Australia’s housing market cooling sharply

Lalaine C. Delmendo | December 10, 2018

Australia annual house prices After six years of strong house price rises, Australia’s housing market is now slowing sharply, mainly due to the introduction of market-cooling measures, including stricter lending restrictions and the imposition of higher taxes on foreign investment in the housing market.

House prices in the country’s eight major cities dropped slightly by 0.27% during the year to end-Q2 2018 (-2.3% inflation-adjusted), in sharp contrast with the y-o-y rise of 11.1% a year earlier, based on figures from the Australian Bureau of Statistics (ABS). It was the first quarter of y-o-y house price declines since Q3 2012.

Quarter-on-quarter, house prices fell by 0.6% (-0.95% inflation-adjusted) in Q2 2018.

However, the national figures conceal regional house price variations. Darwin saw the biggest decline, with the established house price index falling by 4.4% (-6.3% inflation-adjusted) during the year to Q2 2018, followed by Sydney (-4.1%) and Perth (-0.4%).

On the other hand, Hobart’s local housing market remains robust, with house prices surging by 15.5% (13.2% inflation-adjusted) y-o-y in Q2 2018. Modest house price rises were also recorded in Canberra (3.8%), Melbourne (2.6%), Adelaide (2.4%), and Brisbane (2.1%) over the same period.

The mean price of residential dwellings in Australia was AU$686,200 (US$494,493) by end-Q2 2018, down slightly by 0.3% 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$889,200 (US$640,779) in Q2 2018, about 30% above the national mean house price. In contrast, Tasmania has the cheapest housing in Australia, at a mean price of AU$403,400 (US$290,700) over the same period.

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.

The history of the boom

House prices in Australia surged 52.3% (35.6% inflation-adjusted) from 2011 to 2017. As such, some believe that Australia´s housing market is severely overvalued.

  • The Economist estimated that house prices in Sydney are overvalued by as much as 50%.
  • Sydney and Melbourne housing markets are currently overvalued by at least 45%, with house prices in these cities expected to fall by around 4% in 2018, according to SQM Research.
  • However in its 2018 Global Real Estate Bubble Index, UBS downgraded Sydney´s housing market from “bubble risk” to “highly overvalued”. The Australian city’s global bubble-risk ranking fell from 5th in 2017, to 11th this year.
  • Recently the International Monetary Fund (IMF) has predicted a “soft landing” for Australian house prices, even though it estimates that the housing market remains overvalued by about 5% to 15%.

In an effort to cool surging property prices and address building risks caused by high household debt, the Australian Prudential Regulation Authority (APRA) recently introduced new limits on interest-only lending, at 30% of new mortgages.  However, measures to slow foreign property demand have probably had the biggest impact.

Foreign property demand falling sharply

Australia foreign investment

The surge in house prices in Australia in recent years can be partly attributed to the increasing number of foreign homebuyers, accounting for over 20% of property purchases every year.

However, foreign property demand is now falling sharply, hit by tighter regulations both in Australia and in China, the largest source of foreign demand.

In 2017, foreign investment applications in Australian residential real estate market plummeted by two-thirds to just 13,198, compared to 40,149 a year earlier, according to the Foreign Investment Review Board (FIRB). Likewise, the value of residential real estate investment by foreigners dropped more than 65% y-o-y to AU$25.2 billion (US$18.16 billion).

Chinese investment in Australian property fell by 26.8% in 2017, according to, a leading Chinese global property investment portal.

“The results continue to highlight a decline in foreign buying activity resulting from policy changes in China on foreign investment outflows and tighter restrictions on foreign property buyers in Australia,” says National Australia Bank (NAB).

Victoria was the most popular among foreign investors, accounting for about 41% of all residential purchases by foreigners last year, followed by New South Wales, with 32% share, according to the FIRB.

In recent years:

  • New South Wales has recently doubled its stamp duty charges for foreign buyers from 4% to 8% and the annual land tax surcharge on foreign homeowners was also raised from 0.75% to 2%
  • Victoria raised its stamp duty for foreign buyers from 3% to 7%
  • Queensland has recently introduced a 3% stamp duty on foreign buyers
  • In May 2017, the federal government also introduced the so-called "ghost tax" to foreign investors - a AU$5,000 (US$3,700) annual charge on owners who leave their investment properties vacant or unavailable for rent for six months or more.

The effect of these measures was exacerbated by the introduction of capital controls in China in early 2017, effectively limiting the ability of Chinese citizens to get money out of the country, especially for property purchases abroad.

