Australian house prices review
The topic of house prices is never far from the minds of Australian investors. Week after week, our news media publishes dramatic headlines about local housing markets, auction clearance rates, rental yields and other related topics.
This level of comment is not entirely unjustified. After all, in comparison to most other countries, Australians put a high value on owning their own homes. What's more, for many Australians, their first, serious investment decision is whether or not to buy an investment property.
On a macro analysis, the questions are even more pressing. After all, according to RP Data, the residential housing market is Australia’s single largest and most valuable asset class, with a total estimated value of $4.89 trillion at 30 June 2013. This is around three and a half times the total value of every stock on the Australian stock market ($1.4 trillion) and around 3.3 times the size of the total output of the Australian economy in a year ($1.48 trillion).
Housing prices - the last twelve months
Over the 12 months to June 2013, home values across the eight capital cities of Australia (accounting for 65.5% of the national population) increased by 3.8%, according to RP Data. This is a significant improvement on the 3.6% decrease in home values over the previous twelve months. It is not, however, massively higher than CPI inflation (2.4% to year ending 30 June 2013) or the ABS Wage Price Index (up 3.0%). Moreover, home values remain 2.9% lower than they were at their October 2010 peak.
Of course, this type of averaged outcome can conceal some important details. For example, if one digs deeper into the data, one can see that the increases in average prices are driven mainly by a 6.0% increase in home values in Perth and 5.6% increase in Sydney (Darwin has also had a very strong twelve months, but its relatively smaller size means that it did not have a big impact on the overall index). The other key capital cities are seeing much more modest growth in line with or below inflation, although the only fall for the year was in Hobart (see table below).
This city by city analysis raises the question as to whether the current house price growth is sustainable, particularly for the three fastest growing capitals. Answering this requires that we consider the last twelve months in historical context. The Australian Bureau of Statistics (ABS) publishes an index of capital city house values that commenced in March 2002. The results for the three key capitals can be seen in the graph below.
The first observation that can be made is that the last twelve months in Sydney are not particularly spectacular when seen in the context for a decade of very flat housing values. We are in a period of market catch-up for Sydney, in which housing prices are correcting after a decade-long lag.
By contrast, Perth and Darwin provide some challenges for analysts. They have experienced a decade of strong growth, sitting at 2.18 and 2.51 times March 2002 prices respectively at the end of June 2013. However, there have been some fundamental economic reasons for this strong growth, with both cities benefitting enormously from the mining boom.
Housing prices - predictions
But can this momentum continue? Certainly, the key indicators for near-term future house value performance are positive. Auction clearance rates have steadily trended upwards from below 50% for much of 2010 and 2011 to almost 70% by mid 2013. What's more, with interest rates and mortgage repayments at record lows, there is a significant incentive for purchasers to get into the market.
For these reasons, most analysts are positive on the housing market over the next twelve months. In Louis Christopher's city-by-city predictions from his Housing Boom and Bust Report are summarised in the table below. In short, Mr Christopher expects an average housing value increase for 2014 of 7% - 11%. Within that average, with the exception of Canberra, he expects all capital cities to grow. Most spectacularly, he expects Sydney housing prices to surge by 15% - 20%, reflecting a continuation of the correction of the price lag.
Other capital cities will all record solid to strong performance. The outlier, being Canberra, is expected to suffer from prospective cuts to public service employment and will hold flat or decline slightly.
The effect of SMSFs
As a final note, it is worth considering the merits of an issue that has raised its head in some media quarters in recent weeks. The RBA's September Financial Stability Review, made the entirely uncontroversial (indeed, almost inarguable!) statement that the self managed superannuation fund sector, now that it is permitted to borrow for investment, is a new vehicle for potentially speculative demand for property.
On the back of this statement, some commentators and property spruikers began claiming that the RBA was indicating that SMSFs would soon drive property prices into the stratosphere. However, the figures just don't bear this out. At 30 June 2013, ATO statistics indicate that the $495 billion SMSF sector held $75 billion of property assets, of which just $17 billion was residential (commercial property holdings are common in SMSFs because many small business owners hold their business premises in their SMSF). Total property holdings were 15.15% of total funds, almost precisely the same as the standard 15% allocation to property in the balanced option of a large superannuation fund! What's more, residential property was just 3.4% of all SMSF assets!
Furthermore, although borrowing has been permitted in SMSFs for six years, geared assets in SMSFs are just 0.48% of total assets. This is hardly a tsunami of demand by anyone's standards. Now there's no doubt that regulators need to keep a close eye on the sector, to ensure SMSF members are not pushed into inappropriate investment by high powered salespeople. But as the graph below shows, the growth of commercial and residential property holdings in SMSFs does not seem to be out of proportion to the growth in total assets. Indeed, far from affecting house prices, such growth as there is seems largely directed to the commercial property sector.
source: the Dunn Thing
As is mostly the case with housing price discussions, the reality is far from the hype
We thank La Trobe Financial for these comments
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