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Australia: Price History

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Soft landing for
Australia’s housing market

Australia’s housing market is cooling, after a three-year comeback, as the contagious impact of the global credit crunch spreads.

The average established homes price index for 8 capital cities rose by only 2.8% y-o-y in September 2008, a dramatic slowdown from the 11.4% growth a year earlier, according to Australian Bureau of Statistics (ABS). When adjusted for inflation, the index actually fell 2.1% over the same period.

The median house price was AU$447,659 (US$310,128) in Q3 2008, up 1% from a year earlier but down 2.6% from the previous quarter, according to Real Estate Institute of Australia (REIA).

Australia’s housing market accelerated rapidly from mid-90s to the early-2000s, driven mainly by speculative buying. House prices rose 148% (100% in real terms) from 1995 to 2004, according to REIA. To avoid a disastrous crash, the Reserve Bank of Australia (RBA), the central bank, successively raised interest rates to lead the housing market to a soft landing.

After house prices reached bottom at the end of 2004, the market began to regain momentum in 2005. The house price index rose 14% (10.8% in real terms) in 2007, after rising 9.7% (6.3% in real terms) in 2006 and 2.3% (-0.5% in real terms) in 2005.

Local house price variations

The house price rally from 2005 to 2007 was led by Perth, which saw 44% price growth. Other cities with strong price rises were Melbourne (34%), Brisbane (31%) and Darwin (31%). Sydney registered the lowest house price increase over the same period, at only 10%.

During the year to end-Q3 2008, house prices continued to rise in Adelaide (9.7% y-o-y), Melbourne (8.1%), Darwin (6.4%), Brisbane (5.6%) and Hobart (2.4%).

On the other hand, house prices have fallen in Perth (-4.1%) and Sydney (-0.4%) during the same period. In Canberra, house prices were unchanged.

Sydney is Australia’s most expensive city, with a median house price of AU$529,000 (US$367,735) in September 2008. Median house prices in Melbourne, Perth and Canberra are at AU$435,000 (US$302,259). Hobart has the lowest median house price at AU$320,900 (US$222,923).

Economic and housing market slowdown

Australia has a strong and progressive economy, and has enjoyed an average GDP growth rate of 3.6% annually from 1997 to 2007.

As the global financial crisis bites, GDP growth is projected to slow to 2.5% in 2008 and 1.7% in 2009. Some economists even expect Australia to fall into recession between Q4 2008 and Q1 2009. Australia’s GDP grew by a negligible 0.1% in Q3 2008, its lowest growth in 8 years.

Western Australia, which has accounted for half of the country’s GDP growth in recent years, cut growth forecasts more than a third to 3.5% in 2009 after the delay or cancellation of resource sector projects due to China’s weakening economy.

In November 2008, the economy lost about 15,600 jobs, causing unemployment to rise to 4.4%, its highest level in 2008, according to ABS. Unemployment is forecast to reach 5.3% in 2009 and 6% in 2010.

While the Australian housing market remains fundamentally sound, it is still expected to stagnate in 2009. Demand and house prices are projected to decline until end-2009 before returning to growth in early-2010.

"The longer negative impacts of the credit crunch and general uncertainty persist, the greater the risk such a recovery fails to materialise," said Harley Dale, chief economist at the Housing Industry Association (HIA).

Economic recovery is a prerequisite for the housing market to stabilize. In addition, confidence, from both lenders and homebuyers, should return before home sales and prices return to normal levels.

Economic boost

To bolster the slowing economy, the government unveiled an economic stimulus package worth AU$10.4 (US$7.24) billion, around 1% of GDP, in October 14, 2008. It will be used to finance the following:

• New payments to pensioners via bonus payments worth AU$3.8 (US$2.65) billion
• Extra payments to low and middle income pensioners worth AU$3.9 (US$2.7) billion
• Increasing grants for first home owners and first-time buyers of newly-constructed and established homes worth AU$1.5 (US$1.04) billion (First Home Owner Boost Scheme) and the Commonwealth Additional Grant (CAG).
• Accelerating projects on education and research, health and hospitals, and transport and communications

In December 12, 2008, a second economic stimulus package worth around AU$4.7 (US$3.2) billion was announced by Prime Minister Kevin Rudd. The stimulus package, which focuses on infrastructure projects (e.g. railways, roads and university campuses), is expected to boost the economy by 0.25% - 0.5% during the next fiscal year 2009-10.

Mortgage and interest rates

The RBA successively raised the key interest rate to 7.25% in March 2008, from a historic low of 4.25% in early-2002, to prevent the housing market from overheating and to curb inflationary pressures during that period.

The standard variable mortgage rate rose to 9.6% in July 2008, from a low of 6.05% in December 2001. Average 3-year fixed mortgage rate also rose to 9.4% in July 2008, up from 5.95% in July 2003.

However starting September 2008, RBA cut the key rate four times to 4.25% in December 2008 in an effort to boost the economy and counter the effect of the global credit crunch. Following the rate cut, the standard variable mortgage rate dropped to 8.35%, while the 3-year fixed mortgage rate fell to 7.75% in October 2008.

Mortgage market growth

The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 84% of GDP in 2007. In 2007, total mortgage debt was around AU$908 billion (US$632.6 billion), about 77% of which was housing loans. Total housing loans have increased by 13.4% annually from 2002 to 2007.

In the year to September 2008, total housing loans rose 18.3% to AU$784.63 billion (US$546.5 billion) from a year earlier. Around 68% of the outstanding housing loans were for owner-occupied homes while the remaining 32% were for rental homes.

Housing supply falls

In October 2008, total building approvals, an indicator of future activity, decreased 27% to 11,339 units from a year earlier. Housing approvals dropped in Northern Territory (-67%), Queensland (-55%), Victoria (-18%), New South Wales (-17%), South Australia (-16%), and in Western Australia (-7%).

In 2008, total housing starts are expected to fall to around 145,000 units, 6% down from a year earlier, according to the HIA. In 2009, housing supply is projected to rebound with around 156,000 housing starts.

Rising rents, tight vacancy rates

In Q3 2008, housing rents in 8 capital cities have increased more than 10% from the previous year, according to figures from REIA. Darwin registered the highest rent increase at 20%, followed by Sydney (13.2%) and Perth (12.9%).

Darwin has the most expensive rental houses, with median weekly asking rents at AU$480 (US$334). Median rents were also high in Sydney at AU$430 (US$300) and in Canberra at AU$400 (US$279). On the other hand, both Adelaide and Hobart have the lowest median weekly asking rents at AU$290 (US$202).

The continued strength in demand for rental properties, coupled with a limited supply of new housing units, has brought the average rental vacancy rates in Australia’s capital cities at below 3% since 2006.

In September 2008, the rental market in Darwin remained very tight with 0.3% vacancy rate, according to REIA. Rental vacancy rates were also very low in Melbourne (1.1%), Sydney (1.2%), Adelaide (1.3%), and Brisbane (1.7%). Among the capital cities, Perth has the highest vacancy rate at 2.6%, followed by Hobart and Canberra at 2.1%.

Australia - more data and information

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