Seven things to know about Australian property sector

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Australian Economy, Chinese Economy, Uncategorized

 

As the Australia economy dependence is moving away from mining towards service, housing construction boom began, leading to 30% rise in home prices since mid-2012 making Australia one of the world’s least affordable property markets. Accordingly, the rise in home prices slightly softened the household debt to asset ratio to 22% in 2015 from 24% in 2011. Meanwhile, HSBC forecasts national housing price growth to run at low single digit rates in 2016 and into 2017 following growth of about 10% in 2015 on the back of oversupply. Recently, we have seen that Sydney and Melbourne have been doing well in property market while property markets outside of Sydney, Melbourne and maybe Hobart seem to be patchy.

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Now, let’s have a look on the key trends about the Australian property sector.

Property prices are softening: Property prices are falling in many capital cities as per the latest official data for the March quarter of 2016 from the Australian Bureau of Statistics. The average residential dwelling prices dropped 0.2% continued from the December quarter. Although fewer people feel it is good time to buy dwelling, the debate on this is continuing. The dwelling index was down 1.8% in July following a drop of 2.7% in June, although remained 7.4% higher than it was in July 2015.

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March quarter trends (Source: Australian.gov)

Oversupply to support fall in prices: Australian property market is expected to be oversupplied in 2017 after years of record building. Research house BIS Shrapnel forecasts an extra 24,039 homes would come online, which is more than the demand and this will result into oversupply affecting the property prices.

Turbulence in confidence: The sentiments among the property professionals is turbulent in most of the states. With the housing market being frequently driven by sentiments, it has been observed that feeling of lackluster property price growth is supporting softness in confidence among players.

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Confidence Index (Source: ANZ property council)

Interest rate important criteria: Most homebuyers use mortgages to finance house purchases, and the size of the monthly payment is therefore important in terms of affordability. Home loans are usually very long term loans with terms ranging from 15 to 30 years. The level of interest rates thus makes an enormous difference. Interest rates are very important to the valuation of real estate. At present, the administered central bank interest rate in Australia is at a new low. This is actually high compared to similar rates in other developed countries; it may well decline even further.

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High household debt to income ratio: Australia’s household debt to income ratio jumped from 167% in 2011 to 186% in 2015 (As per HSBC report). Meanwhile, Australian banks have heavily invested in inflated real estate markets in the world. The big four banks had issued more than 80% of the countries residential property mortgage. The fall in housing prices would impact these four big bank’s market performance (Australia and New Zealand Bank, Commonwealth Bank of Australia, National Australia Bank and Westpac). The surge against a backdrop of an already high level of household indebtedness would increase the sensitivity of Australian banks to a housing downturn. However, Australian financial system has institutional feature to help to reduce any risk of crisis. Accordingly, all mortgages are full recourse indicating that the lender can pursue a debtor’s other assets to cover a loss on loan, rather than having to write off losses on underwater loans.

Rents are easing: In most of the capital cities, rents are on their backward move and in last three months to June rent declined in most of the cities. Given many properties to come in online in most capital cities, decline in rent is expected to continue.

New identity rule to crackdown foreign investment:  Foreign buyers have to provide citizenship and visa details as well as Foreign Investment Review Board clearance via stamp duty process wherein the stamp duty is $5000 for any property sold for less than $1 million and $10,000 for properties over $ 1 million. Foreign buyers would take a hit due to 4% stamp duty surcharge from June, and 0.75% land tax starting in 2017. This would likely to discourage property buying by foreign buyers.

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