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Nov 03, 2017

Australia’s house price rises accelerating

by Lalaine C. Delmendo

Australia annual house pricesAfter five years of strong house price rises, Australia’s housing market is still powering ahead. House prices in the country’s eight major cities rose by 11.1% during the year to end-Q2 2017 (8.98% inflation-adjusted), a sharp acceleration from an annual rise of 4.65% a year earlier, based on figures from the Australian Bureau of Statistics (ABS).

Quarter-on-quarter, house prices increased 1.9% (1.72% inflation-adjusted) in Q2 2017.

Melbourne saw the biggest increase, with the established house price index surging by 16% (13.8% inflation-adjusted) during the year to Q2 2017, followed by Sydney (14.8%), Hobart (12.2%), Canberra (9%), Adelaide (5.1%), and Brisbane (3.9%). On the other hand, house prices dropped in Darwin (-4.7%) and Perth (-2.8%) over the same period.

The mean price of residential dwellings in Australia was AU$679,100 (US$530,173) by end-Q2 2017, up 9% from the same period last year, according to the ABS.

New South Wales, especially Sydney, has the most expensive housing in the country, with the mean house price at AU$903,700 (US$705,880) in Q2 2017, about 33% above the national mean house price. In contrast, Tasmania has the cheapest housing in Australia, at a mean price of AU$360,400 (US$281,508) over the same period.

House prices in Australia surged 44.2% (30.9% inflation-adjusted) from 2011 to 2016. As such, many believe that Australia’s housing market is severely overvalued.

  • The Economist estimated that Australian house prices are overvalued by more than 40%.
  • According to the 2016 Global Real Estate Bubble Index published by investment bank UBS, Sydney´s housing market now ranks in the bubble risk category and tops all other cities in the region.
  • Sydney and Melbourne housing markets are currently 40% overvalued, with house prices in these cities expected to rise further by around 10% to 16% in 2017, according to Louis Christopher of SQM Research.
  • According to the International Monetary Fund (IMF), housing market risks in Australia remain heightened, especially in Sydney, mainly due to investor credit and interest only loans. House prices are estimated to be moderately overvalued by about 10%. 

Residential construction activity continues to increase. During the first seven months of 2017, construction of dwellings in the country rose both in number and in value, by 5.6% and 9.8%, respectively, according to the ABS.

However demand is mixed. During the first seven months of 2017, purchases of new dwellings increased 9.4% y-o-y to 19,400 units while the value of new dwelling purchases soared by 11.7% to almost AU$7.39 billion (US$5.77 billion), according to ABS. In contrast, purchases of established dwellings fell by 3.5% y-o-y to 313,216 units during the first seven months of 2017 while  the value of established dwelling purchases dropped slightly by 0.3% to AU$117.36 billion (US$91.61 billion).

In the second quarter of 2017, the total residential housing loans outstanding in the country rose by around 6.1% y-o-y to about AU$1.72 trillion (US$1.34 trillion), based on figures from the Reserve Bank of Australia (RBA).

“We believe the fast and sustained growth in credit and house prices will increase risks to fiscal accounts, real economic growth, and financial stability,” said credit rating agency Standard and Poor’s.

In an effort to cool the surging property prices and address building risks caused by high household debt, the Australian Prudential Regulation Authority (APRA), the country’s regulator of the financial services industry, recentlyintroduced new limits to interest-only lending at 30% of new mortgages. Moreover, stamp duty charges for foreign homebuyers were also raised to slow foreign property demand.

In the second quarter of 2017, Australia’s economy grew by 1.8% from a year earlier, at par with the previous quarter’s growth. The economy expanded by a modest 2.5% in 2016, after GDP growth of 2.4% in 2015, 2.7% in 2014, 2% in 2013, 3.6% in 2012, 2.7% in 2011, 2.3% in 2010 and 1.8% in 2009, according to the IMF. The RBA kept the official cash rate unchanged at a record low of 1.5% in September 2017, after cutting it by a cumulative 50 basis points last year, in an effort to stoke price growth and bolster the economy.

Acquisition of residential real estate by foreign nationals and corporations is subject to FIRB approval. Foreigners are not allowed to buy an established (previously occupied) house. They may buy an unoccupied new dwelling, but only if the FIRB feels that the purchase will not add to the shortage of properties available to native Australians.

