The latest official figures show the value of Australia’s 9.45 million capital city residential dwellings leapt by a hair-raising $407 billion last year – roughly equivalent to eight years of wages – to a total value of $5.4 trillion.
That’s a lot of billions and trillions to absorb, so here’s what it looks like as a graph:
Source: ABS
As foreshadowed by RP Data, the ABS data for 2014 revealed the weighted average rise in its capital city house price index was 6.8 per cent for an average price of $571,500. Sydney posted a 12.2 per cent annual gain for an average price above $700,000.
And economists widely predict a repeat of those rises this year.
CommSec and HSBC both expect prices to lift by around 7 per cent. Sydney prices will rise by 9 per cent to 10 per cent, says HSBC, with Sydney and Melbourne to outpace growth in other cities, as they have done since late 2011 as the driving forces of economic growth shift from the west to the east coast.
That means national housing price growth would continue to significantly outpace household disposable income growth.
Sydney’s 3.4 per cent gain in the fourth quarter was undoubtedly driven by the accurate expectation of rate cuts. The Reserve Bank’s resumption of easing last week after an 18-month hiatus will be followed by more cuts, if markets are priced right.
That is likely to keep the investor market invigorated. As we are all too familiar with, bad news is good news for asset markets. Policymakers predict worsening economic conditions, they lower rates, and investors plough cheapened cash into sharemarkets and property. The ASX reacted with its longest ever rally, and property has gone from strength to strength, at least in the largest cities.
While population growth, housing supply and foreign demand have been supportive factors, the single most important determinant of housing price dynamics in Australia is interest rates, HSBC economist Paul Bloxham writes, demonstrated in the chart below.
Source: HSBC
With mortgage rates at record lows, there are signs that those who have been sitting on the sidelines waiting for a correction are ready to bite the bullet and purchase property.
Alongside boosted rental supply -- from investors buying owner-occupied dwellings and letting them -- that poses a threat to rental yields. But for now, the lure of rate cuts appears stronger than the threats.
Beyond higher interest rates, the biggest risk to property values is the potential for changes to macro prudential rules. But it seems regulators can only tinker around the edges, constrained from making any dramatic adjustments as housing stokes the economy. Unusually, prudential policy and interest rate settings are currently working in opposite directions.
Bloxham says there are strong supply and demand fundamentals for Australia’s high house prices and HSBC does not believe Australia currently has a national housing bubble. Australia’s housing debt is mostly held by higher income households, Australians are well ahead on repayments on average, and all mortgages are full-recourse loans, not sub-prime.
The longer house prices continue to increase faster than incomes, the greater the chance a bubble could inflate though, and with interest rates having been low for some time, bubbles could be forming in certain pockets.
“At the least, we now expect that Sydney housing prices are likely to fall when interest rates start to rise, which could be as soon as 2016,” Bloxham says, pointing to a “speculative dynamic in the Sydney market that may be worrisome”.
Analysts expect properties with a land component to hold their value better than units in any eventual market downturn.
The ABS figures do belie a very uneven market. Only Sydney, Melbourne and Brisbane convincingly exceeded annual growth rates of 2 per cent, while prices in Darwin fell in the final quarter.
While the states are typically more synchronised by common mortgage rates, the end of the mining boom is having a larger negative impact on Western Australia and Queensland.
A dramatic decline in the value of homes in Port Hedland illustrates that bargain interest rates alone cannot completely bullet proof house prices.
The fall in the price of iron ore has created a spectacular decline, seeing the median house price in Port Hedland drop almost 23 per cent in two years. A house in the mining town was passed in at auction for $360,000 at the weekend after it was bought for $1.3 million just four years ago.
For now, the easing cycle backed by foreign demand that’s being spurred on by a lower Australian dollar looks set to add billions of dollars more to the value of Australia’s residential dwellings.