Bubble Trouble Seen Brewing in Australia Home Prices
Gigi Wong beat four other bidders in an auction of a three-bedroom Sydney house with peeling wallpaper, cracked doors and an overgrown backyard by paying A$856,000 ($811,060), 14 percent more than the realtor expected the property to fetch.
“I’m not sure if I paid too much,” said Wong, an accountant at the University of Sydney, after winning the bidding war for the investment property in an inner-west suburb where prices have tripled in the past 15 years. “Since I can, and have capacity to borrow money, I should utilize it.”
Australia, where housing accounts for about 60 percent of average household wealth compared with a global average of 45 percent, joins countries from Canada to Sweden to China seeing rapid price gains amid low borrowing costs that are sparking fears of a housing bubble. For now, constrained housing supply and demand from investors are driving prices higher, overpowering the downdraft from slower economic growth and a rising jobless rate.
“It’s easy to see how bubble-like conditions could emerge,” said Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne. For now, while prices are climbing, the increase isn’t being accompanied by a rapid rise in borrowing or building, he said.
In Sydney, the nation’s most populous city, the average home price surged 13 percent in the 10 months to Oct. 31 to a record A$718,122 according to the RP Data-Rismark home value index. That compares with $806,000 in New York as of Sept. 30, according to the Real Estate Board of New York, and 331,338 pounds ($536,237) in London, according to the Nationwide Building Society.
Australians are used to high home prices and debt. Average household debt has hovered near 150 percent of annual income since 2006, compared with 135 percent in the U.S. House prices haven’t fallen more than 10 percent in any one year for more than 40 years, according to data cited by the Reserve Bank of Australia.
In Newtown -- a former working-class suburb 5 kilometers (3.1 miles) from the city center where Wong bought the property, her first as an investor -- prices have risen 13 percent this year, according to researcher Australian Property Monitors.
More than 81 percent of homes that went to auction in Sydney over the Nov. 2 weekend were sold, even as the number of properties for sale rose to 739, the highest number in three years, according to APM.
The average home price across Australia’s biggest cities was A$605,336 as of Oct. 31, after recovering from a decline of 7.4 percent between October 2010 and May 2012, according to the RP Data-Rismark index. While that’s a record, it’s about the same level in real terms as at the end of 2010, based on the statistics bureau’s inflation calculator.
Houses in Sydney took 26 days on average to sell in the week ended Nov. 3, down from 36 days six months earlier, according to RP Data. In Melbourne, houses took 34 days to sell, down from 46 days.
Investors like Wong and self-managed pension funds, along with foreign buyers, are spurring the recovery. The value of loans to investors rose a seasonally adjusted 26 percent in August from a year earlier, while those to owner-occupiers increased only 9.7 percent, government data show.
Rising sales to investors puts the housing market in a more precarious position if economic conditions unexpectedly sour, Eslake said.
“Investors aren’t as committed to their properties as owner-occupiers,” he said by telephone. Changes in the outlook for home prices, rising interest rates or unfavorable changes in regulation could lead them to “dump their properties, putting sharp downward pressure on prices,” he said.
Australia’s tax structure, which allows property investors to claim deductions on investment losses and offset them against other income, encourages investors to buy when they otherwise wouldn’t, Eslake said.
Among investors, self-managed-superannuation funds -- pensions managed by individuals rather than large money managers -- have been boosting purchases of homes. Investment by SMSFs in residential property has risen 65 percent since mid-2008 and 10 percent in the 12 months to June to A$17.5 billion, according to data from the Australian Taxation Office, which oversees regulation of the small funds. The ATO’s June 2013 data is extrapolated from the funds’ tax return filings for the year through June 2012.
While do-it-yourself pensions borrow on average about 70 percent of the value of a home, compared with about 90 percent for regular borrowers, based on Australia & New Zealand Banking Group Ltd. (ANZ) figures, they could “potentially exacerbate property price cycles,” the RBA said in its Financial Stability Review last month.
Foreigners accounted for 12.5 percent of purchases of new homes in the three months to Sept. 30, compared with about 5 percent through most of 2011, according to a survey of more than 300 property professionals by National Australia Bank Ltd. The government doesn’t publish data on the level of foreign investment in residential property.
While Australia is the world’s sixth-largest country by size with a land mass of 7.7 million square kilometers (3 million square miles), about two-thirds of its 22 million people live in its eight state and territory capitals, which occupy less than 0.5 percent of the total area, according to the statistics bureau.
“This population concentration puts upward pressure on capital city dwelling prices,” Michael Blythe, chief economist at Commonwealth Bank of Australia (CBA), said in an Oct. 15 report. Valuations based on capital city home prices and Australia-wide incomes “will have a natural upward bias,” he said.
