Australia’s real estate sector has been a hot topic of discussion in the news lately, with a multitude of factors exerting both positive and negative influences on it.
The latest releases from CoreLogic and the Australian Financial Review (AFR) have brought to light the driving forces behind the rising prices of residential properties in Australia, as well as the potential hazards associated with the housing market.
With the country grappling with high interest rates and an anticipated economic downturn, keeping a close eye on the real estate market is essential.
This article will take a deep dive into these factors, analyzing their effects on the housing market and shedding light on what the future holds for both homeowners and investors.
Advertised supply has been below average since September 2022, with capital city listing numbers ending March almost 20% below the previous five-year average.
Tight rental markets are contributing to the increase in housing values, as renters may be spilling over into the purchasing market.
Net overseas migration is at record levels, and more long-term migrants who can afford it may skip the rental phase and fast-track a home purchase.
The International Monetary Fund (IMF) has ranked Australia second on a list of 27 countries in terms of high risk to housing markets due to high housing debt to household income ratio and high proportion of outstanding housing debt on variable interest rates.
The Australian home building industry has collapsed, with banks and other deposit-taking institutions becoming more cautious and increasing their margins.
These factors include low advertised stock levels, tight rental conditions, and increased demand from overseas migration. Advertised supply has been below average since September 2022, with capital city listing numbers ending March almost 20% below the previous five-year average.
Tight rental markets are also contributing to the increase in housing values, as some renters may be spilling over into the purchasing market, although high mortgage rates may limit some from qualifying for a loan.
Furthermore, with net overseas migration at record levels, more long-term migrants who can afford it may skip the rental phase and fast-track a home purchase simply because they cannot find rental accommodation.
While housing values have been increasing across the upper quartile of Sydney’s housing market, Hobart recorded the largest drop in home values among the capital cities. Despite this, values across every capital city and broad rest-of-state region remain higher relative to where they were in March 2020, with Melbourne dwelling values being the closest to pre-COVID levels.
Vacancy rates across most areas of the country remain extremely tight, and the general trend across the largest capitals is towards an acceleration in rental growth, especially across the unit sector, but slowing growth across the smaller capitals, particularly for houses.
Housing Market Risk
CoreLogic reports that, the International Monetary Fund (IMF) has ranked Australia second on a list of 27 countries in terms of high risk to housing markets due to the outstanding housing debt to household income ratio, a high proportion of outstanding housing debt on variable interest rates, an increasing share of home owners with a mortgage, the sharp rate-hiking cycle, and real house price growth.
However, some positives include the fast transmission of monetary policy and low increase in distressed properties hitting the market so far.
Although there has been a sharp decline in home values, there is room for cautious optimism about the Australian housing market, according to the report.
Home Building Industry Collapse
In its recent article, the AFR highlights that, the collapse of the Australian home building industry can be attributed to lenders becoming more cautious and increasing their margins on top of higher interest rates.
Surprisingly, banks and other deposit-taking institutions increased their exposure to the development sector in the year to December 2022, but most agree that they have become more cautious. Non-bank lenders are playing an increasing role in this sector, but many smaller new entrants have fallen away in the past 12 months.
The emerging build-to-rent sector does not depend on apartment sales but on a rental return. The declining prices of construction, the levelling out of price falls, and the sharp rise in interest rates appears to be over, so the remaining developers, optimistic financiers, and investors backing the non-bank lenders anticipate a golden period ahead.
In summary, the Australian housing market is facing several challenges, but there is still room for cautious optimism. The housing market is being impacted by low advertised stock levels, tight rental conditions, and increased demand from overseas migration.
The Australian home building industry has collapsed, but non-bank lenders and the build-to-rent sector are playing an increasing role. Despite the risks, there is still potential for growth in the market.
Sources: NAB, CoreLogic, AFR
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