Australia’s housing market weakens

December 08, 2016


Australia annual house pricesAustralia’s housing market is slowing, amidst modest economic growth. House prices rose by 4.65% in Australia’s eight major cities during the year to end-Q2 2016 (3.63% inflation-adjusted), a sharp slowdown from an annual rise of 10.53% a year earlier - and the lowest y-o-y increase since Q1 2013, based on figures from the Australian Bureau of Statistics (ABS). House prices increased 2.27% (1.9% inflation-adjusted) quarter-on-quarter in Q2 2016.

Melbourne saw the biggest increase, with residential property prices rising by 8.2% (7.1% inflation-adjusted) during the year to Q2 2016, followed by Canberra (6%), Hobart(4.9%), Brisbane(4.3%), Sydney (3.6%), and Adelaide (3.5%). On the other hand, residential property prices dropped in Darwin (-6.5%) and Perth (-4.8%) over the same period.

The mean price of residential dwellings in Australia was AU$623,000 (US$470,830) in June 2016, up 3% 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$880,000 (US$665,000) in Q2 2016, about 30% above the national mean house price. In contrast, Tasmania has the cheapest housing in Australia, at a mean price of AU$320,000 (US$241,840) over the same period.

While the Reserve Bank of Australia, the country’s central bank, had recently indicated that the risk of a housing market bubble had “diminished”, some critics still believe that Australia’s housing market remains severely overvalued.

  • The Economist estimated that Australian house prices are overvalued by more than 40% as of last year.
  • According to the 2016 Global Real Estate Bubble Index published by investment bank UBS, Sydney housing market now ranks in the bubble risk category and tops all other cities in the region. Based on the report, Sydney real house prices increased by about 45% from 2012 to 2015 while income and rents had stagnated over the same period.
  • 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%. 

Demand continues to rise. In the first three quarters of 2016, purchases of established dwellings rose by 5.3% to 422,765 units from the same period last year, according to ABS. In fact, the value of established dwelling purchases rose by 8.3% to almost AU$153.66 billion (US$116.13 billion) over the same period. Likewise, purchases of new dwellings increased 14.5% y-o-y to 23,267 units in the first three quarters of 2016 while the value of new dwelling purchases soared by 18% to almost AU$8.72 billion (US$6.59 billion) over the same period.

Australia’s economy grew by a modest 2.4% in 2015, after GDP growth of 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 October 2016, after cutting it by a cumulative 50 basis points in May and August 2016, 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.

Higher taxes, tighter lending standards 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 accounted for over 20% of property purchases every year.

In 2015, the number of foreign investment applications in the country’s residential real estate market surged 60% to 36,841 from a year earlier, according to the Foreign Investment Review Board (FIRB). Likewise, the value of foreign investments for residential properties increased to a record AU$60.75 billion (US$45.91 billion), up 75% from the previous year. Chinese investors topped the list, accounting for about two-thirds of applications.

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 introduced a 4% stamp duty surcharge and a 0.75% land tax surcharge on foreign buyers
  • Victoria raised its stamp duty for foreign buyers from 3% to 7%
  • Queensland has recently introduced a 3% stamp duty on foreign buyers

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$7.24 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$6,419) to AU$14,000 (US$12,838) for existing dwellings, and to AU$21,000 (AU$19,257) 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 2015. Among the nine developed nations covered by the 12th Annual Demographia International Housing Affordability Survey, Australia was ranked third most unaffordable major housing market in 2015.

The survey uses the Median Multiple to assess housing affordability in 367 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.

Aside from Sydney, Australia’s least affordable housing markets in 2015 included Melbourne with a Median Multiple of 9.7, followed by Perth (6.6), Adelaide (6.4), and Brisbane (6.1).

Of the 51 Australian markets surveyed in 2015, 33 were rated “severely unaffordable” (Median Multiple of 5.1 and above), 12 were “seriously unaffordable” (Median Multiple between 4.1 and 5.0), 4 was rated moderately affordable (3.1-4.0), and 2 markets evaluated as affordable (3.0 & under).

Among the 367 major markets, Sydney was ranked second most unaffordable. In fact, housing affordability in Sydney deteriorated by about 24% in 2015 from the previous year, the largest change ever recorded in the history of the Demographia Survey. Outside the major markets, the Tweed Heads (Queensland), is the most severely unaffordable market, with a Median Multiple of 9.3.

This was supported by the UBS Global Real Estate Bubble Index, ranking Sydney as the third 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.

Rental yields down, rents falling slightly

Rental yields in Australia have hit historic lows, amidst strong house price increases. In Australia’s eight major cities, rental yields stood at 3.3% in August 2016, down from 3.5% a year earlier, according to CoreLogic RP.

In August 2016:

  • In Sydney, rental yields fell to 3%, from 3.3% a year earlier
  • Melbourne has the lowest rental yields of 2.9%, falling from 3.1% a year earlier
  • In Brisbane, yields fell to 4.2%, from 4.5% a year earlier
  • In Adelaide, yields dropped 4%, from 4.2% a year earlier
  • In Perth, yields fell to 3.8%, from 4% in the previous year
  • In Hobart, yields were unchanged at 5.2%
  • In Darwin, yields fell to 5%, from 5.5% a year earlier
  • In Canberra, yields fell to 4%, from 4.2% a year earlier

“While we’ve seen values remain relatively strong, in contrast, rental yields have been in the doldrums due to the fact that residential property values are rising at a faster rate than weekly rents. The average gross rental yield across the combined capital city dwelling market has held firm at 3.3% over the month, which is at an historic low," said Tim Lawless of CoreLogic RP Data.

