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Australia’s house price rises accelerating
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.
Rental returns on apartments in Sydney are low, at 2.8% to 3.7%
Our Sydney apartment survey is based on the number of bedrooms, because so few advertisements cite square metre measurements.
As we would expect, there are huge difference in the cost of apartments in Sydney depending on area, from relatively inexpensive Vaucluse, to high-priced darling Point and Potts Point. What doesn't differ much are the now low gross rental yields available on Sydney properties (the rental yield is the per cent return on the purchase cost of a property). This will not make landlords happy.
It is rare in Sydney to be able to earn more than 3.7%, and most apartments return less. Bear in mind that usually costs of various kinds will absorb at least 2% of those returns, so that net returns will be a lot lower than the gross figures.
Small apartments earn significantly higher rental returns than big apartments. This is particularly true in the more expensive districts, and if you are looking for yields the table will tell you that the exception to our generally low return figures are 1 bedroom apartments in Potts Point, which can earn gross rental yields of 4.9%.
Surprising, but worth investigating.
Taxes are high in Australia
Rental income: Rental taxable income earned by nonresidents are taxed at progressive rates, range from 32.50% to 45%.
An owner may also be required to pay a land tax annually, depending on his property classification for tax purposes and property location.
Capital Gains: Individuals are subject to a 50% reduction of the taxable gain if the asset is held for at least 12 months. Capital gains follow the individual income tax rates, at rates from 32.50% to 45% for nonresidents.
Inheritance: There are no direct taxes on inheritance.
Residents: Residents are taxed at a progressive rate on their annual income, from 0% to 45%, and are required to pay a 1.5% Medicare levy.
Buying costs are moderate in Australia
Roundtrip transactions costs are 3.76% to 21.15% of the property value. Stamp duty on property transfers ranges from 1.5% to 6.75%, and is paid by the buyer. It takes about five days to complete the five procedures needed to register a property.
Tenancy laws are neutral in Australia
Australia ’s landlord and tenant laws are generally neutral. Both parties’ rights are well-protected by each states’ Residential Tenancy Act.
Rents: Rents can be freely negotiated, but increases are subject to review by a Tribunal provided the tenant makes an application. The rent cannot be increased before the end of the first year of tenancy in any state.
Tenant Eviction: A landlord can terminate a tenancy by giving notice in the approved form, or by using the tribunal. The legal system is highly efficient: it takes an average of 44 days to evict a tenant.
Economic growth continues to improveAustralia is one of the most attractive places to live, judging by all indices of income, human development, healthcare and civil rights. It had a GDP per capita of US$51,850 in 2016, according to the International Monetary Fund (IMF).
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.
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.
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.