Australia’s house prices surge

Lalaine C. Delmendo | August 10, 2020

After almost two years of falling house prices, Australia’s housing market is gaining momentum again.

Australia annual house prices

House prices in the country’s eight major cities rose by 8.1% during the year to Q1 2020 (5.8% inflation-adjusted), in sharp contrast with the y-o-y decline of 7.7% a year earlier, according to the Australian Bureau of Statistics (ABS). It was the second consecutive quarter of y-o-y house price growth and the biggest rise since Q3 2017.

Quarter-on-quarter, house prices were up by 2% (1.6% inflation-adjusted) in Q1 2020.

Sydney saw the biggest growth, with the established house price index rising by 12% (9.6% inflation-adjusted) during the year to Q1 2020, followed by Melbourne (10.8%) and Hobart (7%). Moderate to minimal house price increases were registered in Canberra (3.5%), Brisbane (3.1%), and Adelaide (1%). On the other hand, house prices continue to fall modestly in Darwin (-2.1%) and Perth (-0.6%) during the year to Q1 2020.

The mean price of residential dwellings in Australia was AU$690,200 (US$481,176) in Q1 2020, up by 6.8% 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$890,400 (US$ 620,747) in Q1 2020, more than 25% above the national mean house price. In contrast, Northern Territory has the cheapest housing in Australia, at a mean price of AU$413,200 (US$288,064) over the same period.

Demand is picking up. New dwelling purchases rose strongly by 25.9% y-o-y in the first five months of 2020, following annual declines of 13.8% in 2019 and 9.6% in 2018. On the other hand, purchases of existing dwellings fell modestly by 4.6% in Jan-May 2020 compared to the same period last year, but an improvement from y-o-y falls of 10.6% in 2019 and 7% in 2018.

Yet residential construction continues to fall. Dwelling approvals fell by 2.5% to 71,262 units in the first five months of 2020 compared to a year ago, following an annual decline of 17.4% in 2019, according to ABS.

House prices in Australia surged 52.3% (35.6% inflation-adjusted) from 2011 to 2017. 

To cool the market and address risks caused by high household debt, the government tightened lending restrictions and imposed higher taxes on housing purchases by foreigners. These measures resulted in a 9% (-11.2% inflation-adjusted) decline in house prices from Q4 2017 to Q2 2019.

The economy grew by only 1.4% year-on-year in Q1 2020, the weakest performance since Q3 2009, and shrunk by 0.3% during the quarter with the economy hit by bushfires, drought and the coronavirus outbreak, according to the ABS. It was the first quarterly contraction in 9 years.

Australia house price index

The International Monetary Fund (IMF) projects the Australian economy will contract by 4.5% this year, an improvement from its April forecast of a 6.7% contraction. The economy is expected to bounce back quickly next year, with 4% growth.

Demand is improving

As a result of market-cooling measures, demand has been falling over the past two years. In the secondary market, purchases of existing dwellings fell by 10.6% in 2019, following a 7% decline in 2018, according to the ABS. Likewise, the value of purchases dropped 7% y-o-y to AU$ 107.6 billion (US$ 75.1 billion) last year, after falling by 3.2% in 2018.

Australia dwelling purchases

The primary market showed similar trend. Purchases of newly built dwellings fell 13.8% in 2019, after falling 9.6% the previous year.

Yet in the first five months of 2020, both markets showed some improvements despite the coronavirus pandemic. The number and value of new dwelling purchases rose by 25.9% and 39.2%, respectively, while the number of existing dwelling purchases fell modestly by 4.6% but increased by 12.8% in terms of value.

North American homebuyers replacing Chinese investors

Chinese buyers’ real estate investment in Australia plunged to AU$6 billion (US$4.2 billion) last year, a significant reduction from AU$12.6 billion (US$8.8 billion) in 2018 and AU$31.9 billion (US$22.2 billion) three years ago.