In August 2016, the average weekly rent in Australia’s eight major cities fell slightly by 0.5% to AU$481 (US$364) from a year earlier, according to CoreLogic. Darwin suffered the largest annual decline in rental rates of 14.1% in August 2016, which was followed by Perth (-9.4%). Minimal annual rent declines were also seen in Brisbane (-1.1%) and Adelaide (-0.3%). On the other hand, Hobart saw the biggest annual rental growth in August 2016, at 6.8%, followed by Canberra (2.6%) and Melbourne (2.4%).

Sydney rents were unchanged in August 2016 from a year earlier, at an average of AU$593 (US$448) per week.

“Over recent years landlords haven’t had much incentive to push yields higher due to the low cost of debt and strong capital gains. However, with capital gains starting to slow, investors mayplace a renewed focus on maximising their rental returns which could prove to be difficult given thealready soft rental conditions and substantial ramp-up in housing supply,” said CoreLogic.

“It is anticipated that over the coming months most cities will continue to see rental ratesshift further away from their previous peaks as conditions continue to weaken.”

Interest rates at record lows

Australia interest rates

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

As a result, interest rates for housing loans were also at their historic lows:

  • The average standard variable interest rate for housing loans was 5.25% in October 2016, unchanged from the previous month but down from 5.45% in a year earlier.
  • The average discounted variable interest rate for housing loans stood at 4.5% in October 2015, unchanged from the previous month but down from 4.65% in a year ago.
  • The three-year fixed interest rate for housing loans stood at 4% over the same period, unchanged from the previous month but down from 4.5% in a year ago.

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 97% last year, thanks to low interest rates.

In the second quarter of 2016, the total residential housing loans outstanding in the country rose by around 6.5% y-o-y to more than AU$1.63 trillion (US$1.23 trillion), based on figures from the Reserve Bank of Australia.

Australia mortgage loans

Housing loans for owner-occupiers increased while loans for investors declined slightly. During the third quarter of 2016, housing loans for owner-occupiers stood at AU$963.5 billion (US$728.2 billion), up by 12.6% from the same period last year. In contrast, housing loans for investors dropped slightly by 0.4% to AU$530.4 billion (US$400.85 billion) over the same period.

Residential construction remains weak

Residential construction activity is falling. In September 2016, construction of dwellings in the country also fell slightly both in number and in value, by 5.4% and 0.1%, respectively.

In Q3 2016, the total number of dwelling starts in Australia fell by 3.9% to 52,340 units from a year earlier, according to the Housing Industry Association (HIA). Western Australia registered the biggest drop in housing starts of 29.7% y-o-y in Q3 2016, followed by Tasmania (-19.1%), the Australian Capital Territory (-15.2%), Victoria (-4.1%), South Australia (-2.7%), and New South Wales (-0.2%). In contrast, the North Territory’s construction sector saw the biggest annual increase in dwelling starts of 11.1% in Q3 3016, followed by Queensland (8.2%).

Australia housing starts

Housing starts in Australia is expected to increased slightly by 1% to around 227,600 units in 2016 from the previous year, according to the HIA.

The 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.

The value of dwelling stock owned by households in the country rose by 4.9% y-o-y to AU$5.74 trillion (US$4.34 trillion) in June 2016, according to the ABS. New South Wales accounted for the biggest share of the total dwelling stock at about 40%, followed by Victoria (27%), Queensland (15.3%), and Western Australia (9.4%).

Over the same period, the number of residential dwellings in Australia stood at around 9.7 million, up by 1.8% from a year earlier.

Economic growth continues to improve

Australia exchange rate

In the second quarter of 2016, Australia’s economic growth accelerated to 3.3% from a year earlier, up from an annual growth rate of 1.9% in Q2 2015 and the fastest pace seen in four years, according to the ABS, fuelled by strong domestic demand.

Economic growth was 2.4% last year, down from average annual growth of 3% from 2000 to 2014, according to the International Monetary Fund(IMF). The economy is expected to expand by 2.9% this year, and by another 2.7% in 2017.

The Australian dollar (AUD) rose about 7.2% against the US dollar during the year to October 2016from AUD1 = USD0.7099, to AUD1 = USD0.7613, 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 4.6% of GDP in 2015, from 3% in 2014, 3.4% in 2013, and 4.3% in 2012.  But during the year to Q2 2016, the currency's decline pushed the country’s current account deficit down by 26.6%,to about AU$15,535 million (US$11,741 million), , according to the ABS.

In September 2016, unemployment dropped to 5.6%, from 6.1% a year earlier, according to the ABS. There were about 705,100 unemployed persons in Australia in September 2016, down by 8.5% from a year earlier.

Consumer prices rose by 1.3% in Q3 2016 from a year earlier, up from 1% in the previous quarter, but down from 1.5% from a year ago. Australia’s nationwide inflation rate averaged 3.1% during 2008-2011 before declining to 2% during 2012-2015.

Old Entries


Be the first to comment on this article!

Login or Register to submit a comment!
In order to promote open and spam-free conversations, Global Property Guide moderates commetns on all articles. You can expect that your comment will be published within 24 hours.


Get GPG fortnightly newsletters delivered to your inbox

A quick summary of global real estate trends.