Capital city house prices
Between 1995 and 2005, real house prices in Australia increased by more than
6 per cent annually. This was well above the average annual increase in the 20
years to 1995 of just 1.1 per cent.
When compared with some other capital Australian cities, established house
prices in Sydney grew at a considerably slower pace through much of the 2000s;
and most capital cities experienced flat or negative growth toward the end of
the 2000s. Since the end of 2012, capital city established house prices have
generally increased. The median established house price in Sydney has
increased by 15 per cent since December 2011. Perth (up by 9 per cent) also
experienced relatively strong median house price growth over this period. As of
March 2013, Sydney had the highest median established house price at $605,000,
followed by Perth ($528,000) and Melbourne ($480,000). [2.1]
NSW house prices
Between June 1990 and June 2013, the median NSW dwelling price (for all
dwellings) increased by $339,000 (262 per cent). Price growth has been most
pronounced in the Greater Sydney region where the median dwelling price in the
Inner Ring of Sydney increased by $555,000; prices in the Middle and Outer
Rings of Greater Sydney grew by $455,000 and $332,000 respectively.
The recent upturn in the Sydney market is being led by inner Sydney which
has outperformed Sydney’s overall median growth. Since the end of 2012,
the median Inner Sydney Ring dwelling price grew by $70,000. The median
dwelling price in the middle and outer Sydney rings also grew by $56,000 and
$38,000 respectively. [2.2]
According to BIS Shrapnel, growth in Sydney’s median house price is
forecast to continue rising by 6.5 per cent in 2013-14, 6.1 per cent in
2014-15, and 5.1 per cent in 2015-16. This growth is expected to be driven by
improved State economic conditions and also by the deficiency of dwelling stock
into the middle and outer suburbs. [2.2.1]
General demand drivers
On the demand side, a number of factors have contributed to the strong
growth in house prices over the last two decades: high population growth
(primarily as a result of high migration); real household income growth;
nominal interest rates have fallen; and financial deregulation has meant that
housing finance is more readily available. [3.1]
Between 1991 and 2011, NSW’s population increased by 1.3 million
people, with Sydney accounting for 71 per cent of this increase. New South
Wales’ population increased by 92,827 persons through the year to March
2013 which represents an increase of 1.8 per cent which was the highest level
of growth since the 12 months to March 2008. [3.1.1]
Between 1993 and 2000, Gross State Product (GSP) grew in NSW at an average
annual rate of 4 per cent. This strong period of economic growth also
corresponded with the rapid increase in real estate prices which grew at an
average rate of 7.5 per cent over the same period. [3.1.2]
The move to a low-inflation environment saw interest rates fall over much of
the 1990s and remain at these relatively low levels throughout the 2000s. The
Productivity Commission (2004) and the Senate Select Committee on Housing
Affordability in Australia (2008) both concluded that cheaper and more
accessible housing finance underpinned demand and house price growth. The
current monetary easing cycle has seen the cash rate fall by 225 basis points
to 2.5 per cent (its lowest level in more than 50 years), which has triggered
strong demand growth in the last 12 months. [3.1.4]
Composition of housing demand
Prior to the late 1980s, housing demand was largely accounted for by owner
occupiers. However, the rapid escalation of prices in the early 1990s, combined
with structural tax changes and improved access to credit, saw residential real
estate become a highly desirable form of investment. First home buyers and
owner-occupiers are now not only competing with domestic investors, but also
foreign investors. [3.3]
Value of residential purchases by buyer type,
Australia
Upgraders and downsizers represent the largest component of residential real
estate demand in NSW. In November 2013, there were 16,140 non-first home buyer
(NFHB) owner occupier dwellings financed in NSW. This is above the previous
6-year monthly high of 15,264 reached in October 2013. There have been 156,751
NFHB owner occupier dwelling finance commitments over the 12 months to November
2013. This is well above the calendar average of 125,759 since 2007. NFHB
demand as a proportion of owner occupier demand reached a high of 93 per cent
in NSW, around 6 per cent above the Australian average. [3.3.1]
First home buyer (FHB) demand in NSW has varied over the last two decades,
with the two notable periods of fluctuation corresponding directly with changes
to first home owner incentive schemes in 2001 and 2009. FHB demand reached 34
per cent of all owner-occupier sales by mid-2009 (well above longer term trends
and also well above the previous peak reached in 2001).
With the exception of the brief upturns in 2011 and 2012, FHB demand has
been in decline in NSW since peaking in 2009. In November 2013, there were
1,286 housing finance commitments to first home buyers in NSW. Over the past 12
months, there were 12,682 commitments by first home buyers, 51 per cent lower
than over the same 12 month period in 2012 (25,627 commitments). First home
buyer finance commitments have accounted for 7 per cent of all owner occupier
finance commitments in NSW over the last 12 months. [3.3.2]
Investor activity has been trending up since the late 1980s. In 1985,
investors accounted for only 13 per cent of total housing finance in Australia;
as at November 2013, investors accounted for 38.5 per cent of total housing
finance.
This increase in investor activity has contributed to the growth in housing
prices over the last 12 months. At a national level, there was $10.2 billion
worth of finance commitments for investment purposes in November 2013, which
was 39 per cent higher than in November 2012. Investment finance commitments
were 24 per cent higher over the year over the 12 months to November 2013.
