latest analysis from Fitch Ratings.
Sydney saw price growth of 14.5%, in Perth prices were up 9.9% and Melbourne experienced increased of 8.5%.
The analysis report says that the main drivers of growth is an undersupply of housing and increased borrowing capacity following the policy rate reduction over the past two years.
Local and overseas investors have also driven house price growth, with local investors looking for better returns after bank deposit rates have fallen in line with the official policy rate.
There is also anecdotal evidence that foreign investors have had a role in driving prices higher, however reliable data are not available on this topic. Overseas domiciled investors are restricted to purchasing only newly constructed residential properties.
Prices in Brisbane and Adelaide are expected to follow the other major cities upwards, after relatively low levels of growth in the past five years. Both cities are more affordable with house price to gross income ratios of 6.5 times compared to Sydney and Melbourne with ratios of 9.9 and 9.1 times respectively.
Fitch expects continued house price growth in 2014. House price growth in Sydney, Melbourne and Perth are expected to continue to be positive, though at a slower rate than that experienced in 2013.
With house prices expected to continue to increase in 2014, and interest rates to remain unchanged, affordability pressure will continued to be experienced by new borrowers in Sydney and Melbourne, the report adds.
It also points out that although Australian house prices nationally appear expensive with a house price in gross income ratio of 8.3 times, affordability has improved substantially with existing borrowers seeing mortgage rates fall to an average of 5.1% from the high of 8.95% in August 2008.
Many Australian borrowers choose to maintain their monthly mortgage payments at the previously higher level in order to pay off their mortgage faster. Fitch expects housing loan rates to remain around current levels in 2014 before rising.
First time buyers in the Australian residential housing fell to a low of 12.5% share of all owner occupied properties purchased in September 2013. Increasing property prices and the reduction of first home buyer grants, in the form of stamp duty concession and cash incentives, have led to lower affordability measures for first time buyers, the report explains.
Finance commitments to investors purchasing residential property have increased by 22% in the 12 months to September 2013. Investors represent 37.3% of total monthly residential finance commitments; this rate has gradually been increasing over the past two years. The low interest rate environment and preferential tax treatment of investment properties have encouraged more investment activity.
First time buyers levels are expected to remain low in 2014. The first home owners grant in South Australia expired in December 2013 and in the absence for further assistance the first time buyer activity across Australia is expected to remain subdued.
This article was republished with permission from Property Wire.