Can house prices keep going up?
Each day seems to bring another news article about the rising cost of housing in Australia, especially in Sydney, where 60 percent of the population of NSW resides. In 2014 Sydney home values increased 14.5 percent off the back of 12.4 per cent gains in 2013, according to CoreLogic. To put this in perspective, wages in NSW have risen just 5 percent over the 2-year period. And with auction clearance rates in Sydney now close to 90 per cent the market is still red hot.
Exuberance in the housing market isn’t just confined to the harbour city. Sydney home prices ranked 3rd most expensive in the world recently, worth almost 10 times the average annual income level found in the city. Melbourne placed 4th with home prices almost 9 times annual incomes and Wollongong finished 6th – in fact it is about 20 percent cheaper to buy a home in the Big Apple than in the ‘Gong! More broadly, CoreLogic estimates that home prices across eight Australian capital cities have risen more than 7 per cent in the 12 months to March 31st.
How have we arrived at this point? An undersupplied market is a fundamental cause for longer term home price appreciation in Australia (especially Sydney). But cheap and plentiful credit has been the fuel for the fire in recent years.
Australian households are among the most indebted in the world with debts almost double annual incomes at the end of 2014, and rising. Barclays data shows this to be the highest level in Australia since at least 1960 and compares to a peak level of 1.35 times in the US which occurred right before the financial crisis in 2007.
Official interest rates in Australia are at a record low level of 2.00 percent and many expect the Reserve Bank of Australia to cut next month. Falling interest rates have enabled consumers to pay their mortgage interest bills even as they borrow more and extend home purchases to investment properties. In February 40 per cent of approved home loans in Australia went to investors.
Moreover, higher home prices that were ignited by undersupply and fuelled by low cost and easily accessible borrowings may well be starting to feed on themselves. Banks are lending against higher property values and consumers are willing to pay up to avoid being locked out of an ever more expensive home market, or to chase the promise of speculative future gains.
So where to from here? In contrast to the boom in the nation’s housing market, the underlying economy is weakening. Wage growth in Sydney has slowed to record lows, mortgage repayments now chew up a third of incomes, unemployment has risen above 6 percent, and consumer and business confidence has turned. From this vantage point it feels like we are peering over peak conditions for home prices and the descent on the other side could be a scary one.
The information contained in this newsletter is of a general nature only and does not take into account your particular objectives, financial situation or needs. Accordingly the information should not be used, relied upon or treated as a substitute for specific financial advice. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided. Taurus Financial Services Pty Ltd its directors or staff, nor its employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
Taurus Financial Services Pty Ltd is an Authorised Representative of SECURITOR Financial Group and provides Financial Planning Services in respect of Shares, Managed Investments, Superannuation and Personal Risk Insurance. SECURITOR is only responsible for the services provided by your Adviser through Taurus Financial Services Pty Ltd. You may also receive services from Taurus Mortgage Services Pty Ltd for Mortgage Origination and Debt Re-Financing, and from Taurus Professional Services Pty Ltd in respect of Banking facilities, Taxation, Estate Planning and Migration Services. Taurus Accounting Services Pty Ltd in respect of Accounting and Taxation Services. Taurus Business Partners in respect of Accounting and Taxation Services. Taurus Migration Consultants Pty Ltd in respect of Migration Services and Hatch & Associates Pty Ltd in respect of Legal Services including Estate Planning and Conveyancing. SECURITOR is not responsible for advice provided by your Adviser through Taurus Mortgage Services Pty Ltd, Taurus Professional Services Pty Ltd, Taurus Accounting Services Pty Ltd, Taurus Business Partners, Taurus Migration Consultants Pty Ltd, Hatch & Associates Pty Ltd or any other company.