“The reduction in proposed investment applications, by value, from China…from its peak in 2015-16,” said the Foreign Investment Review Board (FIRB) chairman David Irvine, “can be attributed to a range of factors such as China’s internal domestic policy settings, including increased scrutiny of outbound investment and stricter capital controls.”

Australia foreign investment

Fortunately, the decline in Chinese investment was partly offset by the surge in the number of North American buyers in Australia. Last year, U.S. investment in Australian real estate increased more than three times to AU$19.5 billion (US$13.6 billion), followed by a rise in Canadian investment from AU$2.1 billion (US$1.5 billion) to AU$13.3 billion (US$9.3 billion).

The value of residential real estate investment by foreigners increased more than 18% y-o-y to AU$ 14.8 billion (US$ 10.3 billion), but is still far below the record AU$ 72.4 billion (US$ 50.5 billion) seen in 2016.

Australia established house transfers

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.

Housing affordability remains a major problem

Australia, specially its five major metropolitan areas, remains “severely unaffordable” in 2019, according to the 16th Annual Demographia International Housing Affordability Survey. The Demographia survey uses the Median Multiple to assess housing affordability in 309 metropolitan markets in Australia, Canada, China (Hong Kong), Ireland, Singapore, New Zealand, the United Kingdom, and the United States. Sydney was Australia’s least affordable housing market in 2019 and ranked third worst overall, with a Median Multiple of 11, followed by Melbourne (9.5), Adelaide (6.9), Brisbane (6.3), Perth (6.0). Housing affordability in Sydney has deteriorated by almost 70% over the past 15 years.

“Despite what has been called the largest Sydney price reduction in 35 years, house prices relative to incomes are more than double the rate of the early 1980s,” the Demographia report noted. “In Sydney and Melbourne, median income households need at least three years’ more income to pay for the median priced house than in 2004, when the first Demographia Survey was published.”

Australia mean house prices

The country’s severe housing unaffordability, especially in Sydney, is partly due to urban consolidation policies which severely limit or even prohibit new housing construction on or beyond the urban fringe.

Residential construction activity falling

Dwelling approvals fell by 2.5% to 71,262 units in the first five months of 2020 compared to a year ago, following an annual decline of 17.4% in 2019, according to ABS.

Northern Territory registered the biggest decline in dwelling approvals of 11.8% y-o-y in the first five months of this year, closely followed by Western Australia (-11.7%), and New South Wales (-11.3%). More modest declines were recorded in Australian Capital Territory (-7.5%), Queensland (-6.3%), and Tasmania (-1%). Only Victoria and South Australia saw annual rises in dwelling approvals of 9.9% and 3.4%, respectively.

Victoria, New South Wales and Queensland account for about 80% of all dwelling approvals in the country in Jan-May 2020.

Australia dwelling approvals

The number of residential dwellings in Australia stood at almost 10.5 million in Q1 2020, up by 1.8% from a year earlier. New South Wales has 31% of dwelling stock, followed by Victoria (25.9%), Queensland (20%), and Western Australia (10.6%).

Housing shortage looming

The declining construction activity, coupled with strong population growth and demand for new housing, is expected to create another housing shortage that could push prices up further.

“While the increase in supply has finally met the earlier increase in demand, demand will continue to grow given population growth but supply is going to decline. So there is quite likely to be a shortfall again in the foreseeable future,” said RBA deputy governor Guy Debelle.

Australia building approvals

Even before the pandemic, overall building starts in the country were projected to decline further by at least 7% this year.

Australia has been under-building residential dwellings, 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.

Rental yields falling, residential rent growth slowing

Rental yields in Australia are now falling. In Q1 2020, the nationwide gross rental yields stood at 3.76%, down from 4.1% a year earlier, according to CoreLogic RP. Darwin has the highest rental yield across the country, at 5.9% in Q1 2020, still slightly down from 6% a year ago.

In Sydney, yields reached a record low of 2.96% in Q1 2020, down from 3.5% in the previous year.

In Q1 2020, national rents increased slightly by 1.2% from the previous quarter and by 1.4% from a year earlier, according to CoreLogic RP. Capital city rents rose by 1% y-o-y, while regional rents were up 2.6%.

