During 2013 Australia´s housing market saw its strongest performance, over the past four years. House prices in the country´s eight major cities rose by 9.48% (6.47% inflation-adjusted) during 2013, up from a minimal year-on-year increase of 2.61% (0.48% inflation-adjusted) in 2012, an annual decline of 4.41% in 2011 and a year-on-year rise of 4.72% (7.26% inflation-adjusted) in 2010, based on figures released by the Australian Bureau of Statistics (ABS).
House prices increased 3.51% (2.66% inflation-adjusted) quarter-on-quarter in Q4 2013, the fifth consecutive quarter of quarterly gains and the highest quarterly rise since Q1 2010.
However, the national figures conceal local house price variations. Sydney saw the biggest annual increase in 2013 from a year earlier, with house prices rising by 14.3% (7.4% inflation-adjusted), followed by Perth (8.9%), and Melbourne (8.6%). House prices also increased strongly in Brisbane (6%), Hobart (5.8%), Darwin (5.2%), and Adelaide (3.9%). Out of Australia’s eight capital cities, only Canberra experienced a slight price decline of 0.5%.
Australian housing is among the most expensive in the world. In the last quarter of 2013, New South Wales, especially Sydney, had the most expensive housing in the country, with the median house price at AU$633,200 (US$574,667), about 17.4% above the national median house price of AU$539,400 (US$489,538), according to ABS. Some critics believe that the housing market is severely overvalued.
Demand is rising. Seasonally-adjusted purchases of established dwellings increased 14.2% to 43,176 units in 2013, according to ABS. The number of finance commitments for owner-occupied housing units (seasonally-adjusted) rose by 14.1%, to 51,692, while the total value such financing commitments jumped 19.4%, to AU$16.28 billion (US$13.66 billion).
Residential construction activity continues to surge. Dwelling unit approvals soared by 14.6% to 16,583 units in 2013, according to the ABS; new residential building consents skyrocketed by 29.1% to AU$4.47 billion (US$3.75 billion), both figures seasonally-adjusted.
These dramatic price-rises are somewhat surprising, since Australia´s economy is estimated to have grown by a modest 2.5% in 2013, after GDP growth of 3.7% in 2012, 2.4% in 2011, 2.6% in 2010 and 1.4% in 2009, according to the IMF. However two factors may partially explain it. The Reserve Bank of Australia (RBA) has kept its cash rate at a record low of 2.5%, after cutting it by 25 basis points in August 2013 to match NZ´s OCR for the first time in more than four years. The other factor is increased purchases of residential real estate by foreign nationals, especially Chinese, who continue to find Australian property very attractive. Australia´s Foreign Investment Review Board (FIRB) grave permission for 11,668 residential property purchases by foreigners in 2012-13, to a value of AU$17 billion (US$15.21 billion), an increase of 19% on the previous financial year, according to the FIRB.
Acquisition of residential real estate by foreign nationals and corporations is subject to Foreign Investment Review Board (FIRB) approval.
The strength of Australia’s housing market through the great recession 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:
Among the seven developed nations covered by the 2013 9th Annual Demographia International Housing Affordability Survey, Australia ranks third as most unaffordable major market.
The survey uses the Median Multiple to assess housing affordability in 337 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.
In 2012, Australia’s major market had a Median Multiple of 6.5, compared to the international norm of three times household income. However, this was actually an improvement from 6.7 Median Multiple recorded in 2011. Overall, out of the 39 Australian markets surveyed, 30 of which were rated “severely unaffordable” (Median Multiple of 5.1 and above), while 9 markets were tagged as “seriously unaffordable” (Median Multiple between 4.1 and 5.0).
Sydney continued to be one of the most unaffordable major markets next to Hong Kong and Vancouver, and is the least affordable market in Australia, with a Median Multiple of 8.3. Outside the major markets, the Port Macquarie, located in New South Wales, is the most severely unaffordable market, with a Median Multiple of 8.6.
Yet based on Commonwealth Bank of Australia’s recent Home Buyer Affordability Report in March 2013, housing affordability has recently improved, rising by 1.2% q-o-q to March 2013.
“Overall, the trend across the capital cities is one of continued improvement in affordability, with the capital city index increasing by 2.0 per cent in the March 2013 quarter. However the cities of Adelaide, Perth and Hobart each saw declines in affordability,” according to HIA Senior Economist Shane Garrett.
The highest reductions in housing affordability occurred in Adelaide (-4.1%), followed by Hobart (-3.8%) and Perth (-2.6%). Meanwhile, affordability improved in Brisbane (6.2%), Melbourne (4.7%), Canberra (2.6%), and Sydney (1.2%).
Rental yields in Australia are moderate. Gross rental yields for houses range from 4.36% in Melbourne, to 5.42% in Hobart, according to the March 2013 figures of Australian Property Monitors (APM). Gross rental yields for apartment units range from 4.83% in Melbourne to 6.03% in Darwin.
In Sydney, smaller apartment units of around 60 sq. m. have higher gross rental yields of 6.26%, according to Global Property Guide Research of October 2012. 100 sq. m. and 150 sq. m. apartments have lower yields at around 4.94% and 3.93%, respectively.
The average asking rent on houses, in the eight capital cities, rose 6.1% during the year to Q1 2013. During the same period, the average asking rent on ‘units’ increased by 5.9%. On a national level, asking rents for houses were up by only 0.4% q-o-q to Q1 2013, while ‘unit’ rents were up by 2.2% during the same quarter.
