Surging with the Economic Recovery
Australian housing market ready for a strong comeback
Issue: Jan 2010
Outlook for global economy has stabilized and slow recovery is on the way. Australian economy has proven to be remarkably resilient – so has the Australian housing market. While house prices in some developed economies have tumbled significantly since the global financial crisis, Australian house prices have been resilient and made a strong comeback in 2009. In the third quarter of 2009, the average established home price index for eight capital cities rose by 4.2% quarter on quarter, or 3.2% when adjusted for inflation. First homebuyers incentives and lower interest rates have provided support to the Australian house price surge.
In October 2008, in order to combat the crisis, the Australian government promoted a huge stimulus package worth AUD 10.4 billion which is around 1% of its GDP. This included the First Home Owner Boost Scheme (FHOB), which raised the First Home Owner Grant to AUD 14,000 for existing dwellings and to AUD 21,000 for new homes. The FHOB was very successful in stimulating the housing market. By July 2009, first homebuyers had risen 73% from the same period last year. By the end of August 2009, the FHOB has helped more than 153,000 Australians purchase their first homes.
Fresh in the mind of many consumers was the September 2008 collapse of Lehman Brothers, which set off a financial tsunami that rapidly paralysed global financial markets. Seemingly indestructible giants like AIG and Merrill Lynch were brought to their knees, banks were announcing hundreds of billions of losses, trillions of dollars of wealth had been wiped out, and the global financial system was on life support.
To curb inflationary pressure, Reserve Bank of Australia (RBA) raised the key interest rate to 7.25% in March 2008, from low of 4.25% in early 2002. And in 2009, the key interest rate was reduced to 3% by April 2009 in response to the crisis. Although RBA lifted the key interest rate again in the second half of 2009, it still remained at 3.75%. The lower interest rate has improved housing affordability and boosted demand.
Given the improving confidence and strong fundamentals, Australian housing demand and prices will continue to pick up in the next few years in view of favorable demographics, supply shortage and improving affordability.
Demographics change has always been an important housing demand driver in Australia. According to the Australian Bureau of Statistics (ABS), Australia’s population grew by 443,000 people in the year to June 2009, registering the highest growth rate of 2.1% year on year since ABS records began in 1982. The total population of Australia in June 2009 was about 22 million people. Natural increase and net overseas migration contributed 36% and 64% respectively to this total population growth.
Overseas immigration is a major component of growth in Australia’s population and consequently in new household formation, which in turn, is the key driver of underlying demand for new houses. Normally, overseas immigration has an immediate impact on the demand for housing as migrants always need some form of housing on arrival, whether renting or occupying. The top three states that migrants like to dwell in are New South Wales, Victoria and Queensland. According to Chart 1, population growth of net overseas immigration started to outpace the growth of natural increase since 2006. And despite the weakening economy in 2008 and 2009, overseas immigration population continued to surge to a record high.
Chart 1: Australian Total Population Growth
Source: Australian Bureau of Statistics
In spite of the strength of overseas immigration and total population, new housing starts have contracted since 2002, as shown in Chart 2. Weak housing starts, together with strong population growth, caused a shortage of housing in Australia. In 2009, the estimated housing shortage was about 130,000 units, up by 55,000 two years ago, according to BIS Shrapnel.
Australia has been under-building new residential dwellings in the past years because of the stringent urban planning policies and land use restrictions (“smart growth” or “urban containment”). An increase in government zoning regulation has created artificial shortages of land for residential development. Tax burden on builders and developers is another reason for the shortage of new homes. For instance, in New South Wales, government taxes and other charges are estimated to account for 30% of the price of new houses.
From Chart 2, in 2008, total housing starts fell 3.2% to 148,420 units. And starts are expected to fall another 12.6% in 2009, according to the Housing Industry Association (HIA), before rebounding in 2010. Residential dwelling approvals, an indicator of future development activity, were stable in 2009 although they are still too weak to meet the strong underlying housing demand.
Chart 2: Australian Housing Starts
Source: Housing Industry Association
The rapid fall in interest rates has helped affordability as repayments fell. According to Chart 3, in 2009, affordability ratios, measured by the proportion of household income against housing loan repayments, generally fell below 30% level. And affordability is expected to be healthy for the next few years. The healthy affordability will help to boost the housing demand in future. Despite expectation that interest rates will continue to rise next year, they are expected to remain relatively low, maintaining a stimulatory environment before the economy could fully recover.
Chart 3: Australian Home Loan Affordability
Source: BIS Shrapnel
In summary, both near-term catalysts and long-term fundamentals imply that growth of the Australian residential sector is sustainable. Economic conditions in Australia have been stronger than expected, with consumer spending, exports and business investments notable for their resilience. With influx of overseas immigration, rising deficiencies of dwellings, rising rents, relative affordability, and improving economic environment, the demand for housing and prices will continue to pick up in 2010 and over the next few years.