Australia’s housing boom; crash avoided

Australia price index

The strength of Australia’s housing market through the recession surprised observers, who had predicted that Australia would suffer one of the worst housing market crashes, because of house price overvaluation.

One reason a crash was avoided was that lending standards have been stricter than in the US. In addition, the government helped first-time homebuyers, introducing a AU$10.4 billion (US$8.13 billion) stimulus package in October 14, 2008 - worth 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$5,472) to AU$14,000 (US$10,944) for existing dwellings, and to AU$21,000 (AU$16,416) for newly built homes (however, the FHOG reverted back to $7,000 in December 2009 in NSW, and reduced it in other states).

There are also housing shortages due to a rapidly growing population, and in a context of shrinking Australian household sizes.  There was also strong immigration from 2004 to 2007.

Housing affordability continues to deteriorate

Australia building approvals

Australia, specially its five major metropolitan areas, remains “severely unaffordable” in 2016. Among the nine developed nations covered by the 13th Annual Demographia International Housing Affordability Survey, Australia was ranked third most unaffordable major housing market in 2016.

The survey uses the Median Multiple to assess housing affordability in 406 metropolitan markets in Australia, Canada, China (Hong Kong), Ireland, Japan, Singapore, New Zealand, the United Kingdom, and the United States. The Median Multiple follows this formula: Median Multiple = median house prices / median household income.

Sydney is Australia’s least affordable housing market in 2016, with a Median Multiple of 12.2, followed by Melbourne (9.5), Adelaide (6.6), Brisbane (6.2), Perth (6.1),

Of the 54 Australian markets surveyed in 2015, 33 were rated “severely unaffordable” (Median Multiple of 5.1 and above), 14 were “seriously unaffordable” (Median Multiple between 4.1 and 5.0), 3 was rated moderately affordable (3.1-4.0), and 4 markets evaluated as affordable (3.0 & under).

Among the 406 metropolitan markets, Sydney was ranked second most unaffordable. In fact, housing affordability in Sydney deteriorated by more than 60% in the past 12 years, from a Median Multiple of 7.6 in 2004 to 12.2 last year. Outside the major markets, Wingcaribbee, NSW is the most severely unaffordable market, with a Median Multiple of 9.8, followed by Tweed Head, NSW (9.7), Gold Coast, Queensland (9.0), and Sunshine Coast, Queensland (9.0).

This was supported by the UBS Global Real Estate Bubble Index, ranking Sydney as the fourth most vulnerable market in the world to real estate bubble risk.

The severe housing unaffordability in the country, especially in Sydney, was mainly due to the urban consolidation in Australia during the period, which severely limits or even prohibits new housing construction on or beyond the urban fringe.

Modest rental yields, rising rents

Surprisingly, rental yields in Australia are rising, despite strong house price increases. In Australia’s eight major cities, rental yields stood at 3.6% in September 2017, up from 3.3% a year earlier, according to CoreLogic RP.

In Q3 2017:

  • In Sydney, rental yields stood at 3.1%, up from 3% a year earlier
  • Melbourne has the lowest rental yields of 2.9%, unchanged from a year ago
  • In Brisbane, yields rose to 4.4%, from 4.2% a year earlier
  • In Adelaide, yields rose to 4.2%, from 4% a year earlier
  • In Perth, yields rose to 3.9%, from 3.8% in the previous year
  • In Hobart, yields fell slightly to 5%, from 5.2% a year earlier
  • In Darwin, yields rose to 5.7%, from 5% a year earlier
  • In Canberra, yields rose to 4.4%, from 4% a year earlier

Residential rents are rising modestly. During the year to Q3 2017, the natiowide average weekly rent increased 2.9%, according to CoreLogic. Hobart registered the largest annual rise in rental rates of 8.9% in Q3 2017, which was followed by Canberra (5.7%), Melbourne (4.8%), Sydney (4%), and Adelaide (2.2%). In contrast, Perth saw the biggest annual rental growth in Q3 2017, at 3.7%, followed by Darwin (-2.2%) and Brisbane (-0.1%).

Australia dwelling purchases

“It’s likely that landlords will be seeking to recover some, or all, of their increased financing costs associated with higher interest rates on investment in interest only loans by progressively increasing weekly rents,” said Tim Lawless of CoreLogic RP Data.

Demand is mixed

Demand for newly built dwellings continue to rise strongly, but it is now falling for established dwellings.

In the primary market:

  • The total number of new dwelling purchases rose by 9.4% to 19,400 units during the first seven months of 2017 from the same period last year, according to the ABS.
  • The value of new dwelling purchases increased strongly by 11.7% to AU$7.39 billion (US$5.77 billion) over the same period.

In the secondary market:

  • The total number of established dwelling purchases fell by 3.5% to 313,216 units in January to July 2017 from the same period last year.
  • The value of established dwelling purchases fellslightly by 0.3% to AU$117.36 billion (US$91.61 billion) over the same period.

Higher taxes might undermine foreign property demand

The surge in house prices in Australia in recent years can be partly attributed to the increasing number of foreign homebuyers in the country, who have accounted for over 20% of property purchases every year.

In 2016, the number of foreign investment applications in the country’s residential real estate market rose by 9% to 40,149 from a year earlier, according to the Foreign Investment Review Board (FIRB). Likewise, the value of residential real estate investment by foreigners surged 19% to AU$72.4 billion (US$55.83 billion) over the same period. Chinese investors topped the list, accounting for about two-thirds of applications.

Victoria was the most popular among foreign investors, accounting for about 44% of all residential purchases by foreigners last year, followed by New South Wales, with 32% share, according to the FIRB.

However, the recent introduction of taxes and the tightening of lending standards imposed by banks can potentially weaken foreign property demand in the coming years.

  • New South Wales has recently doubled its stamp duty charges for foreign buyers from 4% to 8% and the annual land tax surcharge on foreign homeowners was also raised from 0.75% to 2%
  • Victoria raised its stamp duty for foreign buyers from 3% to 7%
  • Queensland has recently introduced a 3% stamp duty on foreign buyers
  • In May 2017, the federal government also introduced the so-called “ghost tax” to foreign investors – a AU$5,000 (US$3,700) annual charge on owners who leave their investment properties vacant or unavailable for rent for six months or more.

“Foreign buyers continued to play a role in Australian housing markets in the June quarter despite China’s crackdown on capital outflows into overseas property and a raft of new restrictions and taxes on foreign ownership introduced in the 2017/18 federal budget,” said National Australia Bank’s chief economist Alan Oster.

Interest rates remain low

Australia interest rates

The RBA kept the official cash rate unchanged at a record low of 1.5% in September 2017, after cutting it by a cumulative 50 basis points in 2016, in an effort to stoke price growth and bolster the economy.

As a result, interest rates for housing loans remain low:

  • The average standard variable interest rate for housing loans was 5.20% in August 2017, unchanged from the previous month but down slightly from 5.25% in a year earlier.
  • The average discounted variable interest rate for housing loans stood at 4.45% in August 2017, unchanged from the previous month and from a year ago.
  • The three-year fixed interest rate for housing loans stood at 4.15% over the same period, unchanged from the previous month but slightly up from last year’s 4.1%.

Mortgage market continues to grow

The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 58.4% of GDP in 2002, to 86% in 2009 and finally to around 98.3% in 2016, thanks to low interest rates.

Australia house loans

In the second quarter of 2017, the total residential housing loans outstanding in the country rose by around 6.1% y-o-y to about AU$1.72 trillion (US$1.34 trillion), based on figures from the Reserve Bank of Australia.

Housing loans for both owner-occupiers and investors continue to rise. In July 2017, housing loans for owner-occupiers stood at AU$1.05 trillion (US$822.21 billion), up by 7.1% from the same period last year. Likewise, housing loans for investors rose by 4.8% y-o-y to AU$560.84 billion (US$438.43 billion) over the same period.

Tighter lending standards introduced

In March 2017, APRA introduced new limits to interest-only lending to big banks to 30% of new mortgages, in an effort to cool the surging property prices and address building risks caused by high household debt.

Other measures:

  • limit loan-to-value (LTV) ratio at 80% and strictly scrutinize instances of interest-only lending at an LTV above 90%;
  • restrain lending growth in higher risk segments of the bank portfolio (e.g. high loan-to-income loans, high LTV loans, and loans for very loang terms), and;
  • maintain 10% annual cap on investor credit that was first established in December 2014.