“Sydney, Melbourne and Perth were the big movers in unit rents over the March quarter with only Perth of all the major capitals recording a rise in house rents. Sydney median asking house rents were again steady over the March quarter at $500 but remained the highest rents of all capitals except Darwin. Sydney house rents have now recorded no growth over the past year,” says Dr Andrew Wilson, APM’s Senior Economist.
The highest median weekly asking rents can be found in Darwin, with houses at around AU$ 700 (US$ 639.59) and units at AU$550 (US$ 502.54). It was followed by Sydney with median rents at AU$500 (US$ 456.85) for houses and AU$ 470 (US$ 429.44) for units. Hobart has the lowest median weekly asking rents at AU$ 310 (US$ 283.25) for houses and AU$ 250 (US$ 228.43) for units.
Continuous upward pressure on rents is expected in Perth, Darwin and Sydney due to the chronic housing shortage. Increased demand for unit accommodation is expected to continue in Sydney and Melbourne, but new apartment supply is predicted to offset rental demand. Canberra, Adelaide and Hobart are likely to have subdued rental growth for the rest of 2013, Due to their under-performing local economies.
Though Australia’s benchmark interest rate remained on hold at 2.75% as of July 2013, an additional rate cut is most likely to happen, and could be influenced by the future performance of the Australian dollar.
“The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy,” according to RBA Governor Glenn Stevens.
Inflation has been consistent with RBA’s target, and is expected to continue for the next couple of years.
Before arriving at this record low figure of the Official Cash Rate, the Reserve Bank of Australia (RBA) made seven rate cuts from November 2011 to May 2013. The rate cut started due to Australia’s overall moderate economic growth in 2011, and a more neutral stance of monetary policy would be consistent in having a sustainable growth and lower inflation of around 2% to 3% over time.
The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 87% of GDP in 2012. Outstanding mortgage loans rose by 4.8% in 2012, down from 6% growth in 2011.
According to ABS figures, new home lending in Australia slightly improved in May 2013. Housing finance commitments for both new and established owner occupied dwellings were up especially in the Northern Territory (4.7%), Queensland (3.9%), and Western Australia (3.4%). In contrast, the Australian Capital Territory had a decline in the total number of housing finance commitments by around 0.5%.
The mortgage market is highly concentrated. Australia’s “big four” banks—National Australia Bank, Commonwealth Bank of Australia, Westpac Banking Corporation, and ANZ—accounted for about 85% of the country’s housing loans in May 2013, according to the Australian Prudential Regulation Authority (APRA).
In April 2013, housing approvals rose 37% higher to 13,202, but this was only 3% up on 2012’s monthly average of 12,792.
The lack of affordable housing has driven those at the bottom of the market to become renters instead, struggling with high rents. Australia’s affordability problem is also attributed to insufficient construction of new houses.
Australia has been under-building new residential dwellings in the past years, for several reasons.
In 2012, housing starts fell by 2.2%, compared to the 11.3% drop in 2011.
A mild recovery was expected in 2013, driven by interest rate cuts, new home incentives in some states, and focus on policy reform in New South Wales, according to HIA chief economist, Harley Dale. However, it was observed in Q1 2013 that there was no growth in the residential construction industry. “In seasonally adjusted terms, the volume of investment in new homes increased by 2.2 per cent over the quarter, as the modest recovery from very weak levels in the first half of 2012 continued. Meanwhile, the on-going decline in alterations and additions investment provides a weak update on the mindset and appetite for spending on the part of the household sector,” says HIA Economist, Geordan Murray.
The weaker residential building activity was attributed to the RBA’s decision to keep its Official Cash Rate on hold at 2.75%. According to HIA’s Senior Economist Shane Garrett, lower interest rates were badly needed to help the industry.
In the fourth quarter of 2013, Australia’s economic growth accelerated to 2.8% from a year earlier, up from an annual growth rate of 2.3% recorded in the previous year, fuelled by increases in household spending and exports, according to the Reserve Bank of Australia (RBA), the country’s central bank. On a quarterly basis, the economy grew by 0.8% in Q4 2013, up from quarterly growth rates of 0.6% in Q3, 0.7% in Q2, and 0.5% in Q1 2013.
Australia’s economy expanded an average of 3.1% from 2000 to 2012, according to the IMF.
Australia’s export industry is now improving. In Q4 2013, the country’s current account deficit narrowed to a record AU$10.1 billion (US$9.17 billion), down from a previous deficit of AU$12.5 billion (US$11.34 billion). Despite this, demand from China remains unstable, according to the RBA.
The RBA expects that the economy will grow by between 2.25% and 3.25% this year, thanks to a lower exchange rate and increasing activity both in the retail and housing markets.
“The depreciation of the exchange rate should provide some additional impetus to activity in the traded sectors of the economy,” said the RBA.
The Australian dollar (AUD) depreciated by more than 18% from AUD0.953 = USD1 in January 2013 to AUD1.1283 = USD1 in January 2014.
In January 2014, the nationwide unemployment rate rose to 6%, the highest level since July 2003, according to RBA. The jobless rate is expected to rise further, as about 50,000 jobs in the auto industry are about to be lost due to the closure of manufacturing plants of Toyota Motor Corp, Ford Motor Co. and General Motors Co. In addition, Alcoa Inc. also announced that it will close it aluminium smelter and two mills in the country.
From 2004 to 2013, the country’s jobless rate averaged 5% per year, according to the IMF.
Consumer prices rose 2.7% in Q4 2013 from a year earlier, up from a rise of 2.2% recorded in the previous quarter, but still consistent with the central bank‘s 2%-3% inflation target, according to the ABS. The increase in inflation rate is mainly attributed to rises in costs of domestic and international holiday travel and accommodation, and prices of fruits, vegetables, tobacco and new dwelling purchase by owner-occupiers.
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