For the second quarter in a row, real estate prices in Australia continued to rise, with house prices currently averaging just 2.2% below the March 2008 peak. Analysts believe that a combination of low housing supply, rapidly growing population, government incentives, low interest rates and higher lending standards have helped the Australian housing market to avoid the crashes experienced in other countries. See the following article from Global Property Guide for more on this.
The Australian housing market has made a strong comeback. In the third quarter of 2009, the average established home price index for eight capital cities rose by 4.2% q-o-q, or 3.2% when adjusted for inflation.
This follows a 4.1% rise in Q2 2009 and a 0.7% decline in Q1 2009, according to the Australian Bureau of Statistics (ABS).
In the year to end-Q3 2009, “composition-adjusted” median house prices rose by 6.2% (4.9% in real terms), according to Australian Property Monitors (APM). The dramatic 6.2% y-o-y decline (-8.4% in real terms) in Q1 2009 was something of a ‘blip’. Since the peak in March 2008, house prices have fallen by just 2.2%.
“Prices have stopped falling and are on the way up, due to increased investor activity and revived interest from second and third homebuyers who have returned to the market,” says REIA president David Airey. “These buyers are selling to first homebuyers who have shown a preference for established homes in seven out of 10 sales.”
“It is looking increasingly clear that Australia has avoided the large falls in house prices seen in some other countries over the past two years or so,” said Tony Richards of the Reserve Bank of Australia (RBA), the central bank.
“But looking forward, the risk is that we might move towards undesirable strong growth in housing prices.” Housing affordability has long been an issue in the country. “We don’t want very strong growth in housing prices that would be unhelpful from a social perspective.”
Darwin leads the recovery
In September 2009, all the eight Australian capital cities recorded strong annual house price increases. Darwin recorded the highest house price increase of about 12.3% from a year earlier. Melbourne and Canberra followed, with price rises of 8.4% and 7.8% over the same period.
Sydney registered a house price increase of 5.9% in September 2009 from a year earlier. House prices have also risen in Brisbane (5.6%), Hobart (5.4%), Perth (4.4%), and Adelaide (3.7%).
Sydney has the most expensive housing in Australia, with an average house price of AU$569,061 (US$530,001) in the third quarter of 2009, according to APM. Darwin follows with average house prices of AU$528,650 (US$492,363). On the other hand, Hobart has the lowest median house prices at AU$311,366 (US$289,994) .
The history of the boom
Australia’s housing market accelerated rapidly from mid-90s to the early-2000s, driven mainly by real housing demand, and supply shortages. House prices rose 148% (100% in real terms) from 1995 to 2004.
To moderate the house price increases, the RBA raised interest rates in 2002 and 2003. By H1 2004, annual price increases had successfully been forced down to zero, but quickly regained momentum in 2005. The house price index rose 2.3% in 2005 (-0.5% in real terms), 9.7% in 2006 (6.3% in real terms), and 14% in 2007 (10.8% in real terms).
To curb inflationary pressures, the RBA raised the key interest rate by steps to 7.25% in March 2008, from a historic low of 4.25% in early-2002.
Crash avoided – observers amazed
The strength of Australia’s housing market 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 housing crash due to a combination of reasons:
- Severe housing shortage due to a rapidly growing population, and overseas migration from 2004 to 2007;
- Preference for smaller household sizes;
- Higher lending standards relative to the US;
- Record low mortgage interest rates; and
- Government incentives for first-time homebuyers (e.g. First Home Owner Grant).
FHOB fuels the housing market
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In response to the crisis, the government introduced a huge stimulus package, worth AU$10.4 billion (US$7.24 billion), around 1% of GDP, in October 14, 2008. This included the First Home Owner Boost Scheme (FHOB) which raised the First Home Owner Grant 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.
Due to its success, the FHOB scheme was extended from its original September expiry date till end-December 2009, though the grant amounts were reduced.
The FHOB was very successful in stimulating the housing market. By the end of August 2009, the FHOB had helped more than 153,000 Australians buy their first home. By July 2009, first home buyers had risen 73% from the same period last year.
New home sales rose 11.4% in August 2009 (or by 25% up on last year), from anemic monthly increases of 0.1% in July and 0.5% in June 2009, according to the Housing Industry Association (HIA). Detached home sales rose 11.8%, while apartment sales rose 7.5% in August 2009 from the previous month.
Victoria registered the highest increase in detached home sales of about 21.8%, followed by Queensland (20.9%) and Western Australia (15.1%). On the other hand, sales fell by 11.3%in New South Wales and 2.5% in South Australia.
“A late surge in sales to first home buyers ahead of the step-down in the new home boost, propelled new home sales…[making] August the best monthly result for over three and a half years,” said HIA chief economist Harley Dale.
Estimated housing shortage rising
A combination of high migration and weak housing starts is creating a severe housing shortage up. In 2009, the estimated housing shortage was about 130,000 units, up by 55,000 on two years ago, according to BIS Shrapnel.
In 2008, total housing starts fell 3.2%, to 148,420 units. Starts are expected to fall another 12.6% in 2009, according to the HIA, before rebounding in 2010.
Residential dwelling approvals, an indicator of future activity, were flat month-on-month in August 2009. While the detached housing market is strong (buoyed by the First Home Owner Grant), the multi-units market is weak, says HIA’s senior economist Ben Phillips.
In August 2009, approvals for detached houses rose 3.1% from the previous month. For the multi-unit sector, building approvals dropped 10.9%.
