Australian property market re-fueled despite cooling attempts
A report claims that house prices in Sydney grew 18.9% YoY to June 2015, but questions how long the boom in the housing market can last while the wider economy does not. This comes after a recent Morgan Stanley report claimed that the the Australian property market has peaked and that a fall in value is coming. The growth of house prices in Sydney and M﻿elbourne had slowed towards the end of last year, down to a growth rate of 12.1% YoY, but have since picked up, despite regulatory moves to force the nation's banks to restrict their lending to the property sector. The Reserve Bank of Australia is reportedly not considering raising interest rates, which could provoke a collapse in the housing market, as the central bank fears what impact that could have on the broader economy, which is struggling.

The latest residential housing price figures released this week by the ABS show that after a brief respite, the housing market has again caught fire in Sydney and Melbourne.



In the latter part of 2014 and early stages of 2015 there was some evidence that the housing boom was cooling off. After house prices in Sydney soared by 16% from March 2013 to March 2014, things settled down a bit. Prices kept going up, but the speed was not as fast. In the 12 months from December 2013 to December 2014, Sydney prices went up on average by a lower 12.1%.

Well, strap yourself in. In the latest data from the ABS, housing prices in Sydney have risen 18.9% in the 12 months to June 2015 – the biggest annual rise in Sydney in over a decade:

Melbourne too has had an increase. After similarly looking like it had peaked in March 2014, the quarterly growth of 4.2% in June was the biggest in Melbourne since March 2010:

But, as has often been the case with the housing boom since 2012, it is mostly occurring in Sydney and Melbourne. In all the other capital cities there is barely a sign of housing life. Perth is the worst of the lot – with the impact of the end of the mining boom, average house prices in that city have not risen since March 2014.

This discrepancy is made even more clear when we look at the growth of prices since the RBA began cutting interest rates in November 2011.

In that time, Sydney residential house prices have risen 52%, Melbourne’s went up by 20%, whereas none of the other capital cities have seen rises above 15%:

Funnily enough, only Sydney’s housing prices since the December 2011 quarter have risen faster than the weighted national average – which shows how much the Sydney market dominates the rest of Australia.

In terms of total housing stock, the NSW market accounts for 40% and Victoria an additional 25%:

Interestingly, the housing boom of the early to mid-2000s was not really a Sydney one. Sydney house prices of course were easily the most expensive in the nation, but from 2004 to 2008 places like Perth and Melbourne saw the big price jumps.

But since 2011 it has been all about Sydney. In December 2011 the median house price in Sydney was $533,000, compared with $495,000 in Melbourne – 92% of the level in Sydney. Now the median house price in Sydney is $871,000, while in Melbourne it is just 65% of that amount, at $570,000.

And this boom, as ever, has been fuelled by debt.

In March, Australia set a record high housing debt to income ratio of 142.1%.

And after six years of relatively flat growth, debt levels in Australia since the RBA began cutting rates at the end of 2011 have started rising fast:

The 8.9 percentage point increase in the debt to income ratio over the past two years is the fastest two-yearly rise in debt levels since March 2007:

The rise in house prices continues to be mostly off the back of investors. While the Australian Prudential Regulation Authority has instituted measures to try to limit investor credit growth for individual banks at 10% per annum, the current overall growth remains at 10.8%:

Interestingly, last week before the House Economics Committee RBA governor Glenn Stevens noted these new rules, which were devised to limit investor credit, had seen some banks increase the interest rates for investors. He predicted it may have an effect on credit growth, but one more about definition than reality.

Stevens predicted that “we will now see a number of people who used to call themselves investors are going to call themselves owner-occupiers because the relative pricing has changed”.

He said he believed the rules did serve to maintain stability in the banking system, but they may not do much to make house prices stable.

In response to a question from a student from Gungahlin college in the ACT, about the difficulty for first-home buyers, Stevens argued the issue was more about increasing housing supply than government measures designed to reduce prices.

He argued that “the answer is not going to be government programs that give you money, because that money just ends up in the hands of the sellers. The answer has to come on the supply side of the market. In a country with this much land, something is wrong if we cannot do the marginal cost of housing a bit cheaper than we do”.

For now, it appears the RBA is happy to keep interest rates where they are, and there seems little concern about them needing to rise to cool down the housing market – especially at a time when overall economic growth is weak.

And thus the question remains, as it has for the past three years: can prices continue to boom when the economy itself does not? Six months ago it seemed house prices were beginning to respond to the weak economy and slow down, but these latest figures show that, once again, they have shot off ahead.