The state of play in the Australian Residential Market

The state of play in the Australian Residential Market

It is not surprising that many clients ask what is the state of play with the Australian residential market. Many indicators are showing that prices in some markets namely Sydney and Melbourne continue to move higher.

Earlier this month, CoreLogic released their Hedonic Home Value Index for April 2017. On the 5 capital city aggregate measure for all dwellings,  the data showed year-on-year growth of 11.2%. The largest contribution to this strong rate was again provided by Sydney’s all dwellings measure which increased 16.0% and Melbourne’s rate of 15.3%. On the other end of the spectrum,  capital city dwelling values decreased in Perth (-6%) and Darwin (- 2.3%).   Three of Australia’s eight capital cities are now showing an annual growth rate in dwelling values higher than 10% which is one city less than the print form last month.

Note: 5 capital city aggregate includes Sydney, Melbourne, Brisbane (inc. Gold Coast), Adelaide and Perth.
Month and Year Changes are updated monthly and calculated as at the end of each calendar month respectively.

Another prompt for discussion has been the findings published by Demographia. In their most recent 2017 Report, Sydney rates as the second most expensive city for housing after Hong Kong. Currently, Sydney’s average house price is a multiple of 12.2 times the average Sydney household income. (Hong Kong’s multiple is 18.1).

Much has been written about what is driving the seemingly endless rise in Sydney and Melbourne prices – and the candidate set of explanatory variables are many. These include limited supply of new housing partly due to planning system inefficiencies and delays, record low interest rates, the strength of the tradeable jobs market and business investment opportunity, the strength of overseas migration, as well as other factors that promote Sydney’s global profile as a residential investment opportunity.

Sydney and Melbourne’s prominence as cities of stellar rates of annual house price growth over recent years can be considered as a positive story in terms of the Australian economy transition from its biggest resources boom since the 19^th century gold rush.  Australia was “a two-speed economy”, then with the resource rich states of Queensland and Western Australia leading the way. The increase in Australia’s terms of trade since the mid-2000s gave rise to a surge in resource investment, an appreciation of the exchange rate, and a reallocation of labour and capital in the economy.

The adjustment from the resource boom has proceeded much more smoothly than has been the case in previous terms of trade booms, with housing playing a big role.

The Australian economy is still a two-speed economy however in this version, the residential investment boom in New South Wales and Victoria means that these two non-resource rich states are contributing the bulk of economic growth. However, the Australian financial authorities are indicating that the rate of increase in prices, mainly in Sydney and Melbourne, represents a heightened level of risk to the economy.

To assess why this is the case, a brief look at the overarching performance of economic growth and investment cycles, and some analysis of the key demographic indicators and the specific housing data over recent years is insightful.

In terms of economic growth, New South Wales and Victoria have strengthened over recent years. Gross state product (GSP) increased in both states by 3.5% in 2015-16 and notably, this is fastest rate of growth in over a decade for New South Wales.  Meanwhile GSP growth in Queensland and Western Australia has eased from the rapid rates earlier in the decade.

Following a peak and then sharp fall in bulk commodity prices, mining investment has declined sharply as resource projects have gradually been completed and few new projects having commenced. Growth in GSP in Western Australia was 2% in 2015-16, its slowest pace in 15 years while economic activity in Queensland has been mixed with the decline in mining investment impacting heavily on some regional areas. It is interesting however to note that conditions in some parts of the state have been very positive and benefited from an increase in dwelling investment and tourism, including for example the Gold Coast.  For more information contact Higgins Advisory on 1300 391804.