Australia's house prices surge
Lalaine C. Delmendo | October 26, 2020
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.
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.
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 4.5%, 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 Camberwell, which apparently can earn gross rental yields of 8.7%.
Surprising, but worth investigating.
Round trip transaction costs can be high for foreigners buying residential property in Russia. See our Australia transaction cost analysis and our Australia property transaction costs compared to other countries.
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.
Slowing economy; record trade surplusOn 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.
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.
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.