As per the recent property views by AMP Capital’s chief economist Shane Oliver, apartment prices are being said to drop between 15% to 20% in Sydney and Melbourne over the next two years. The rise in multi-dwelling building activities in Brisbane, Sydney, Melbourne and Perth has made apartments more vulnerable than houses as an investment. Regions such as Melbourne CBD have seen highly concentrated construction activity which indicates more vulnerability to great price falls at the back of risk of oversupply. Oliver further had highlighted that the surplus supply and not investors defaulting will drive the slump in the Australian housing market. On the other hand, mixed views came in from RBA Governor. Even, recent comments from Colonial First State highlighted that the risk of a collapse in the Australian housing market will be offset by a third wave of growth from the health, education, infrastructure and tourism sectors.
Looking at the statistics as per the Australian Prudential Regulatory Authority release, the mortgage debt over property issued as on December 2015 is ~ $1.4 trillion as against $638 billion in 2008, indicating that the average size of the mortgage loan has grown as property market is into overdrive. As the economy is moving from mining towards service, housing construction boom began, leading to a 30% rise in home prices since mid-2012 making Australia one of the world’s least affordable property markets. The rise in home prices slightly softened the household debt to asset ratio to 22% in 2015 from 24% in 2011. 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 over-supply. The key things to look at include:
Fall in new home sales in July: New home sales slummed 9.7% in July following a jump of 8.2% in June as per the data released by Housing Industry Association. Housing sales declined 12.8% in South Australia while a drop of 8.7% was seen in Queensland. It fell by 8.2% in Western Australia, 6.2% in New South Wales and by 6% in Victoria. This indicates that if the fall would continue, then the housing bubble is headed for a dramatic burst. Economists are expecting a sharp fall in 2017 and 2018.
Private new dwelling sales (Source: ABS)
Property prices are softening: Property prices are falling in many capital cities as per the official data for the March quarter from the Australian Bureau of Statistics (ABS). The average residential dwelling prices dropped 0.2% continued from the December quarter.
Falling residential property prices (Source: ABS)
Oversupply to support fall in prices: Australian market is expected to be oversupplied in 2017 after years of record building. Research house BIS Shrapnel forecasts an extra number of 24,039 homes which would come online, and which is more than the demand and would result into an oversupply affecting property prices.
Dwellings (Source: ABS.BIS Shrapnel)
Fall in the confidence: A decline in sentiments among the property professionals is evident in most states (Source: ANZ property council). As housing market is frequently sentiment driven, it has been observed that that the feeling of lackluster property price growth is supporting low confidence among players.
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). Australian banks are 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 surge against a backdrop of an already high level of household indebtedness would increase the sensitivity of Australian banks to a housing downturn.
On a correlation basis, the economic factors that can hit the property market going forward include,
Unemployment triggering forced home sales: Economy is moving from mining to service and construction industry. In this transition, there are chances of rise in unemployment rate which would force home sales triggering fall in housing prices.
Rise in interest rate: 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 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. However, the organization for economic cooperation and development warns a crash rather than comfortable end to the housing boom and rise in interest rates in 2017. The rise in interest rate to cause homeowners to default on their mortgages would thus be another factor to consider. A rise of just 1% in interest rate can lead to a 20% increase in mortgage repayment.
Credit squeeze: Fall in mortgage payment is likely to tighten the bank lending criteria, squeezing the credit to finance property purchases.
New identity rule to crackdown foreign investment: Foreign buyers are now supposed to provide citizenship and visa details as well as Foreign Investment Review Board clearance through stamp duty process, and this is likely to discourage property buying by foreign buyers.
Thus, in era of slowdown in building and construction activity, the whole cycle is affected, slowing down the demand for goods and services from various industries affecting the investment in those industries. Lower production and sales would have straight impact on manufacturing, poor monetary flow in the economy leading to rise in interest rates, dearer funding for consumption and capital expenditure, and finally the slowing of the economy. As of now, the picture for the property sector still seems to be hazy on both sides whether good or bad.
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