Australia’s Housing Market Struggles

Reports from the Real Estate Institute of Australia supports data showing that Australia’s property prices are falling despite a strong economy and a strategy that has managed to …

Reports from the Real Estate Institute of Australia supports data showing that Australia’s property prices are falling despite a strong economy and a strategy that has managed to stave off a crash many argue could have been tripped by overpricing, strict lending standards and several other factors. The house price index for eight capital cities dropped on the year ending in the second quarter of 2012, including Melbourne, Brisbane, Adelaide and others. The Australian mortgage market is dwindling despite a halt to a key rate hike, but the silver lining is that rental yields continue to improve. For more on this continue reading the following article from Global Property Guide.

Australia’s housing market continues to weaken, despite its strong and resilient economy. The house price index for 8 capital cities dropped 2.1% (-3.2% inflation-adjusted) during the year to end-Q2 2012, according to the Australian Bureau of Statistics (Austats). House prices in Australia have been falling since Q2 2011.

During the year to end-Q2 2012, six of the eight capital cities have seen their house prices falling. Melbourne recorded the biggest house price fall of 4.8%, followed by Hobart (-3.2%), Brisbane (-2.7%), Canberra (-2.6%), Adelaide (-1.3%), and Sydney (-0.9%). In contrast, house prices rose in Darwin (10.3%) and Perth (1.1%) over the same period.

On a quarterly basis, the house price index for 8 capital cities rose by a meager 0.5% (-0.01% inflation-adjusted) in Q2 2012.

This was supported by the figures released by the Real Estate Institute of Australia (REIA).

Sydney has the most expensive housing in Australia, with the median house price at AU$642,425 (US$657,702), about 23.6% above the weighted average.

Residential construction is also slowing. The total dwelling units approved dropped 15.4% to 12,046 in August 2012 from a year earlier, according to Austats. Likewise, total dwelling units commenced dropped 10.4% y-o-y in Q2 2012.

Inflation fears have receded, with underlying inflation at 2.4% in September 2012, consistent with the central bank‘s 2%-to-3% target.

Despite external threats, the economy grew by 3.7% in the second quarter of 2012 from a year earlier, according to the Australian Bureau of Statistics. The Australian economy is expected to expand by around 3.25% in 2012, thanks to still strong resource investments, according to the IMF. The Reserve Bank of Australia (RBA), the country’s central bank, ended a three-meeting pause and cut overnight cash rate by 25 basis points to 3.25% in October 2, 2012, with the eurozone debt crisis weighing on growth.

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Australia’s housing boom; crash avoided

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 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 has 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 that was reduced in other states.

Housing starts boosts

The Housing Industry Association (HIA) claims there was actually a shortage of 22,000 dwellings in 2009/10 and of 16,800 dwellings in 2010/11.

“Australia continues to run large annual deficits between the underlying demand for dwellings and the completion of dwellings,” says HIA’s Senior Economist Andrew Harvey. “So in the longer term Australia’s housing market is underpinned by the immutable forces of insufficient supply and robust underlying demand.”

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.

Nevertheless housing starts rose by a surprising 23.6% in 2010 (2009 saw a 6.8% decline in housing starts), prompted by the fact that interest rates only very slowly increased from the all-time low of 3% prevailing in October 2009. By March 2010, housing approvals were running at an amazing 17,439 per month, but fell back to 13,904 in April, when the RBA’s key interest rate was increased to 4.25%.

Worsened housing affordability

Australia has the least affordable housing market among the six developed countries covered by the 2010 7th Annual Demographia International Housing Affordability Survey.

The survey uses the Median Multiple to assess housing affordability in 325 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.

Australia’s Median Multiple is 6.1, compared to the international norm of three times household income. Of the 32 Australian markets surveyed, 27 were rated as “severely unaffordable” (Median Multiple of 5.1 and above), while 5 markets were regarded as “seriously unaffordable” (Median Multiple between 4.1 and 5.0).

Sydney’s Median Multiple in 2010 climbed to 9.6, from 8.3 last year. The Sunshine Coast, located in Queensland, is the most severely unaffordable market outside the major markets, with a Median Multiple of 8.4.

Another measure of stress is affordability. In the year to December 2010 housing affordability haddeclined by 10%, according to the Commonwealth Bank of Australia’s Home Buyer Affordability Report. Sydney had the largest housing affordability decline among capital cities at 5.5%, while Perth (0.1%) and Brisbane’s (0.5%) affordability improved.

Key rate hike paused

Australia’s benchmark interest rate, the highest among developed countries, is likely to remain unchanged in the upcoming months, as inflation is expected to stay within RBA’s target of 2%-to-3%.

“The RBA seems pretty comfortable with where policy is as they’re ahead of the curve, having gained a bit of time from slower fourth-quarter inflation,” says Michael Turner, economist at RBC Capital Markets Ltd. However, Turner expects a rate rise in 2011’s second quarter, as commodity prices pick up.

Mortgage market slows

The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 80% of GDP in 2008.

  • 69.8% of outstanding housing loans to households are for owner-occupied homes
  • 30.2% outstanding housing loans are for investment homes

The 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).

Rental market remains strong; moderate to poor yields

Rental yields in Australia are moderate to poor. Gross rental yields for houses range from 3.52% in Melbourne, to 5.13% in Hobart, based on December 2010 figures from APM. Gross rentals yields for apartment units are also moderate, ranging from 4.17% in Melbourne to 5.48% in Canberra.

In Sydney, gross rental yields on 120 sq. m. and 170 sq. m. apartments were around 4.01% and 3.87%, respectively, according to Global Property Guide Research in August 2, 2010. Yields on smaller units of 50 sq. m. were higher, at 5.87%.

Average rents in the eight capital cities rose 4.8% in the year to December 2010, following a 2.6% rise the previous year. Nationally, house rentals rose 3% during 2010, while ‘unit’ rentals rose 3.2% in 2010.

“The capital city markets of Sydney, Adelaide and Darwin recorded flat growth in house rentals in the December quarter, with Melbourne and Perth growing slightly by just over +1%,” says Dr Andrew Wilson, APM’s Senior Economist. On the other hand, Canberra, Brisbane and Hobart showed strong yields growth.

Darwin rents are the highest, with median weekly asking rents at AU$550 (US$559). Rents are also high in Sydney, with a median of AU$480 (US$488), and Canberra, with a median of AU$460 (US$467). Hobart has the lowest median weekly asking rent, at AU$320 (US$325).

Wilson predicted that rental growth would resume by the middle of 2011, given strong population increases, falling dwelling construction levels, and income rises due to economic growth acceleration in 2011.

Resilient economy

It achieved uninterrupted economic growth from 1992 to 2007, with an average GDP growth rate of 3.7% per year. While most developed countries fell into recession during the global financial meltdown, Australia has avoided it, with economy expanding 2.5% in 2008, 1.4% in 2009, 2.5% in 2010, and 2% in 2011.

Australia’s continued economic growth was mainly driven by the mining industry and robust demand for iron ore, coal and natural gas from Asia, especially China.

In the second quarter of 2012, the economy grew by 3.7% from a year earlier, according to the Australian Bureau of Statistics.

Unemployment was 5.1% in August 2012. From 2004 to 2011, the country’s jobless rate has been stable in a range of 4.3% to 5.6%, according to the IMF.

Consumer prices rose 2.4% in September 2012 from a year earlier, slightly up from 2.2% recorded in the previous month, but still consistent with the central bank‘s 2%-to-3% target.

This article was republished with Global Property Guide.


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