Housing market slowly recovering in Australia

Australia's housing market is showing signs of recovery, backed by lower interest rates and improving affordability. The house price index for 8 capital cities rose by 2.6% (0.1% in real terms) during the year to Q1 2013, according to the Australian Bureau of Statistics (ABS). It was the second consecutive quarter with a nominal y-o-y increase, after a series of price drops since Q2 2011.

Darwin had the highest price increase during the year to end-Q1 2013 (8%), followed by Perth (6.1%) and Sydney (3.6%). Smaller nominal price increases were also recorded in Canberra (1.5%), Brisbane (1.4%), Melbourne (1.1%), and Adelaide (0.9%). Out of Australia's eight capital cities, only Hobart experienced a price decline of 1.9%.

As compared to the previous quarter, the house price index for 8 capital cities rose by only 0.1% (-0.3% in real terms) in Q1 2013.

The same conclusion can be drawn by looking at the national figures released by the Real Estate Institute of Australia (REIA). The overall median house price in the 8 capital cities was up by 4% y-o-y to Q1 2013, but it was down by 0.2% from the previous quarter.

Sydney has the most expensive housing in Australia, with the median house price at AU$ 673,681 (US$ 620,353), about 26.2% above the weighted average.

The supply side of the housing market remained flat during the first quarter of 2013, as the Reserve Bank of Australia (RBA) decided to hold interest rate at 2.75%, in contrast to an expected rate cut. Housing approvals in April 2013 were up by only 3% on the previous year, according to ABS. Total dwelling units commenced during the year to Q1 2013 was up by 13%. However, q-o-q estimates show that construction activity only increased by 0.5%.

Australia's economy grew by 2.5% y-o-y to Q1 2013, according to the ABS. The economy is expected to slow in 2013, as a spill-over effect of China's slowdown. Meanwhile, as inflation remains consistent with the central bank's target, RBA decided to keep the rates at 2.75% as it was seen as an "appropriate policy for the time being".

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

Australia's housing boom; crash avoided

The strength of Australia's housing market through the great recession 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 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 reduced it in other states.

Housing remains "severely unaffordable"

Among the seven developed nations covered by the 2013 9th Annual Demographia International Housing Affordability Survey, Australia ranks third as most unaffordable major market.

The survey uses the Median Multiple to assess housing affordability in 337 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.

In 2012, Australia's major market had a Median Multiple of 6.5, compared to the international norm of three times household income. However, this was actually an improvement from 6.7 Median Multiple recorded in 2011. Overall, out of the 39 Australian markets surveyed, 30 of which were rated "severely unaffordable" (Median Multiple of 5.1 and above), while 9 markets were tagged as "seriously unaffordable" (Median Multiple between 4.1 and 5.0).

Sydney continued to be one of the most unaffordable major markets next to Hong Kong and Vancouver, and is the least affordable market in Australia, with a Median Multiple of 8.3. Outside the major markets, the Port Macquarie, located in New South Wales, is the most severely unaffordable market, with a Median Multiple of 8.6.

Yet based on Commonwealth Bank of Australia's recent Home Buyer Affordability Report in March 2013, housing affordability has recently improved, rising by 1.2% q-o-q to March 2013.

"Overall, the trend across the capital cities is one of continued improvement in affordability, with the capital city index increasing by 2.0 per cent in the March 2013 quarter. However the cities of Adelaide, Perth and Hobart each saw declines in affordability," according to HIA Senior Economist Shane Garrett.

The highest reductions in housing affordability occurred in Adelaide (-4.1%), followed by Hobart (-3.8%) and Perth (-2.6%). Meanwhile, affordability improved in Brisbane (6.2%), Melbourne (4.7%), Canberra (2.6%), and Sydney (1.2%).

Moderate yields, but rent hikes continue

Rental yields in Australia are moderate. Gross rental yields for houses range from 4.36% in Melbourne, to 5.42% in Hobart, according to the March 2013 figures of Australian Property Monitors (APM). Gross rental yields for apartment units range from 4.83% in Melbourne to 6.03% in Darwin. Read more >>>

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