Australia's housing market continues to weaken in the first half of 2011, following the Reserve Bank of Australia (RBA)'s action in hiking the key interest rate to 4.75% in November 2010, up from 3% in September 2009. RBA has kept the key rate unchanged since then.

The house price index for 8 capital cities dropped 1.87% during the year to end-Q2 2011, according to the Australian Bureau of Statistics (Austats). When adjusted for inflation, house prices actually fell by 5.28%. In contrast, the weighted average median house price rose slightly by 0.9% y-o-y to Q2 2011, according to the Real Estate Institute of Australia (REIA), suggesting that most of the price-falls were at the top end.

Last year, there was an amazing 20% surge of house prices y-o-y to March 2010, triggering the RBA's interest rate rises. Since then, house price rises have moderated. The house price index for 8 capital cities rose 5.8% y-o-y to Q4 2010 (3.1% in real terms), after annual increases of 10.8% and 16% respectively (7.8% and 12.6% in inflation-adjusted terms) the previous two quarters.

In Q2 2011, housing starts fell by 4.7% from the previous quarter. The Northern Territory saw the largest drop (69.4%), followed by NSW (-20.1%), Queensland (-16.3%), and Tasmania (14.3%).

The RBA believes it can repeat its success of 2004, when it cooled the housing market by raising interest rates and issuing warnings against housing speculation, thus preventing a crash similar to the US and Europe.

Inflation fears have receded, with underlying inflation at 2.8% in 2010, which is consistent with the RBA's 2%-to-3% target. The inflation rate is expected at 3% in 2011, according to the IMF.

In the second quarter of 2011, the country proved its resilience by posting a stronger-than-expected seasonally-adjusted GDP growth rate of 1.2%, the fastest pace in four years. The economy is expected to grow by 1.8% in 2011 and by 3.3% in 2012, according to the IMF.

Acquisition of residential real estate by foreign nationals and corporations is subject to Foreign Investment Review Board (FIRB) approval.

Modest house price growth in most capital cities

House price rises continue strong in only 3 cities:

  • Melbourne had house price increases of about 10.8% in the year to December 2010
  • Sydney and Canberra followed with y-o-y price rises of 7.4% and 6.5%.

Other cities have showed little, if any, growth. Adelaide registered a house price increase of 3.5% in the year to December 2010, in Darwin (1.7%), Hobart (1.0%) and Brisbane (0.7%).

Perth alone experienced a drop, with house prices falling by 2.0% during the year.

Australia's housing boom; crash avoided

The strength of Australia's housing market has amazed observers, who had predicted that Australia would suffer one of the worst housing market crashes, because of a perceived house price overvaluation.

Australia has avoided a crash for these reasons:

  • There are housing shortages, due to a rapidly growing population
  • Strong overseas migration from 2004 to 2007
  • Australian household sizes are shrinking
  • Lending standards are stricter than in the US
  • Mortgage interest rates have been at record lows
  • The government has helped first-time homebuyers, introducing a AU$10.4 billion (US$7.24 billion) stimulus package in October 14, 2008 - 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 constructed homes. However, the FHOG reverted back to $7,000 in December 2009, in NSW, and that was reduced in other states.

Housing starts boosts

The Housing Industry Association (HIA) claims there was actually a shortage of 22,000 dwellings in 2009/10 and of 16,800 dwellings in 2010/11.

"Australia continues to run large annual deficits between the underlying demand for dwellings and the completion of dwellings," says HIA's Senior Economist Andrew Harvey. "So in the longer term Australia's housing market is underpinned by the immutable forces of insufficient supply and robust underlying demand."

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 global credit crunch, developers continue to struggle to secure finance.

Nevertheless housing starts rose by a surprising 23.6% in 2010 (2009 saw a 6.8% decline in housing starts), prompted by the fact that interest rates only very slowly increased from the all-time low of 3% prevailing in October 2009. By March 2010, housing approvals were running at an amazing 17,439 per month, but fell back to 13,904 in April, when the RBA's key interest rate was increased to 4.25%.

