3 August 2017
Australia outpaces low wage growth as property values continue higher
Citi talks to Core Logic’s Tim Lawless about influences in the residential property market.
By Damon Frith
The forces driving prices in different segments of the housing market vary considerably, and currently, global growth and a healthier outlook for the financial services sector are keeping a floor under the high end of the property market.
Despite a long and sustained period of capital growth, Core Logic director of research, Tim Lawless, says properties in the multi-million dollar category are more affected by events like prevailing bonus levels in the financial services sector, and the performance of leading economies.
"So in 2008 and 2009 when the global financial crisis hit, bonuses were slashed, and there was job shedding in financial services. And it had a great impact on the Eastern Suburbs and lower North Shore in Sydney, and other blue chip locations.
"But now world growth is returning to trend, and even though Australia’s performance is expected to be below par for the next 18 months, in the period after that Treasury and the Reserve Bank of Australia expect growth to return to trend at around 3.5 per cent.
"That's a fairly good outlook," says Lawless, “and it helps put a floor under the prolonged period of property price increases we have experienced since late 2008.”
An issue for the broader property market is the sustained period of low wage growth, which has been experienced since the 2009 international recession, and end of the mining boom and the high salaries it created from 2004-2010.
Lawless says rental and capital growth outweighs the wage growth issue currently, but that households were increasingly becoming aware of the cost of debt. It’s also an issue the RBA is acutely aware, and Lawless shares the position of Citi that the RBA will be cautious in any shift to higher rates.
And low wage growth also impacts housing affordability, particularly for first home buyers as they seek to raise a deposit. In the past five years dwelling values in Sydney and Melbourne have increased 77 per cent and 61 per cent respectively.
According to Core Logic's latest research in the 12 months to June 15.4 per cent of all house sales, and 8.8 per cent of all unit sales nationally, were at a price of at least $1 million. By comparison, 12 months earlier 14.4 per cent of all house sales and 7.5 per cent of all unit sales were at least $1 million in value.
Break it down to the main capital cities and the numbers are more dramatic. In Sydney nearly half of all houses sold went for more than $1 million in the 12 months to June. In comparison a decade earlier it was 13.8 per cent.
"That's a fairly good outlook, and it helps put a floor under the prolonged period of property price increases we have experienced since late 2008."
In Melbourne, just over a quarter of all houses fetched more than $1 million, compared to 5.8 per cent a decade earlier.
Unit sales are also breaching the $1 million mark more frequently, and in the past year represented 21.4 per cent of unit sales in Sydney, and 7.4 per cent of sales in Melbourne.
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Of course it's impossible to talk residential property without discussing investors, and although the environment has become more difficult for the investor, they are still a dominating force.
Lawless says the latest ABS data revealed 55 per cent of all property loans originations in June came from investors in the NSW market.
But he said investors in NSW with an interest only loan can now be paying as much as 100 basis points more than a loan to an owner/occupier, and that eventually investors will likely turn to higher yield and job growth regions like South East Queensland.
He also said foreign investors were being impacted by tightened lending policies from financial institutions, but that regulatory changes and moves by some states to impose additional taxes were viewed more as a "cost of doing business."
However, constant "changing of the goal posts" could create a sovereign risk issue, he said.
For many foreign investors Lawless said capital gains and yields were secondary issues, as they were buying properties for family members that may be living here, or as a residence for when visiting.
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