As a result, both the demand and supply of homes are now falling.

During the first eight months of 2018, purchases of new dwellings fell by 3.5% y-o-y to 21,901 units, according to ABS, and purchases of established dwellings fell by 4.1% y-o-y to 348,127 units.

Residential construction is also declining. During the first eight months of 2018, construction of dwellings in the country fell both in number and in value, by 3.8% and 0.5%, respectively, according to the ABS.

Yet economic growth is strong

In the second quarter of 2018, Australia’s economy expanded by 3.4% y-o-y, the fastest annual growth rate since Q3 2012, thanks to strong consumer spending.

The economy is expected to grow by 3.25% this year and in 2019, up from last year’s growth of 2.2% and the average 2000-2016 annual growth rate of 3%, according to the RBA. The central bank kept the official cash rate at a record low of 1.5% in September 2017, after cutting it 50 basis points in 2016, to bolster the economy.

Housing affordability remains a major problem

Australia price index

Australia, specially its five major metropolitan areas, remains "severely unaffordable" in 2017. Among the nine developed nations covered by the 14th Annual Demographia International Housing Affordability Survey, Australia was ranked third most unaffordable major housing market in 2017.

The survey uses the Median Multiple to assess housing affordability in 293 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.

Sydney was Australia´s least affordable housing market in 2017, with a Median Multiple of 12.9, followed by Melbourne (9.9), Adelaide (6.6), Brisbane (6.2), Perth (5.9).

In fact, housing affordability in Sydney has deteriorated by almost 70% over the past 13 years. Outside the major markets, the Sunshine Coast, Queensland (9.0) and Gold Coast, Queensland-New South Wales (8.4) are least affordable.

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.

Rental yields and residential rents are both rising

Rental yields in Australia continue to rise. In September 2018, the nationwide gross rental yields stood at 3.75%, up from 3.6% in September 2017 and from 3.3% two years earlier, according to CoreLogic RP.

In Q3 2018:

  • In Sydney, rental yields stood at 3.2%, up from 3.1% a year earlier
  • Melbourne has the lowest rental yields of 3.1%, up from 2.9% a year ago
  • In Brisbane, yields stood at 4.4%, unchanged from a year earlier
  • In Adelaide, yields was also unchanged at 4.2%
  • In Perth, yields rose to 4%, from 3.9% in the previous year
  • In Hobart, yields fell slightly to 4.9%, from 5% a year earlier
  • In Darwin, yields was 5.6%, down slightly from 5.7% a year earlier
  • In Canberra, yields rose to 4.5%, from 4.4% a year earlier

Residential rents are rising modestly. During the year to Q3 2018, the average dwelling rent in Australia increased 1.3%, according to CoreLogic. Hobart registered the largest annual rise in rental rates of 8.5% in Q3 2018, which was followed by Canberra (5.4%), Melbourne (2.6%), Adelaide (2%), Brisbane (1.5%) and Perth (1%). In contrast, residential rents fell Darwin (-3.5%) and Sydney (-1.3%) over the same period.

Demand is falling

Australia dwelling purchases

The number of purchases for both newly-built and established dwellings is now falling.

In the primary market:

  • The total number of new dwelling purchases fell by 3.5% to 21,901 units during the first eight months of 2018 from the same period last year, according to the ABS.
  • The value of new dwelling purchases increased 5.2% to about AU$9.11 billion (US$6.56 billion) over the same period.

In the secondary market:

  • The total number of established dwelling purchases fell by 4.1% to 348,127 units in January to August 2018 from the same period last year.
  • The value of established dwelling purchases rose by 2.3% to AU$139.12 billion (US$100.25 billion) over the same period.

Interest rates remain low

Australia interest rates

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 bolster the economy.

As a result, interest rates for housing loans remain low:

  • The average standard variable interest rate for housing loans was 5.3% in September 2018, unchanged from the previous month but slightly up from 5.2% in a year earlier.
  • The average discounted variable interest rate for housing loans stood at 4.55% in September 2018, slightly up from 4.5% in the previous month and 4.45% from a year ago.
  • The three-year fixed interest rate for housing loans stood at 4.1% over the same period, unchanged from both the previous month and a year earlier.

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 97.6% in 2017, thanks to low interest rates.

Australia house loans

In the second quarter of 2018, the total residential housing loans outstanding in the country rose by around 5.1% y-o-y to almost AU$1.8 trillion (US$1.3 trillion), based on figures from the Reserve Bank of Australia.

