March 23, 2016

How the Real Estate Industry in Australia has Evolved in the last years

Australia’s real estate industry has defied the odds. Since 2001, market analysts have suggested that the real estate industry has developed property bubbles; a phenomena which occurs when periodic high property valuations become unsustainable. 15 years later, real estate prices continue to increase and maintain its upward trajectory.
Real Estate Industry in Australia

Australia’s property market has grown at a rate of 6.5% per annum since the 1990’s. But during the last decade, the rise in property prices have out- paced the growth in average income. It was estimated that in 2010, the average price of housing in Australia was equivalent to seven years of income compared to three years in the 1950’s up to the early 1980’s.

What has caused the increase in property prices the last few years? Here are a few of the possible factors:

  • Lack of available land area for development
  • Easier access to credit due to financial deregulation
  • Availability of low interest rates since 2008
  • 53.8% increase in average floor area from 1984 to 2003
  • Increasing population growth; more demand plus fewer supply
  • Favorable taxation system for investors and current home owners

Property prices grew highest in Sydney at 19.9% in 2015. This was followed by Melbourne at 9.9%, Canberra at 4%, Brisbane at 3.8% and Adelaide at 3.5%. The prominent cities which saw a drop in property values were Perth at -3.3% and Darwin at -2%.

Sydney also lays claim to having the most expensive property in New South Wales with an average cost of AUS$ 780,000; 30% above the national mean house price. On the other end of the spectrum, Tasmania has the most affordable property at AUS$ 321,000.

Despite these numbers, studies and reports continue to show that Australia’s property market remains unstable. In its report, The Economist suggested that Australia’s residential property was overvalued by 30% in 2015. This was the same sentiment echoed by the UBS and the International Monetary Fund or IMF.

Demand for Australia’s real estate market seems to be resistant to rising property prices.

Analysts have also speculated that foreign investment has played a role in the increase in property prices. The rising prices of Australia’s property markets have not discouraged foreign buyers from China and Hong Kong.

Reports show that as of the 3rd Quarter of 2015, Chinese investment in Australia’s property market had grown by more than 400% in the last five years. Numbers show that Chinese investors had purchased AUS$ 12 Billion worth of real estate property between the years 2014 to 2015.

Why is it that more Chinese are buying or investing properties in Australia?
The primary driver is pricing. Despite its rapid pricing increases, many Chinese still find property values more affordable in Australia than in their homeland. Some investors have stated in reports that a modest home in Sydney is the same price as a small apartment in China.

Many Chinese also happen to enroll their children in some of Australia’s prestigious universities. Australia’s universities and educational system are world renowned and reputed to be among the best in the global stage.

There appear to be a good number of Chinese families that want their children take their university studies in Australia. Thus, they invest in housing to give their children a place to live during the school year.

Can the increasing number of foreign investments in Australia be the main factor in driving prices upward?

The numbers presented by the Real Estate Industry of Australia say otherwise. According to the REIA, the Chinese focus on buying properties that are over and above the price range of the local Australian. On average, Chinese investors buy properties that cost AUS$ 1 Million for temporary real estate residence which is already 30% than the average housing price in the most expensive city in Australia which is Sydney.

There are also strict foreign investment rules which govern the purchase of property. These provisions include:

  • Foreigners may not buy existing homes but they can purchase new homes on the market.
  • Foreigners who live in Australia and purchase property must reside in it and sell it upon expiration of their visa.
  • The Foreign Investment Review Board is mandated by law to review all investments and purchases in real estate property.

The latest report by the Master Builders of Australia have presented their findings that contrary to popular opinion, foreign investment only accounted for 2.5% of annual sales in 2015.

Thus, it may seem based on these figures that foreign investment is not the significant driver most Australians thought of.

From these data, Australia’s current growth trend despite the lack of solid economic fundamentals proves one thing: the strength of “The Great Australian Dream”.

Australia’s economy only registered a modest growth rate of 2.4% in 2015. The global economy is still reeling from the effects of the 2003 economic collapse of equity markets and the 2009 Euro Zone crisis. Yet prices continue to rise over the last six years.

Although not commiserate with the growth of property prices, Australia’s incomes have also risen. In 2012, the average weekly wages in Australia was estimated to be at AUS$ 1,050.2. In 2016, the average weekly wage has risen to AUS$ 1,145.7 or a 9% increase over the last four years.

The availability of low interest rates continues to encourage Australians to borrow and pursue their dreams of owning a home. Proof if this is the growth of Australia’s mortgage market. In 2002, the mortgage market accounted for only 58% of Gross Domestic Product or GDP. But in 2015, the mortgage market had accounted for 95% of GDP.

This of course, presents a scary scenario should property bubbles exist and begin to pop. With more than AUS$ 1.55 Trillion in outstanding housing loans, the last thing Australia needs is a collapse in the property market.

The Reserve Bank of Australia or RBA continues to maintain the official cash rate unchanged at 2% largely to support borrowing and to prop up spending for a sluggish economy.

The question now is to see how demand for real estate will continue to keep prices up over the next few years. Population will be a key factor as Australia’s has been growing at a rate of 1.8% per annum. So far, Australians passion for home ownership has helped the country defy the odds and prevent a prolonged fall in its property market outside a brief spell in 2009.