Property remains a very popular asset class among SMSFs. Ben Anderson provides a brief overview of the current status of the domestic market.
The Australian residential property market recorded growth of 4 per cent in the quarter ending August 2013. Even as the monthly growth slowed to a more sustainable 0.5 per cent, as recorded by RP Data, the annual growth of 5.3 per cent was some indication of the current momentum. Property sales numbers are up substantially on an annual basis, by just under 30 per cent, as the difference from the previous peak property median value peak in 2010 narrowed to just 0.9 per cent last month. Sydney and Canberra are two cities that have already posted records, up 4 per cent and 1.2 per cent respectively from their previous record values.
The historic low cash rate of 2.5 per cent has been evidently driving the current market statistics. Auction clearance rates are being reported at all-time record levels for the major capital cities, Sydney and Melbourne, which have posted clearances of more than 80 per cent consistently. This is despite these markets having relatively high median values compared to the rest of Australia, and posting current annual growth rates of 7 per cent and 4.3 per cent respectively. Nevertheless, with the cash rate low and the markets still emerging from the decline in the recent years, the affordability index reported last month by the Housing Industry Association (HIA) and Commonwealth Bank of Australia showed a 4.4 per cent increase over the previous quarter.
There was a slightly different picture presented by some other market statistics. The HIA’s new home sales figure showed a 4.7 per cent fall last month. This was the first decline since January, which was again the only decline recorded since last September. New dwelling approvals continued to present a rising trend, while the Australian Bureau of Statistics’ (ABS) housing finance commitments value figure rose again by 1.1 per cent over the past month. The Westpac Melbourne Institute Consumer Sentiment Index rose strongly over August too, posting a 4.7 per cent rise to 110.6 points. This was evidently due to the improved affordability and positive expectations of growth in this sector over the coming years.
The Australian unemployment rate rose by 0.1 per cent to 5.8 per cent recently, with the participation rate unchanged. Inflation is currently at 2.4 per cent. The Australian dollar’s value against the US dollar rose by 4.8 per cent in the past month, after news of delayed cuts to the United States’ quantitative easing program.
Property market performance
While the capital city property markets are currently experiencing a heightened level of activity, it is important to note several of these property markets have not matched the rises experienced by other asset classes over the long-term past. As RP Data representative Cameron Kusher says, Sydney home values have not grown in the past decade by enough to even match inflation. Despite the eight Australian capital cities having grown an aggregate 9.2 per cent on an annualised basis since the start of 2013, only Sydney and Canberra’s median prices have currently passed their previous peaks. The markets for Hobart and Brisbane, for example, are currently 11.5 per cent and 9.4 per cent below their previous record dwelling values, and have only grown by 2.8 per cent and 2 per cent in the past year respectively.
There are differing perspectives about the direction of growth in the housing market. Given the rebound of this asset class since the beginning of 2013, with total year-on-year return currently at 10 per cent and close to 7 per cent growth since the start of 2013, there has been speculation about the expansion approaching levels that may be cause for concern.
One factor that has been brought into the spotlight is the disposable income growth statistic tracked by UBS, which is currently at 3.3 per cent and much lower than that during the previous periods of high dwelling value growth. Moreover, with the low cost of credit, there are fears of instability in the market potentially caused by a credit boom and loose lending standards by the mainstream Australian banks.
These revelations, however, are in contrast to the evidence pointing towards the market currently experiencing legitimate growth through fundamental market forces. In the past month, experts at several financial institutions have dismissed claims of an unstable bubble forming in this market. Reserve Bank of Australia (RBA) assistant governor Malcolm Edey was quoted as calling the fears of a housing bubble “unrealistically alarmist”, while ANZ’s Australian chief Phil Chronican called the claims “overstated”. Citibank economists pointed to the current increase in prices as not being caused by out-of-control debt, but by wealthy buyers exploiting the unique current conditions of this asset class re-emerging from recent decline.
In fact, while the cash rate has been reduced and thus improved affordability, the credit growth rates indicate this has not resulted in an increase in overall debt. RBA statistics indicate housing credit growth has only been 4.2 per cent from its previous historic lows last year.
The debt-to-income rate is also below previous peaks and there is anecdotal evidence that debt repayments have not fallen since the reduction of the borrowing rate. Moreover, the value of total finance commitments as tracked by the ABS has risen by just 1.1 per cent in the past year, while the housing turnover remains low compared to the last decade, according to the RBA. The lending standards in Australia are also under scrutiny by the International Monetary Fund, ensuring consistently stringent practices.
Housing market growth does not seem likely to be caused by speculation or rising credit with the potential to cause turmoil. It can be rather attributed to the increased affordability, rising demand from the increased population and decreased supply from credit-constrained property developers. Australian capital city dwelling values grew by 0.5 per cent over August.
Auction clearance rates
Auction clearance rates continued to surpass previous peaks in the capital cities of Sydney and Melbourne in August. The clearances were recorded at up to 86.3 per cent for Sydney and 80.1 per cent for Melbourne by APM in September. Monthly averages, according to the Real Estate Institute of Victoria and the Real Estate Institute of New South Wales, were a robust 75 per cent from around 1300 and 3000 auctions in Sydney and Melbourne respectively.
Capital cities
The capital cities showed a lower growth in August compared to the previous month. The outstanding performer was units in Adelaide, which rose almost 6 per cent in the month, followed only by an all dwelling growth statistic of 1.5 per cent for Brisbane. The steepest fall was posted by Darwin units, which contracted by 4.1 per cent in August. The highest year-on-year returns, according to RP Data, were for Perth’s detached housing at 14.7 per cent, closely followed by Sydney’s at 12.2 per cent.