Sydney remains the most expensive rental market in the country, with a median dwelling rent of AU$ 577 (US$ 403) per week. It was closely followed by Canberra, with a median weekly rent of AU$ 576 (US$ 402).

“It is worth noting that rent data for the March quarter would capture little of the impact from COVID-19, where the regulations of social distancing that have been most disruptive to the economy commenced on March 23rd,” said Eliza Owen, Head of Research Australia at CoreLogic.

Interest rates continue to fall

The RBA kept the official cash rate unchanged at a record low of 0.25% in June 2020, after cutting it by 25 basis points in October 2019 and by another 5o basis points in March 2020.

Australia interest rates

As a result, interest rates for housing loans have been falling:

  • The average standard variable interest rate was 4.52% in June 2020, down from 5.15% a year earlier.
  • The average discounted variable interest rate for housing loans stood at 3.65% in June 2020, down from 4.46% a year ago.
  • The three-year fixed interest rate for housing loans was 2.35%, down from 3.88% a year earlier.

Mortgage loan growth slowing

The Australian mortgage market has grown from around 15% of GDP in the 1970s to 95.4% in 2018, thanks to low interest rates. But last year the size of the mortgage market relative to GDP declined to 91.6%, amidst slowing housing loan growth.

Australia house loans

In 2019, husing loans for owner-occupiers, which represents real demand, stood at AU$1.15 trillion (US$803.3 billion) in 2019, down 5.2% from a year earlier. On the other hand, housing loans for investors rose strongly by 11.9% y-o-y to AU$665.8 billion (US$464.5 billion).

Lending standards eased

In July 2019, Australian Prudential Regulation Authority (APRA) scrapped its 7% interest rate floor for mortgage serviceability assessments and allowed authorized deposit-taking institutions (ADI) to set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5% over the loan’s interest rate.

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary,” said Chairman Wayne Byres. “With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that (banks) actively consider their portfolio mix and risk appetite in setting their own serviceability floors,” Byres added.

This followed the recent removal of the 30% cap on interest-only residential mortgage lending by ADIs, effective January 1, 2019. The supervisory benchmark was put in place in March 2017, in an effort to cool surging property prices.

Earlier in April 2018, the 10% temporary cap on investor credit growth, introduced in December 2014, was also removed.

Slowing economy; record trade surplus

On an annual basis, Australia’s economy grew by 1.4% in Q1 2020, a slowdown from the previous quarter’s 2.2% expansion and the weakest performance since Q3 2009.

The International Monetary Fund (IMF) projects the Australian economy to contract by 4.5% this year, but it’s a big improvement from its April forecast of a 6.7% contraction. The economy is expected to bounce back next year, with a 4% growth.

Australia exchange rate

The Australian dollar (AUD) appreciated rapidly in the past three months, gaining more than 11% to reach an average exchange rate of AUD 1.4496 in June 2020.

The recent strength of the Australian dollar is partly attributed to upbeat trade balance figures. Australia registered a record trade surplus of AU$8.03 billion (US$ 5.6 billion) in May 2020, as imports fell faster than exports, based on figures from the ABS. Total exports declined 4% to AU$ 35.74 billion (US$ 24.93 billion) while imports fell by 6% to AU$ 27.72 billion (US$ 19.34 billion). Previously the dollar had been falling, depreciating by almost 22% against the US dollar in the past two years, from AUD 1.2569 = USD 1 in January 2018, to AUD 1.6108 = USD 1 March 2020.

Australia gdp inflation

Nationwide unemployment jumped to 7.1% in May 2020, up from 6.4% in April and the highest level since October 2001, after the country lost a further 227,700 jobs during the month, according to the ABS. Moreover, the participation rate dropped to its lowest level since January 2001, at 62.9% in May 2020.

Inflation stood at 2.2% in Q1 2020, sharply up from 1.3% in the previous year, according to the RBA. In fact, it was the highest level since Q3 2014.


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