Will it or won’t it? That seems to be the question eluding the Australian property buying market for the last 2 decades.
Australia’s property market has remained on an upward trend since 1986. Analysts have long been saying the increasing gap between real estate prices and income levels has led to unsustainable demand for property. In short, conditions in the market have created a bubble which could burst at any time.
However from 2003 to 2012, price- to- income and rent- to- income ratios appeared to have stabilized and talks of a property bubble quieted down.
But in 2014, prices started to rise higher relative to income. This was confirmed in a report by the International Monetary Fund in the same year which cited Australia as having the third highest price to income ratio among global home prices.
Current Outlook on the Australian Property Buying Market
According to 2016 figures released by the Australian Bureau of Statistics, the growth of Australia’s housing market has slowed down despite modest economic growth.
Flint Property claims that house prices increased by 4.65% across Australia’s 8 key cities toward the end of the second quarter of 2016, it was a sharp drop from the 10.53% gain made in the same period the previous year. It represented the lowest increase on year- to- year growth in the property market since 2013.
Here were the performances of the 8 major cities in Australia:
- Melbourne – +8.2%
- Canberra – +6%
- Hobart – +4.9%
- Brisbane – +4.3%
- Sydney – +3.6%
- Adelaide – +3.5%
- Darwin – -6.5%
- Perth- -4.8%
In terms of pricing, median property price for Australia was estimated at AUS$623,000 which was 3% higher than same period in 2015. New South Wales had the highest median property price at AUS$880,000 while Tasmania had the lowest at AUS$320,000.
While the Reserve Bank of Australia (RBA) is more confident that Australia’s risk of a property bubble bursting has diminished, UBS believes such is not the case with Sydney.
A report by UBS reveals that of the 8 major cities, Sydney belongs in the property bubble risk category. According to the report, property prices in Sydney increased by 45% during the period of 2012 to 2015 but income had remained largely stagnant.
Foreign Investments in the Australian Property Buyers Market
A significant factor in the rise of the prices in the Australian property buyers market is the continued influx of foreign buyers. On average, foreign buyers account for 20% of property investments in Australia every year.
According to the Foreign Investments Review Board (FIRB), applications for investments in Australia rose by 60% in 2015 versus 2014. Total value of foreign investments n the property buyers market was estimated at AUS$60.75 Billion. Of this amount, roughly 20% to 25% were investments from China.
Analysts project that China’s investments in Australian property buying market will hit US$60 Billion from 2015 to 2021.
However, the following tax reforms may put a damper on these projections:
- A 4% stamp duty surcharge and a 0.75% land tax surcharge in New South Wales.
- An increase in stamp duty charges from 3% to 7% for foreign buyers in Victoria.
- 3% stamp duty charges for foreign buyers in Queensland.
In addition, banks have tightened up its lending policies in view of the continued rise in property demand.
2017 and Beyond: Fearless Forecast on the Australian Property Buyers Market
It used to be mere coffee chatter for people to think Sydney’s property prices to encroach the 1 Million Dollar mark. But that is exactly where it is today. Yet, its prices continues to increase.
There are a number of reasons to believe demand and therefore, prices in Australia’s property market will continue to rise:
- Attractive interest rates – RBA further reduced its cash rate from 2% to 1.5%.
- Increasing population – Australia’s population grew by 12.8% from 21.5 Million in 2011 to 24.26 Million in 2016.
- Tight supply on housing – It was estimated in 2011 by the National Housing Supply Council that there is a shortage of housing in Australia in the amount of 284,000 homes.
The decision of the RBA to slice the cash rate to 1.5% in August 2016 will continue to spur Australians to chase the Great Australian dream through borrowings where a 30 year term appears to be the new normal.
BIS Shrapnel believes property prices in Australia will weaken slightly in 2017. This is due to the increasing unaffordability of Australian property market and perhaps an upward revision of interest rates.
It may give first time home buyers and investors an opening to buy homes on a downturn. But one thing is for sure, don’t expect any property bubble to burst in the next few years. Modest economic growth, a growing population, expected greater volume of investments and friendly interest rates may still lead to more upside in the Australian property market.