House price rises accelerating in Australia
Last Updated: January 30, 2016
Sydney saw the biggest increase, with residential property prices surging by 19.9% (18.1% inflation-adjusted) during the year to Q3 2015, followed by Melbourne (9.9%), Canberra (4%), Brisbane (3.8%), Adelaide (3.5%), and Hobart (1.7%). On the other hand, residential property prices dropped in Perth (-3.3%) and Darwin (-2%) over the same period.
The mean price of residential dwellings in Australia was AU$612,200 (US$429,734) in September 2015, up 10.2% from the same period last year, according to the ABS.
New South Wales, especially Sydney, has the most expensive housing in the country, with the mean house price at AU$780,900 (US$548,152) in Q3 2015, about 30% above the national mean house price. In contrast, Tasmania has the cheapest housing in Australia, at a mean price of AU$321,100 (US$225,396) over the same period.
Some critics believe that Australia's housing market remains severely overvalued.
- The Economist estimated that Australian house prices are overvalued by more than 30% as of Q3 2015.
- According to the Global Real Estate Bubble Index published by investment bank UBS, Sydney house prices are significantly overvalued and at risk of falling in the future. Based on the report, Sydney house prices had increased by about 30% since 2012 while income and rents had stagnated over the same period.
- According to the International Monetary Fund (IMF), housing market risks in Australia remain heightened, especially in Sydney, mainly due to investor credit and interest only loans. House prices are estimated to be moderately overvalued by about 10%.
Yet demand remains strong. In October 2015, seasonally-adjusted purchases of established dwellings rose by 8.4% to 46,868 units from the same period last year, according to ABS. In fact, the value of established dwelling purchases soared by 23.7% to almost AU$18.11 billion (US$12.71 billion) over the same period. Likewise, seasonally-adjusted purchases of new dwellings increased 8.9% y-o-y to 2,953 units while the value of new dwelling purchases soared by 32.4% to almost AU$1.25 billion (US$0.88 billion) over the same period.
The continued strength of the housing market is somewhat surprising, since Australia's economy is estimated to have grown by a modest 2.4% in 2015, after GDP growth of 2.7% in 2014, 2.1% in 2013, 3.6% in 2012, 2.7% in 2011, 2.3% in 2010 and 1.6% in 2009, according to the IMF. However two factors may partially explain it. The Reserve Bank of Australia (RBA) has kept its cash rate at a record low of 2%, after cutting it by 25 basis points each in February and in May 2015. The other factor is increased purchases of residential real estate by foreign nationals, especially Chinese, who continue to find Australian property very attractive. Proposed foreign investment in the country’s residential real estate market surged to AU$34.7 billion (US$24.36 billion) in 2013-14, up from AU$17 billion (US$11.93 billion) in the previous year, according to the Foreign Investment Review Board (FIRB). China topped the list of real estate approvals, with AU$12.4 billion (US$8.7 billion), twice that of the United States.
Acquisition of residential real estate by foreign nationals and corporations is subject to FIRB approval. Foreigners are not allowed to buy an established (previously occupied) house. They may buy an unoccupied new dwelling, but only if the FIRB feels that the purchase will not add to the shortage of properties available to native Australians.
Rental returns on smaller apartments in Sydney are acceptable
Our Sydney apartment survey is based on the number of bedrooms, because so few advertisements cite square metre measurements. A 1-bedroom apartment costs around US$ 500,000, and a 3-4 bedroom apartment around USD 1.8 million. Amazing prices! Monthly rents average US$ 2,000 for 1 bedroom apartments and US$ 4,300 for 3-4 bedroom apartments. So the gross rental yield for apartments, i.e., the gross return on investment in an apartment if fully rented out, ranges widely, from 2.8% to 5.0%.
Small apartments earn significantly higher rental returns than big apartments.
Taxes are high in Australia
Rental income: Rental taxable income earned by nonresidents are taxed at progressive rates, range from 29% to 45%.
An owner may also be required to pay a land tax annually, depending on his property classification for tax purposes and property location.
Capital Gains: Individuals are subject to a 50% reduction of the taxable gain if the asset is held for at least 12 months. Capital gains follow the individual income tax rates, at rates from 29% to 45% for nonresidents.
Inheritance: There are no direct taxes on inheritance.
Residents: Residents are taxed at a progressive rate on their annual income, from 0% to 45%, and are required to pay a 1.5% Medicare levy.
Buying costs are moderate in Australia
Roundtrip transactions costs are 3.76% to 21.15% of the property value. Stamp duty on property transfers ranges from 1.5% to 6.75%, and is paid by the buyer. It takes about five days to complete the five procedures needed to register a property.
Tenancy laws are neutral in Australia
Australia ’s landlord and tenant laws are generally neutral. Both parties’ rights are well-protected by each states’ Residential Tenancy Act.
Rents: Rents can be freely negotiated, but increases are subject to review by a Tribunal provided the tenant makes an application. The rent cannot be increased before the end of the first year of tenancy in any state.
Tenant Eviction: A landlord can terminate a tenancy by giving notice in the approved form, or by using the tribunal. The legal system is highly efficient: it takes an average of 44 days to evict a tenant.
Economic growth remains modest, exports improvingAustralia is one of the most attractive places to live, judging by all indices of income, human development, healthcare and civil rights. It had a GDP per capita of US$51,642 in 2015, according to the International Monetary Fund (IMF).
In the third quarter of 2015, Australia’s economic growth accelerated to 2.5% from a year earlier, up from annual growth rates of 1.9% in Q2 2015, 2.1% in Q1 2015, and 2.2% in Q4 2014, fuelled by the biggest increase in exports since 2000 and supported by the central bank’s decision to keep its key rates steady, based on figures from the Reserve Bank of Australia (RBA).
Economic growth was estimated at around 2.4% last year, from an average annual growth of 3% from 2000 to 2014, according to the IMF.
The RBA kept the target cash rate at 2% in December 2015, after a cutting it by 25 basis points in May 2015, in an effort to buoy the domestic economy amidst an economic slowdown in China, Australia’s largest trading partner.
The Australian dollar (AUD) depreciated by about 11% from AUD1 = USD0.8202 in December 2014 to AUD1 = USD0.7306 in December 2015.
Australia’s export industry is now improving. In Q3 2015, the country’s current account deficit narrowed to about AU$18,104 million (US$12,826 million), down from a deficit of AU$20,506 million (US$14,528 million) in the previous quarter, according to the ABS. Despite this, demand from China remains unstable.
In December 2015, the nationwide unemployment rate dropped to 5.8%, unchanged from the previous month and down from 6.1% in the same period last year, according to the ABS. There were about 727,500 unemployed persons in Australia in December 2015, down by 3.6% from a year earlier.
Consumer prices rose by 1.7% in Q4 2015 from a year earlier, slightly up from 1.5% in the previous quarter, but unchanged from a year ago, amidst falling petrol prices. Australia’s nationwide inflation rate averaged 3.1% during 2008-2011 before declining to 2.2% during 2012-2014.