[3.3.3]
Between 1995-96 and 2011-12, the value of foreign investment approvals in
Australian real estate increased from $12.4 billion to $59.1 billion. In
2011-12, residential approvals accounted for $19.7 billion, with the remaining
$39.4 billion tied to commercial approvals. Since 1995-96, the number of
foreign residential investment approvals in Australia has increased from 3,181
to 9,768.
Foreign investment growth in NSW residential real estate remained relatively
subdued prior to 2008-09, varying between $2 and $4 billion. Foreign investment
in NSW has more than tripled between 2009-10 and 2011-12 from $1.9 billion to
$6.9 billion.
Since 2007-08, real estate investment in Australia from China has increased
by more than $2.7 billion. Real estate investment from Singapore has also
increased significantly from $1.8 billion in 2007-08 to $5.7 billion in
2011-12. The US was the largest foreign investor in Australian real estate in
2011-12 at $8.1 billion. [3.3.4]
Housing supply
Over the longer term, dwelling commencements have generally failed to keep
pace with increases in underlying demand despite rising house prices. Annual
dwelling approvals (all property types) in Australia have declined by 15 per
cent since 2002, and in 2012, were at their lowest level (90,438) since 1996.
Nationally, dwelling approvals have been trending up in recent months; with
monthly housing approvals for October 2013 up 9 per cent since January and
other dwelling approvals are up by 30 per cent. This increase in approvals is
most likely a response to the rapid price rises seen across the major capital
cities, including Sydney, at the end of 2012 and throughout 2013. [4.1.1]
In NSW, between 1995 and 2012, the annual number of dwelling approvals (all
property types) decreased by 22 per cent from 57,528 to 36,394. This decrease
was largely accounted for by the 40 per cent decline in housing approvals over
this period. The number of ‘other’ dwelling approvals has
fluctuated over this period, but recent downward growth has meant they remain
around the 20-year historical average. [4.1.2]
Home ownership affordability
Rental prices, which form a large component of a prospective home buyers
housing costs, have risen consistently in NSW over the last two decades, with
the growth most pronounced in the inner urban areas of Sydney. Between March
1993 and March 2013, the median rent (for all properties) in the inner ring of
Sydney more than doubled from $195 to $560; while the median rent in the middle
ring of Sydney increased by $300. [5.1]
The ratio of dwelling prices to income in Australia was relatively stable
over the early to mid-1980s, but rose considerably during the late 1980s, the
1990s and the early 2000s, driven by rising dwelling prices. Between 2003 and
2012, the ratios flattened and then trended lower. Sydney’s house price
to income ratio has tended to be above those of the other State capitals.
[5.2]
Housing interest repayments in Australia have increased over the last decade
as a proportion of disposable income. Throughout the 1990s, this figure
fluctuated between 4 and 6 per cent. Between December 2001 and June 2008, this
ratio increased from 5.1 to 10.9 per cent. This period reflected rising
interest rates and declining affordability for households. While this ratio has
declined following its peak in 2008, it still remains above the 20 year
historical average of 6.7 per cent. [5.3]
Gearing (the ratio of the value of housing debt to housing assets) has
nearly tripled since the late 1980s, increasing from 10.6 per cent in September
1985 to 28.4 per cent in June 2010. This can expose borrowers and
owner-occupiers to financial risk and variation in interest rates which may
undermine the long-term affordability of home-ownership. [5.4]
The most widely reported measures of home loan affordability in Australia
are the Real Estate Institute of Australia Home Loan Affordability Indicator,
the Commonwealth Bank of Australia–Housing Industry Association Housing
Affordability Index, and the BIS Shrapnel Home Loan Affordability Index. All
three indexes show that home loan affordability has fluctuated considerably in
the last two decades; and while affordability improved between 2010 and 2012
following a decline in interest rates, affordability remains relatively weak on
a longer term historical basis. However, the methodological and data
limitations associated with these indexes prevent a complete and localised
assessment of affordability. Also, these indexes are not entirely up to date.
With interest rates at the bottom of the easing cycle and price growth
expected to continue, the affordability problem is unlikely to improve
significantly in the next few years. Sydney and Melbourne, which are the least
affordable capital cities in Australia, are also ranked 3rd and
6th globally in terms of unaffordability by the Demographia
International Housing Affordability Survey. [5.5]
Outcomes of reduced affordability
Home ownership rates for young households have declined steadily since the
mid-1980s and represent a negative outcome of the affordability problem in
Australia. According to Battellino (2012), it may be that this is driven by
demographic factors; but it is largely financially driven by unaffordability.
[6.1]
There are wealth implications from not having affordable access to home
ownership. Owner-occupiers not only own all of the owner-occupied housing
wealth, they also own most of the wealth in investment housing and most
non-housing wealth. Baby boomer households (born from 1945 to 1960 and in
middle age in 2005-06) who were able to become home owners (most likely in the
1970s or 1980s and no later than the 1990s) have the greatest holdings of all
forms of wealth. Households who have not been able to gain access to home
ownership have relatively little wealth of any sort. [6.2]
