A close up on the residential sector
Residential real estate is commonly held, well known and largely loved by many Australians. Low interest rates, rising house prices and improved affordability have significantly boosted housing sentiment and the sustained improvements in the housing market over the past 12 months. But could this be changing?
In this Hot Topic, we take a close look at the Residential sector and outline the key drivers and headwinds as we see them at present.
The Australian Bureau of Statistics recently announced that over the 12 months to June 2014, home values were up 10.1% across the combined Australian capital cities, led by Sydney (15.6%) and Melbourne (9.3%). Clearance rates continued to hold firm just under 70%, while selling time and discounting rates levelled.
Transaction numbers were up 10.4% over the year and the total value of dwelling finance commitments excluding alterations and additions rose 1.0% from May-June 2014 according to the ABS, which is a strong result. But despite these healthy results, buyer demand appears to be moderating. Cyclical trends and a heavy supply pipeline may indicate the value appreciation may have in fact peaked.
In our view, we anticipate that a moderation and stabilisation is likely to occur into the medium term due to the following sector drivers and potential headwinds.
Sector drivers:
◾Residential building approvals have lifted sharply with indicators showing future moderation albeit above the historical average;
◾Housing affordability is improving due to a combination of lower interest rates and new dwelling supply;
◾Recent declines in the ‘time to buy a dwelling’ index are showing movement towards parity between those for and against becoming active purchasers within the market;
◾House prices are showing signs of moderating from the seemingly unsustainable highs of the past 12 months;
◾Offshore investment into Australian Residential property is likely to continue, from Asia in particular, due to a supportive Federal policy and the appeal of Australia as a stable economic destination.
Potential headwinds:
◾Weakness in the first home buyer segment due to a lack of Government incentives (which contrasts 2000/01 and 2008/09) particularly if interest rates rise;
◾Potential for future reform of capital gains tax and negative gearing which the Murray Financial System Inquiry has suggested these reforms should be a priority in the forthcoming tax white paper;
◾If the unemployment rate continues to increase it may make it more difficult for potential purchasers to enter the housing market;
◾Global macroeconomic and geopolitical crises impacting local economic growth and confidence.
Housing affordability and job security are the biggest concern for buyers
The Westpac ‘time to buy a dwelling’ homebuyer sentiment index is sitting above neutral levels and rose 11.4% from May to June, indicating more people thought it was a good time to get into the Residential market. Interest rates remain near all-time lows which has bolstered buyer sentiment to date, however, strong price growth and potential capacity for a future rise in interest rates pose risks despite high forecast supply.
Job security is identified as one of the biggest impediments to buying property in Australia. In July the unemployment rate rose to 6.4% which is the highest level in 12 years. This increase in unemployment combined with subdued wage growth over the quarter will likely weigh on household budgets. Furthermore, the RBA have flagged employment growth is expected to remain moderate through the 2014 calendar year.
Changing preferences driving demand
As Australia’s social landscape continues to change driven by lifestyle preferences, economic forces and immigration, the Residential sector continues to evolve. New dwelling approvals appear to be increasing across most states, with higher density projects dominating new dwelling approvals and a trend toward inner city apartments. HIA (Housing Industry Association) forecasts indicate that more new houses and apartments will be started this year than in any 12 month period since 1994.
Foreign buyers less prevalent in the June quarter 2014 but here to stay
According to data released by the Federal Treasury, foreign investment accounted for a historically high 13.0% of total sector turnover in the first quarter of 2014, although this has since moderated to 10.1% in the June quarter. Nationally, foreign buyers were less prevalent in both new and established property markets in the June quarter, albeit in Victoria, foreign buyers reached a new high of 17% (around 1 in 6 new properties). Demand pulled back sharply in Queensland and was flat in New South Wales. Although less prevalent in the recent quarter, indicators suggest offshore purchasers are here to stay and will continue to support new supply, while competing with domestic purchasers.
We thank APN Property Group for this update.
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