Australian Bureau of Statistics’ (ABS) revelation of house price fall for the first three months of year 2016 raised a lot of concern with regard to state of the market. Primarily, a fall in prices for attached dwellings (flats, units and apartments plus semi-detached, row and terrace houses) showcased the first ever drop since the June quarter 2012. Price drop was noted for Adelaide, Perth and Canberra while the drop of about 0.6% and 1.3% in Sydney and Melbourne majorly contributed to the above price fall. On the other hand, prices jumped in Brisbane, Hobart and Darwin. Particularly, Hobart prices surged 2.3% for the quarter. The ABS data indicated residential prices rise in Melbourne (+0.8%), Adelaide (+0.5%) and Brisbane (+0.3%) while a drop was noted in Darwin (-2%), Perth (-1.7%), Sydney (-0.7%), and Canberra (-0.4%), as per March quarter. The total value of Australia’s 9.7 million residential dwellings was said to jump by $15.4 billion to $5.9 trillion with the mean price of residences as $613,900. Annually, residential property prices jumped in Melbourne (+9.8%), Sydney (+9.7%), Canberra (+4.6%), Hobart (+4.2%), Brisbane (+4.1%) and Adelaide (+3.1%) and fell in Darwin (-4.9%) and Perth (-4.5%).
Residential Property Prices (Source: Australian Bureau of Statistics)
In central Melbourne, apartments were being resold at prices as much as 30% less than the original purchase price. All the units did not show a reduction in value, but a sample of transactions indicate that many apartments have been unable to hold their value between the time of original purchase and the time of resale. The boom in new apartments in Melbourne led many people to believe more than one year ago that prices were likely to go down as a result of oversupply. The increase in supply would restrict the growth of rental income, but continuing low interest rates would make it unlikely for prices to correct substantially because buyers could still afford the disparity between rental income and mortgage payments. The present decline is definitely not the norms though low interest rates continue to be a mitigating factor and people are not necessarily forced to sell in the present market.
Dwelling units and Private Sector Houses Approved (Source: Australian Bureau of Statistics)
The country is said to be experiencing what is probably the greatest real estate bubble that it has ever known, driven by the easy availability of credit. Lindsay David of LF Economics and the author of the book Australia Boom to Bust believes that the economy is going to be devastated when the bubble does burst and possibly bring down the big banks. Since 1996, Australia has seen a national boom in housing prices, with prices adjusted for quality, rising by 121% up to 2014, the largest and most sustained growth since records were first kept. Between 1996 and 2014, housing prices and mortgage debt impacted economic fundamentals like rents and income, GDP and inflation. It was said that inflation has been overtaken by household debt by a factor of 10 times and that new homebuyers in Sydney will spend around 6 1/2 years of savings (assuming a saving of 30% of income) to put down a 20% deposit on a median priced house. Among English-speaking cities, only inhabitants of Vancouver spend more than Sydney and homebuyers and Melbourne, Adelaide, Perth and Brisbane will put down between 3.97 years and 5.78 years, respectively. Biggest victims of the household debt burden have been outlined to be young homebuyers and people in middle income groups who are either unable to afford their purchases or forced to take on unbearable amounts of leverage. The more debt that comes into the market from the banking system, the greater the number of homebuyers created and the larger the number of people competing with each other at house auctions. There are further predictions that things will start to fall apart in 2017, and that the collapse will start in the West.
On the other hand, Australia is estimated to build 231,129 new apartments over next two years as per CoreLogic’s analysis, which is roughly 10,000 additional dwellings added to Australia’s existing housing stock each month. Based on CoreLogic home value index for June, 2016, the capital city house prices for the month jumped up by 0.5% with the quarterly increase at 3.8% and year-over-year rise of 8.3%. Australia’s largest city, Sydney, contributed to said figures.
This also means that oversupply following otherwise strong price increases may pose a threat and may eventually lead to a price crash. However, this is subject to many other economic factors. Market estimates that there will be a further fall in housing prices given the volatile conditions and other headwinds for Australian economy.
Property Indices Map (Source: ASX)
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