“This increased scrutiny has been in response to an environment of heightened risks, reflected in an environment of high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures,” said APRA.

Dwelling starts continue to rise

Residential construction activity continues to increase. During the first seven months of 2017, construction of dwellings in the country rose both in number and in value, by 5.6% and 9.8%, respectively, according to the ABS.

Australia housing starts

In 2016, the total number of dwelling starts in Australia increased slightly by 1.1% to 228,230 units from a year earlier, according to the Housing Industry Association (HIA). New South Wales registered the biggest rise in housing starts of 17.9% y-o-y in 2016, followed by South Australia (10.6%), the Australian Capital Territory (6.4%), and Queensland (3%). In contrast, Western Australia’s construction sector saw the biggest annual decline in dwelling starts of 24.3% over the same period, followed by the North Territory (-23.6%), Tasmania (-23.2%), and Victoria (-4.8%).

The value of dwelling stock owned by households in the country rose by 10.4% y-o-y to AU$6.39 trillion (US$5 trillion) in Q2 2017, according to the ABS. New South Wales accounted for the biggest share of the total dwelling stock at about 41%, followed by Victoria (27.8%), Queensland (14.6%), and Western Australia (8.3%).

Over the same period, the number of residential dwellings in Australia stood at around 9.91 million, up by 2% from a year earlier.

Residential construction to fall amidst tighter lending standards, higher taxes

Australia dwellings stock

Housing starts in Australia are projected to decline by 11.8% y-o-y to around 201,310 units this year and by another 13.4% to 174,380 units in 2018, according to the HIA, amidst the introduction of stamp duty charges on foreign homebuyers and APRA’s imposition of new limits on new mortgages.

“The housing boom was not consistent across Australia and now with NSW and Victoria cooling, all indicators are that the market is well past its 2016 peak when over 231,000 new homes were commenced,” said HIA Senior Economist Shane Garrett.

“The investor side of the market has also been hit by tighter lending finance due to APRA’s recent restrictions on interest-only mortgages,” Garrett added.

The anticipated decline in housing construction is expected to exacerbate the shortage of affordable housing in the country, which could drive those at the bottom of the market to become renters instead of buying, and struggle with high rents.

Australia’s affordability problem is partly 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 extended impact of the global credit crunch, some developers continue to struggle to secure finance.

Modest economic growth

Australia exchange rate

In the second quarter of 2017, Australia’s economy expanded by 0.8% from the previous quarter, up from 0.3% in the first quarter, thanks to strong domestic demandand soaring business confidence, according to the ABS. On an annual basis, the economy grew by 1.8% in Q2 2017 from a year earlier, at par with the previous quarter’s growth.

Economic growth was 2.5% last year, down from average annual growth of 3% from 2000 to 2015, according to the International Monetary Fund(IMF). Recently, IMF slashed its economic growth forecast for Australia to 2.2%, significantly less than the 3% forecast six months ago.

“Growth is expected to soften temporarily to 2.2% in Australia, where housing investment and mining exports in the first half of the year were undermined by bad weather,” says the IMF.

The Australian dollar (AUD) appreciated by about 10.5% against the US dollar in the past two years, from AUD1 = USD0.7149 in August 2015, to AUD1 = USD0.7898 in August 2017, according to the RBA. Earlier, the AUD had lost around 25.6% of its value against the USD, from June 2014 to September 2015.

Australia gdp inflation

The country’s current account deficit was equivalent to 2.7% of GDP in 2016, from 4.7% in 2015, from 2.9% in 2014, 3.2% in 2013, and 4.3% in 2012. During the year to Q2 2017, the seasonally-adjusted current account deficit stood at AU$9.56 billion (US$7.47 billion), up from AU$4.75 (US$3.72 billion) in Q1 2017 but down from AU$15.43 billion (US$12.06 billion) in the same period last year.

Nationwide unemployment dropped to 5.5% in September 2017, from 5.7% a year earlier and 6.1% two years ago, according to the ABS. There were about 716,600 unemployed persons in Australia in September 2017, slightly down by 0.3% from a year earlier.

Consumer prices rose by 1.9% in Q2 2017 from a year earlier, down from 2.1% in the previous quarter but up from 1% in a year earlier. Australia’s nationwide inflation rate averaged 3.1% during 2008-2011 before declining to 1.9% during 2012-2016.






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