Asian and local investors have been pouring money into Australian property, driving up house prices in Sydney and other major centers. With interest rates relatively low, is the land Down Under set for another housing bubble?
In a nation where housing accounts for around 60 percent of average household wealth compared to the global average of 45 percent, any surge in property prices akin to the gains of the previous decade would have a major influence on consumption.
Sydney house prices have risen by 11.4 percent over the year to date, with the nation’s second-largest city of Melbourne recording a rise of 6.8 percent. Resource-rich Perth has posted an 8.6 percent gain, although the third-largest city, Brisbane, has lagged with 4.1 percent growth, according to the latest Australian Bureau of Statistics (ABS) data.
Bubble-like conditions in the nation’s most populous city have pushed average Sydney house prices to a record A$718,122 ($666,858) compared to $806,000 in New York City and $536,237 in London, according to data compiled by Bloomberg News.
One in five Sydney suburbs now boast a median home price above A$1 million, up 31 percent from a year earlier, according to APM data.
While the United States and United Kingdom saw their housing markets sold off during the global financial crisis, Australian home prices have not fallen by more than 10 percent in any single year from more than 40 years.
On Wednesday, the impact of rising property values and the central bank’s decision to keep interest rates on hold again in its latest policy meeting was shown in the latest consumer confidence survey, which posted its highest level since late 2010. The index compiled by Westpac and the Melbourne Institute showed confidence concerning the property market was 23 percent higher than 13 months earlier.
Foreign Investors Active
China’s property market has shown 17 straight months of price rises, and Chinese and other Asian buyers have been increasingly active in the Australian property market. According to a survey by National Australia Bank, foreign buyers accounted for 12.5 percent of new home purchases in the three months to September 30, compared to around 5 percent during 2011.
“Anecdotally, it's largely from Asia,” NAB chief economist Alan Oster told property website Domain. “These investors are predominantly from mainland China, Hong Kong and Singapore. We hear – and again it's anecdotal – that a lot of it is being paid for by cash. They don't have to come to the banks for this.”
Yet while the major centers of Sydney and Melbourne have traditionally been popular among foreign investors, Brisbane and the Gold Coast in southeast Queensland state have also attracted increasing attention.
According to the latest Foreign Ownership of Land Register compiled by the Queensland government, foreign investors bought nearly A$1.9 billion of Queensland property during fiscal 2013, led by buyers from China (A$323 million) and Singapore (A$317 million).
In fiscal 2012, real estate was the largest single category for official foreign investment, accounting for 35 percent of the total approved by Australia’s Foreign Investment Review Board (FIRB). Under FIRB rules, non-resident foreign investors are only allowed to buy newly built apartments or houses, a policy aimed at boosting the national housing stock.
Bubble Fears Disputed
Despite recent price gains, analysts have expressed mixed views on the prospects of the property market overheating.
“If you have house prices going up 7 percent and incomes going up 5 percent – and you've had no increase in house prices for a number of years – how can that be a bubble? If you look at people's ability to borrow, they are significantly using less of that ability now than what they did,” NAB’s Oster said.
In a research note, Westpac’s chief economist Bill Evans said concerns of a bubble were overstated given lower economic growth forecasts, reduced business and public investment and a weakening labor market.
Demand from first home buyers has dropped by 27 percent in the year to September, while demand from investors has risen strongly, predominantly in Sydney, accounting for around a third of new loans.
Housing construction has lagged, with ANZ estimating a shortfall of 270,000 homes, or the equivalent of 20 months of home construction activity. In October, the Australian Industry Group’s construction index posted its first rise since 2010, indicating that the pickup may finally be occurring.
An index of “housing bubble” media mentions peaked at a decade high 194 in September, according to CommSec, with property promoters keen to encourage further buying.
But with official interest rates already at record lows and wages growth expected to remain sluggish, the property “bubble” could quickly evaporate if investors’ expected capital gains fail to materialize.
Rudd Resigns
On Wednesday evening, former Australian Prime Minister Kevin Rudd announced his resignation from Parliament, declaring “it really is time for me to zip.” The move by the former Labor Party leader followed his party’s election loss in the September 7 poll, following which Rudd quit the party leadership.
The move ended a tumultuous political career for the Brisbane-based lawmaker, who won a landslide election victory in 2007 before being removed by his own party in 2010, successfully winning back the prime ministership in June 2013 in another leadership challenge.