Sydney now has 122 suburbs -- or one in five -- with a median home price above A$1 million, a 31 percent jump from a year ago, according to researcher APM.
Irina Burgess, 46, has been searching for a home to buy in Sydney’s lower north shore district for the past two years without success.
“A friend sent me a link to try and cheer me up, which was a 10-bedroom chateau in France with 22 acres (8.9 hectares) for less than the price of a two-bedroom apartment in Cremorne,” a suburb 5 kilometers north of Sydney’s center, she said. “The prices are bonkers.”
The nation’s largest city isn’t alone. Of the 20 suburbs with the biggest home-price gains over the past 15 years, half were in Perth -- the biggest beneficiary of the nation’s mining boom. Oakford, 34 kilometers south of the city center, has seen prices surge eightfold in the past 15 years to a median of A$852,000, according to APM.
In other parts of the country, gains have been more modest with prices in Canberra rising 3.5 percent in the year to Oct. 31, Brisbane prices increasing 3.4 percent and Adelaide 1.9 percent, according to RP Data-Rismark data. Hobart and Darwin home prices have fallen 0.7 percent and 0.1 percent respectively.
The most recent prices have generated plenty of talk of a housing bubble, with those words appearing in Australian media articles more times in September than at any time since 2003, Chief Economist Craig James and Economist Savanth Sebastian of Commonwealth Bank of Australia’s CommSec unit said in an Oct. 30 research note.
Similar concerns have emerged in countries including the U.K., where former Financial Services Authority Chairman Adair Turner said an economic recovery “is heavily focused on that favorite old British activity, which is another house price boom.”
In Sweden, apartment prices rose 16 percent in the 12 months through September after more than doubling since 2000, sending household debt to record levels and prompting a warning from the International Monetary Fund that the country needs to take measures to prevent consumer debt and housing costs from spiraling out of control.
In China, prices jumped by the most this year in October, the 17th consecutive month of increases, and in Canada, policy makers have been tightening rules on mortgages to try and prevent the market from overheating.
Helping drive the pickup in prices in Australia is the central bank’s 2.25 percentage points cut to its benchmark rate since November 2011 to a record low 2.5 percent as it seeks to offset a peak in mining investment. The RBA’s rate cuts have pushed the average standard variable home loan rate to 5.95 percent, the lowest level since September 2009.
Even with mortgage rates at a four-year low, not everyone is participating. First-home buyers accounted for 13.7 percent of loans in August, the lowest level since April 2004 and compared with a high of 31 percent in May 2009 when government incentives targeting them were in place.
The number of homebuyers who think now is a good time to buy fell 10 percent in October from September, according to a Westpac Melbourne Institute Survey.
“What we saw was a reaction to rising prices and the impact that is having on affordability,” said Matthew Hassan, senior economist at Westpac Banking Corp. (WBC) “It’s an indication that buyers aren’t looking to jump in in anticipation of significant capital gains.”
The government is keen to see house prices rise in the hope that the construction industry, which is seeing a pickup, will underpin slowing economic growth. Treasurer Joe Hockey said last month that rising prices encourage more development and help ease a shortage of homes.
Home construction approvals were a seasonally adjusted 19 percent higher in September compared with a year earlier, according to the Bureau of Statistics. Sales of newly built homes jumped a seasonally-adjusted 6.4 percent in September to the highest level in more than two years, the Housing Industry Association said on Oct. 30.
Treasury in August cut its growth estimate for the 12 months through June 2014 to 2.5 percent from 2.75 percent seen in May. Unemployment, which rose to 5.8 percent in August from 5.1 percent a year earlier, will climb to an 11-year high of 6.25 percent by mid-2014, it said.
Australia’s population growth -- which has averaged 1.6 percent a year over the past decade, based on government data -- means the country needs about 170,000 new homes a year while actual supply has been 154,000, according to the Oct. 15 Commonwealth Bank report.
The country has a shortfall of 270,000 homes, equivalent to about 20 months of housing construction, according to estimates by ANZ Bank. This is expected to climb to 370,000 dwellings by 2015, the bank forecasts.
“Ideally, the RBA would like to see housing construction pick up without a housing price boom,” Paul Bloxham, chief Australia and New Zealand economist at HSBC Holdings Plc in Sydney, wrote in an Oct. 8 note. “But developers and households are unlikely to build new houses unless prices are rising. In this way, a housing price boom is a necessary ‘evil.’”
To contact the reporter on this story: Nichola Saminather in Sydney at email@example.com