Housing loans for both owner-occupiers and investors continue to rise. In August 2018, housing loans for owner-occupiers stood at AU$1.09 trillion (US$786.69 billion), up by 6.8% from the same period last year. Likewise, housing loans for investors rose slightly by 1% y-o-y to AU$557.47 billion (US$401.73 billion) over the same period.

Tighter lending standards introduced

In March 2017, APRA limited interest-only lending to 30% of new mortgages, in an effort to cool the surging property prices and address building risks caused by high household debt.

Other measures:

  • the loan-to-value (LTV) ratio is generally limited to 80%, and instances of interest-only lending at an LTV above 90% must be strictly scrutinized;
  • lending growth in higher risk segments of the bank portfolio (e.g. high loan-to-income loans, high LTV loans, and loans for very long terms) are restricted, and;
  • a 10% annual cap on investor credit was introduced in December 2014.

In April 2018, the 10% temporary cap on investor credit growth was finally removed. However, APRA indicates that it will be replaced with a series of more permanent measures to continuously improve the banking system’s lending standards. More specifically, APRA plans to require banks to develop internal limits on new lending to borrowers with very high debt-to-income ratios, and set maximum debt-to-income levels for individual borrowers.

Residential construction activity is slowing sharply

Australia dwelling approvals

Residential construction is now slowing sharply. During the first eight months of 2018, construction of dwellings in the country fell both in number and in value, by 3.8% and 0.5%, respectively, according to the ABS.

Dwelling approvals increased by a meagre 0.25% to 164,628 units in the first three quarters of 2018 compared to a year ago.

Australia dwellings stock

The Australian Capital Territory registered the biggest rise in dwelling approvals of 47.6% y-o-y in the first three quarters of 2018, followed by Tasmania (15.3%), Victoria (9.9%), and South Australia (1.9%). In contrast, the Northern Territory´s construction sector saw the biggest annual decline in dwelling approvals of 20.6% over the same period, followed by Western Australia (-13.8%), New South Wales (-8%), and Queensland (-0.3%).

New South Wales accounted for the biggest share of total dwelling stock at almost 40% in Q2 2018, followed by Victoria (28.3%), Queensland (14.9%), and Western Australia (8.4%).  The number of residential dwellings in Australia stood at around 10.09 million, up by 1.8% from a year earlier.

Residential construction to fall further

Australia building approvals

From a peak of 233,890 units in 2016, housing starts in Australia fell by 5.7% to 220,660 units in 2017, according to the Housing Industry Association (HIA). Housing starts are projected to decline further to 215,040 units in 2018, to around 199,00 units in 2019 and to 180,400 units in 2020.

“HIA is forecasting that building activity will decline modestly – from record highs - over a number of years, consistent with typical cyclical trends in the industry.”

“Government interventions into the market recently include: state governments imposing punitive Stamp Duty charges on foreign buyers, Federal charges for foreign purchasers, a new set of visa rules that could slow overseas migration, restricting lending to domestic investors and new regulations limiting interest only lending,” HIA added.

The anticipated continued decline in housing construction is expected to exacerbate the shortage of affordable housing, driving those at the bottom of the market to become renters instead of buying.

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 economy is strengthening

Australia exchange rate

In the second quarter of 2018, Australia’s economy expanded by 3.4% y-o-y, the fastest annual growth rate since Q3 2012, thanks to strong consumer spending.

Economic growth was 2.2% last year, down from average annual growth of 3% from 2000 to 2016, according to the International Monetary Fund (IMF). The economy is expected to grow by 3.25% this year and in 2019, according to the RBA.

The Australian dollar (AUD) depreciated by about 7.7% against the US dollar in the past year, from AUD 1 = USD 0.7673 in October 2017, to AUD 1 = USD 0.7085, according to the RBA.  The AUD had gained 11.8% against the USD from September 2015 to September 2017.

Australia gdp inflation

The country’s trade surplus surged to over AUD 3 billion (USD2.2 billion) in September 2018 – the third-largest on record, according to the ABS. This was mainly due to the rising prices of iron ore and LNG exports, along with a drop in imports of machinery, industrial equipment, and civil aircraft.

Exports rose by 1% to AUD37.5 billion (USD27 billion), the highest level ever recorded, while imports fell by 1% to AUD34.5 billion (USD24.9 billion).

Unemployment fell to 5% in September 2018, from 5.3% in the previous month and 5.5% a year earlier, according to the ABS. There were about 665,800 unemployed persons in Australia in September 2018, down by 6.6% from a year earlier.

Inflation stood at 1.9% in Q3 2018, up slightly from 1.8% a year earlier.


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