Worsened housing affordability

Australia has the least affordable housing market among the six developed countries covered by the 2010 7th Annual Demographia International Housing Affordability Survey.

The survey uses the Median Multiple to assess housing affordability in 325 markets in Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom, the United States and Hong Kong.

The Median Multiple follows this formula: Median Multiple = median house prices / median household income.

Australia's Median Multiple is 6.1, compared to the international norm of three times household income. Of the 32 Australian markets surveyed, 27 were rated as "severely unaffordable" (Median Multiple of 5.1 and above), while 5 markets were regarded as "seriously unaffordable" (Median Multiple between 4.1 and 5.0).

Sydney's Median Multiple in 2010 climbed to 9.6, from 8.3 last year. The Sunshine Coast, located in Queensland, is the most severely unaffordable market outside the major markets, with a Median Multiple of 8.4.

Another measure of stress is affordability. In the year to December 2010 housing affordability haddeclined by 10%, according to the Commonwealth Bank of Australia's Home Buyer Affordability Report. Sydney had the largest housing affordability decline among capital cities at 5.5%, while Perth (0.1%) and Brisbane's (0.5%) affordability improved.

Key rate hike paused

Australia's benchmark interest rate, the highest among developed countries, is likely to remain unchanged in the upcoming months, as inflation is expected to stay within RBA's target of 2%-to-3%.

"The RBA seems pretty comfortable with where policy is as they're ahead of the curve, having gained a bit of time from slower fourth-quarter inflation," says Michael Turner, economist at RBC Capital Markets Ltd. However, Turner expects a rate rise in 2011's second quarter, as commodity prices pick up.

Mortgage market slows

The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 80% of GDP in 2008.

  • 69.8% of outstanding housing loans to households are for owner-occupied homes
  • 30.2% outstanding housing loans are for investment homes

The mortgage market is highly concentrated.

Australia's "big four" banks-National Australia Bank, Commonwealth Bank of Australia, Westpac Banking Corporation, and ANZ-had an almost 100% share of the country's new mortgage market in July 2009, according to the Australian Prudential Regulation Authority (APRA).

Rental market remains strong; moderate to poor yields

Rental yields in Australia are moderate to poor. Gross rental yields for houses range from 3.52% in Melbourne, to 5.13% in Hobart, based on December 2010 figures from APM. Gross rentals yields for apartment units are also moderate, ranging from 4.17% in Melbourne to 5.48% in Canberra.

In Sydney, gross rental yields on 120 sq. m. and 170 sq. m. apartments were around 4.01% and 3.87%, respectively, according to Global Property Guide Research in August 2, 2010. Yields on smaller units of 50 sq. m. were higher, at 5.87%.

Average rents in the eight capital cities rose 4.8% in the year to December 2010, following a 2.6% rise the previous year. Nationally, house rentals rose 3% during 2010, while 'unit' rentals rose 3.2% in 2010.

"The capital city markets of Sydney, Adelaide and Darwin recorded flat growth in house rentals in the December quarter, with Melbourne and Perth growing slightly by just over +1%," says Dr Andrew Wilson, APM's Senior Economist. On the other hand, Canberra, Brisbane and Hobart showed strong yields growth.

Darwin rents are the highest, with median weekly asking rents at AU$550 (US$559). Rents are also high in Sydney, with a median of AU$480 (US$488), and Canberra, with a median of AU$460 (US$467). Hobart has the lowest median weekly asking rent, at AU$320 (US$325).

Wilson predicted that rental growth would resume by the middle of 2011, given strong population increases, falling dwelling construction levels, and income rises due to economic growth acceleration in 2011.

Stabilizing economy

The Australian economy has been strengthening, with a GDP growth of 2.7% in 2010, up from 1.7% in 2009 (IMF).

  • Unemployment was 5% in January 2011, according to ABS, 0.2 percentage points down on previous month's 5.2%.
  • The ABS Consumer Price Index increased y-o-y by 2.7% to December 2010.

"These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices," according to RBA Governor Glenn Stevens.

Source: Australia's housing market still cooling