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.) have created artificial shortages of land for residential development. “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 have aggravated the situation. 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 of large-scale residential projects continue to struggle to secure finance from banks and other lending institutions, despite the improving economic outlook.
More rate hikes to come
In November 2009, the RBA raised the key rate to 3.5%. Australia was the first developed country to reverse the cycle of interest rate cuts, raising the key rate to 3.25% in October 2009 from a 50-year low of 3%.
Yet in reality, mortgage interest rates had already started rising in the second half of 2009. The 3-year fixed mortgage rate rose to 7.6%, while the standard variable mortgage rate rose slightly to 6.05% in October 2009.
As the economy and the housing market continue to recover, RBA is hinting at more interest rate hikes in the coming months.
Strong rental market; yields moderate to poor
Average rents in the eight capital cities rose by 4.8% in the year to September 2009, following a 10.1% rise during the year to September 2008.
In Q3 2009, the median asking rents have remained flat from the previous quarter, according to figures from the APM. “The median asking rental prices for houses and units in Sydney and Perth continued to decline, [while] a small rise was seen in other capital cities including Brisbane, Hobart, Darwin and Canberra,” says Matthew Bell of APM. “The declines have been helped along by low interest rates and the First Home Owners Boost giving tenants more accessibility to alternative options to renting,”
Darwin has the most expensive rental houses, with median weekly asking rents at AU$500 (US$459). Rents are high too in Sydney, with a median of AU$450 (US$413), and Canberra, with a median of AU$420 (US$385). Hobart has the lowest median weekly asking rent, at AU$300 (US$275).
The continued strength of demand for rental properties is fueled by rapid population growth and decreasing household size. This has brought the average rental vacancy rates in Australia’s capital cities at below 3% (which is already regarded as undersupply) since 2006.
In addition, the limited supply of new housing units has aggravated the situation. In September 2009, the vacancy rate in all capital cities averaged 1.9%, according to REIA.
One measure of house price valuation is the rental yield, the ratio of house prices to rent. Rental yields in Australia are moderate to poor. In September 2009, the gross rental yields for houses range from 4.17% in Melbourne and Perth to 4.95% in Darwin and Hobart, based on figures from APM.
Very unaffordable houses
Although Australia’s rental yields are not out of line with developed economy averages, Australia has the least affordable housing market among the six developed countries covered by the 2009 5th Annual Demographia International Housing Affordability Survey.
The survey covers 265 urban housing markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States. It uses the Median Multiple to assess housing affordability. The Median Multiple is computed by dividing the median house price by the median household income. The norm value for the Median Multiple is three times the annual household income or less.
The Median Multiple in Australia is 6. The Sunshine Coast, located in Queensland, is the most severely unaffordable market among the 265 housing markets surveyed, with a Median Multiple of 9.6. Sydney has a Median Multiple of 8.3, down from 8.6 last year.
Of the 27 Australian markets included in the survey, 24 markets were rated as “severely unaffordable” (with Median Multiple of 5.1 and above), while 3 markets were regarded as “seriously unaffordable” (Median Multiple between 4.1 and 5.0).
Housing affordability has worsened as house prices have recovered, according to the latest Housing Industry Association-Commonwealth Bank of Australia First Home Buyer Affordability Report. In September 2009, the housing affordability index deteriorated by 3.3% q-o-q, following a 5% slide in June 2009.
Highly concentrated mortgage market
The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 84% of GDP in 2008. In 2008, total mortgage debt was around AU$995 billion (US$912.4 billion), about 83% of which was housing loans.
Total housing loans have increased by 13.7% annually from 2004 to 2008.
In the year to June 2009, total mortgage debt rose by 9.3% to AU$1,046 billion (US$959 billion) from AU$957 billion (US$878) a year earlier.
Around 70% of the total outstanding housing loans to households were for owner-occupied homes while the remaining 30% were for investment homes, according to ABS.
The Australian mortgage market is highly concentrated. Australia’s “big four” banks—National Australia Bank, Commonwealth Bank of Australia, Westpac Banking Corporation, and ANZ—had an almost 100% share of the country’s new mortgage market in July 2009, according to the Australian Prudential Regulation Authority (APRA). Larger banks benefited as smaller lenders exited the market due to financial difficulties caused by the global credit crunch.
Australian economy defies recession
The Australian economy is now recovering quickly. In Q2 2009, the economy grew by 0.6% q-o-q, following 0.4% in Q1 2009. The growth was mainly driven by strong domestic demand. In 2009, Australia is projected to post a modest annual GDP growth rate of 0.7%, before accelerating to 2% in 2010, according to the IMF
“Economic conditions in Australia have been stronger than expected, with consumer spending, exports and business investment notable for their resilience,” said Reserve Bank Governor Glenn Stevens.
In October 2009, the unemployment rate rose slightly to 5.8% from 5.7% in the prior month. Australia’s unemployment rate remained relatively steady, despite forecasts that it would rise up to 8.5% in 2010.
In the year to September 2009, the inflation rate was 1.3%, down from 5% from the same period last year, based on figures from RBA. On the other hand, the underlying inflation, RBA’s current main guide to action, was around 3.5%. The large difference between CPI and underlying inflation was due to large falls in the prices of fuel and in the prices of deposit and loan facilities used by households.
This article has been republished from Global Propety Guide. You can also view this article at Global Property Guide, an international real estate analysis site.