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.
CoreLogic RP Data Daily Home Value Index: Monthly Values - 30 April 2017
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 19th 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.
The Reserve Bank has been looking for non-mining businesses to fill some of the gap left by the sharp fall in mining, but to date dwelling investment has been heavily relied on. Non-mining business investment has increased in New South Wales and Victoria in recent years alongside the improvement in business conditions and demand in those states. However, non-mining investment in Queensland and Western Australia has decreased, due to the decline in mining investment also weighing on non-mining activity. Meanwhile public investment has been flat for several years. State government budget estimates suggest that public capital expenditure will make a more meaningful contribution to growth over coming years. This is particularly the case in New South Wales and Victoria where there is a road and rail transport infrastructure pipeline of considerable scale.
Low interest rates have supported dwelling activity in all markets, however, growth in dwelling investment by state has varied in part due to the differences in underlying housing market conditions and population growth.
Dwelling approvals peaked in 2016 but there is a considerable volume of construction work in the pipeline particularly in high rise units and particularly in Victoria and New South Wales. This activity is expected to support dwelling investment activity in the south-east states for the next few years.
A few key points regarding the Australian demographic context also informs the state of play with the residential market. The following are key findings from the Australian Bureau of Statistics (ABS) in its latest population data release:
- In the year to September 2016, Australia’s population increased by 348,000 or 1.5% to 24.2 million people.
- This growth is below the resource boom peak of about 2% in 2007-2009 but is well above the pre-resource boom rate of growth.
- This growth is also relatively high compared to growth patterns established by western economies as Australia continues to remain popular with migrants with net overseas migration (arrivals less departures) comprising 55% of total growth.
- In terms of state results, Victoria increased by approximately 125,500 or 2.1%, followed by New South Wales with 110,000 or 1.4% and Queensland had population growth of 68,000.
The ABS also provided projections of population growth accompanied by the estimated number of households. By 2036, Australia’s population is expected to be 32.4 million and, by 2056, 39.8 million. Sydney and Melbourne are expected to accommodate most of this growth. Sydney is forecast to increase from almost five million in 2016 to 6.6 million in 2036 and to 8.1 million in 2056, and Melbourne growing from 4.6 million in 2016 to 6.4 million in 2036 and to 8.2 million in 2056.
Applying a crude measure of household size of 2.6 this projected increase in population translates into an extra 6,000,000 households in Australia by 2056 (or an average annual rate of approximately 154,000 households).
Naturally, supply will need to increase to accommodate this. As well as supply factors to which the Reserve Bank has given significant emphasis to, much market commentary focuses on demand. Housing, courtesy of leverage, is naturally prone to cycles and the tax benefits to both owner occupiers and investors tends to accentuate that cyclicality. In that cycle, clearly investors in housing have been very active.
The most recent lending finance data shows that the demand for investor finance remains very robust. According to Lending Finance data for February, released by the ABS the annual value of investor loans in New South Wales (essentially Sydney) increased for a seventh consecutive month. This was also the case for Victoria (essentially Melbourne), where another increase was recorded. By contrast, investor loans in Western Australia continue to retreat.
As at February 2017, investors accounted for a significant 56.2% of total housing finance commitments (excluding refinancing) in New South Wales (Sydney), down from the record 61.7% share posted in June 2015. Victoria’s (Melbourne) investor mortgage share continues to firm, hitting 46.1% in February, although it was still down from June 2015’s 52.3% peak.
In summary, there are valid reasons for the financial authorities to be sounding out warnings about the risks associated with the elevated market position of Sydney and Melbourne. The Australian financial systems exposure to the housing market is problematic and in need of some reduction. Furthermore, the contemporary geopolitical context represents another level of risk to all markets including the residential market – here and abroad. MacroPlan’s house view of the market is that we expect it to lose its current momentum in 2017 as it factors in the end of the easing in the interest rate cycle and the increase in supply coming into the market, with potential for a correction. A correction of 5-10% would not be outside historical precedents however further rises will build the downside risks. Finally, all cycles are different, and the end of the residential boom will create its own uncertainties, risks and opportunities for all stakeholders in the Australian residential market.
About the author:
Mark Courtney General Manager – Queensland firstname.lastname@example.org
Mark Courtney is MacroPlan’s General Manager – Queensland. Mark’s is an accomplished property professional whose experience uniquely positions him to provide leadership in property research and consultancy. He has considerable experience in the analysis and development of Australia’s industrial property sector, as well as extensive market trend analysis, feasibility assessment and land demand and supply modelling expertise.
About MacroPlan: MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities. Contact Mark Courtney, General Manager – Queensland, today to discuss your property research requirements.