2019 Is witnessing the rapid deflation of the Australian property bubble, which has been in the making for over a decade. Such is the seriousness that many fear this will puncture the economy. This came despite cheerleaders promising the Australian population that the housing market is robust, with solid fundamentals. As the facts demonstrate now: Every bubble has its day. This is notwithstanding the attractiveness of Australia as a country for wealthy migrants.
The only one thing Australia can do to reverse the bubble is to open up the property market to foreigners. This is because currently, only Australians can buy detached homes, whereas foreigners are limited to apartments. This is unlikely to happen though – so Aussies are bracing for the bubble of all times, with the wealthy likely to snap up properties from the middle class in coming months.
Australia enjoyed six years of strong housing prices, with CoreLogic (Australia’s data provider), ending their end-of -2017 report by noting that Australia was enjoying the fastest growth rate since 2009, with a year-on-year rise of 11.1%. Now, in 2019, Professor Steve Keen, formerly of the University of Western Sydney and now of at Kingston University in West London, has almost guaranteed a recession, saying it’s 95 per cent likely.
Exactly a year later, CoreLogic noted that price values had dropped 4.8% in 2018, with the country facing the weakest housing conditions since 2012.
The eight major cities saw slight drops of 0.27%, at the end of Q2, 2018 with quarter-on-quarter prices down by 0.6% in Q2.
Darwin saw the biggest decline, with a fall of 4.4% in the established house price index for Q2, followed by Sydney (-4.1%) and Perth (-0.4%).
However, Hobart saw house prices surge by 15.5% in the same quarter. Modest increases in prices were recorded in Canberra (3.8%), Melbourne (2.6%), Adelaide (2.4%) and Brisbane (2.1%), by the end of Q2.
The mean price of residential dwellings for the same quarter went down slightly by 0.3% from the same period for the previous year, at AU$686, 200. New South Wales, especially Sydney, is the most expensive with the mean house price at AU$889,200 at Q2 2018; 30% above the national mean house price. Tasmania has the cheapest housing, at AU$403,400.
All of the above statistics were drawn from the Australian Bureau of Statistics (ABS).
This sharp braking in housing prices is mainly due to the market-cooling measures introduced, including lending restrictions and higher taxes on foreign investment in the housing market. The RBA will be reporting soon and many are expecting an announcement of further tightening.
Household debt is currently high and price declines can have a positive effect for those wanting to enter the housing market. Young Australians may now have a better chance of buying property at last.
So far, the drop in prices have not had a significant effect on the market, but a further drop could dampen spending, especially since the debt levels are high and banks are tightening their lending. Australian households can’t afford any significant changes as they are already burdened by low wage growth and are saving less than ever.
Rental returns on apartments in Sydney rarely yield more than 3.7%, and most will yield as low as 2.8%. These are gross figures, and at least 2% of the yield will be absorbed by various costs.
Prices vary greatly in Sydney, depending on the area, with Vaucluse at relatively inexpensive levels, and Darling Point and Potts Point at the higher end. All these areas have low gross rental yields except for small apartments in Potts Point. Small apartments earn higher rental returns than bigger ones, especially in the more expensive districts.
Taxes and costs
In Australia, the acquisition of residential real estate by foreign nationals and corporations is subject to Foreign Investment Board (FIRB) approval. Foreigners may not buy a previously occupied house, and may only buy an unoccupied dwelling if there is no shortage of properties available to native Australians.
Taxes are high and rental income earned by nonresidents is taxed at progressive rates, from 32.5% – 45%. Depending on the property classification and location, an annual land tax may also apply.
Capital gains tax has a 50% reduction if the house has been kept for at least 12 months. For non-residents it is at the same level as individual income tax rates, and ranges from 32.5% to 45%.
Inheritance is not taxed directly.
Residents are taxed on their annual income at a progressive rate, from 0% to 45%, and are required to pay a Medicare levy of 1.5%.
Complete buying costs range from 3.76% to 21.15% of the property value. Stamp duty, paid by the buyer, ranges from 15% to 6.75%. The five procedures needed to register a property take five days to complete.
Tenancy laws are neutral and both parties well-protected by the Residential Tenancy Act in each state.
Rents can be freely negotiated; tenants can make an application to a Tribunal if they want increases reviewed. All states protect the tenant for the first year of tenancy, while no increases are allowed in that period.
Tenancy can be terminated by the landlord through giving notice or by using the Tribunal. It only takes an average of 44 days to evict a tenant as the judicial system is highly efficient.
Australia is a vast country and its population of 25,182 million lives a comfortable life, judging from all indices of income, human development, health care and civil rights.
IMF official statistics show that it had a GDP per capita of US$56,700 in 2018. Strong consumer spending helped expand Australia’s economy by 3.4% y-o-y in the Q2 of 2018, the fastest rate since Q3 2012. Economic growth was 2.2% in 2017, down from 3%, which was the average annual growth from 2000 to 2016, and reached 3.2% in 2018, where it is expected to stay for 2019 too.
After gaining 11.8% against the USD from September 2015 to September 2017, The Australian dollar depreciated against it in 2017-2018. It is currently trading at AUD 1=USD 0.725 according to the Reserve Bank of Australia (RAB).
Australia has a health trade surplus; it grew to AUD 3 billion in September 2018, the third largest on record, caused by rising iron ore prices, exports of LNG, and a drop in imports. Exports rose by 1% to AUD 37.5 billion, while imports fell by 1% to AUD 34.5 billion.
Unemployment fell to 5% in September 2018, from 6.6% the previous year, and there are 665,800 unemployed people in the country.
Inflation was slightly higher than the previous year at 1.9% in Q3 2018.
Everyone will be watching the housing market in 2019 to see how far it will decline. The policies implemented in 2017 by the Australian Prudential Regulation Authority (APRA) have worked effectively and precipitated the desired slow down in order to prevent a housing market at risk of becoming a bubble.
Commentary by Martin North, a prominent data scientist in Australia: