Sydney: Australia’s flagging property market is poised to get a boost from record low interest rates and a housing shortage that could boost prices by as much as 10 per cent this year. The Reserve Bank of Australia has cut the cash rate by 1.75 percentage points since November 2011 to match a 50-year low, which has helped reduce standard variable mortgage costs to 6.65 per cent in November, the lowest in almost two years, central bank data show. Traders are betting on a 49 per cent chance the central bank will drop the rate a quarter point to 2.75 per cent by March, interest-rate swap prices compiled by Bloomberg show. While lower borrowing costs failed to stimulate demand in 2012, additional rate cuts and a constrained supply of homes will draw buyers back to the market, said Janu Chan, a Sydney-based economist at St George Bank Ltd.

A decline in home prices is already showing signs of moderating, with a 0.4 per cent decline in 2012 after a 3.6 per cent drop in 2011, according to data from Brisbane-based researcher RP Data. “The two most recent rate cuts, and all the successive ones, should continue to feed through to the economy and have an impact, particularly on housing,” Chan said in a telephone interview. “There’s also the supply side — there’s been a long period of underbuilding in various areas.” Chan predicts home prices could rise by 5 per cent to 10 per cent on average in Australia’s biggest cities, including Sydney, Melbourne and Perth in 2013.

Median price

Her estimate is higher than those of analysts from Australia & New Zealand Banking Group and Commonwealth Bank of Australia, who predict average gains of between 3.5 per cent and 5 per cent in the cities. The median price for homes and apartments across the eight biggest cities was A$483,000 (Dh1.8 million, $506,473) as of December 31, according to RP Data. Sydney’s was the highest at A$580,246, Melbourne’s median price was A$500,000 and Perth’s was A$479,000. House price growth started to slow in 2010 after rising every year but one in at least 23 years, according to government data. Prices fell 4.1 per cent in 2008, before climbing 14 per cent again the following year, the data shows. New homes under construction fell for the third straight year in the 12 months to June 30, statistics bureau data showed. Approvals to build homes slipped for a second straight year to 145,515 units in the year to October 31, compared with 160,760 two years earlier, according to government figures. Australia’s building industry, which has been shrinking for 30 months, is showing signs of recovery, a private construction performance index showed.


The index rose to 37 in November from 35.8 per cent in October, revealing a slower pace of contraction, according to the most recent index figures. The S&P/ASX 200 Real Estate Index jumped 25 per cent last year, compared with about 15 per cent for the benchmark index. Construction also is picking up, underscoring a turnaround. Residential work done rose 1.5 per cent in the September quarter from the lowest level since March 2010 in the previous three months, data from the statistics bureau show. Queensland, New South Wales and South Australia state governments are trying to both stimulate building and boost demand for homes by offering A$15,000 to first-time home buyers purchasing a newly built home, according to state government announcements made in 2012. They join the Reserve Bank in trying to stoke industries such as construction as commodity prices ease and the nation’s mining boom looks set to peak this year. The measures contrast with moves by governments across Asia to contain booming housing markets. Singapore home sales are expected to fall as much as 27 per cent, according to Chicago-based broker Jones Lang LaSalle Inc, after six rounds of housing curbs by a government trying to control prices that soared to a record in 2012.


Hong Kong’s monetary authority has warned about an overheated property market and a “disconnect between property prices and economic fundamentals” after prices doubled in the past four years. An increase in home building will help keep a lid on Australian prices and avoid a repeat of the surges following the RBA’s last easing cycle, said Savanth Sebastian, an economist in Sydney at a unit of Commonwealth Bank who forecasts a 5 per cent average increase across the country in 2013. Despite declines in mortgage rates, “the housing market has still been unable to record growth in values over the year,” RP Data senior research analyst Cameron Kusher said in an emailed release this week. “It is clear that the previous strong value growth conditions to which many home owners have become accustomed of recent years are well and truly behind us.” Kusher forecasts 2013 home price increases between inflation and wage growth. That would equate to price growth between 2 per cent and 3.75 per cent, based on government and RBA forecasts. The central bank cut its benchmark rate to 3 per cent in April 2009 from 7.25 per cent in September 2008. House prices responded, surging 21 per cent in the 15 months to June 2010, according to government data, boosted also by increased handouts of as much as A$21,000 to first-time buyers of both new and existing properties.

Lending and prices also took off after the overnight cash rate was lowered to 4.25 per cent in December 2001 from 6.25 per cent in February that year. House prices almost doubled in the following decade as households’ debt-to-disposable income ratio jumped to a high of 156.3 per cent in September 2006 from 97.7 per cent in March 2001, according to central bank data. That ratio was at 148 per cent in the September quarter.


“Forward-looking indicators of residential construction, including building approvals, continued to point to a modest recovery in that sector in the period ahead,” the RBA said in minutes of its December 4 meeting. “This was likely to be supported by the pickup in dwelling prices, sales activity and rental yields over recent months.” Total gross returns on houses and apartments rose to 4 per cent as of December 31 across Australia’s eight biggest cities, compared with minus 1.2 per cent six months earlier, figures from RP Data show. At the same time, rental yields remained steady at 4.2 per cent for houses and 4.9 per cent for apartments, according to RP Data. Australia had 494 suburbs in November where it was more expensive to rent than to buy a house or apartment, up from 388 in October, RP Data said. Rising rental yields are drawing more investors to purchase. Investors accounted for A$7.7 billion of home loans as of October 31, a 15 per cent jump from two months earlier, while loans to owner occupiers rose 1 per cent to A$9.94 billion in the same period, statistics bureau figures show. Housing finance approvals for owner occupied and investment properties rose 3.8 per cent in the 12 months to October 31, after falling 2.8 per cent in the same period a year earlier, according to statistics bureau figures. “Housing finance has seen some steady growth and a lot of other indicators of housing market confidence have started to turn,” David Cannington, Melbourne-based economist at ANZ Bank, said. “We’ll most likely see 100 basis points of interest rate cuts in 2013 and that’ll go a long way toward improving housing affordability.” Cannington forecasts prices across capital cities will be about 3.5 per cent higher than current levels by the end of 2013.


Still, even as mortgage approvals rise, the pace of growth remains sluggish. Growth in mortgages to owner occupiers declined 4.3 per cent as of October 31, compared with 9.3 per cent three years earlier, according to RBA figures. Home-loan growth remains at the slowest pace since records began in 1977 as concern about the growth of the global economy and declining commodity prices kept potential home buyers on the sidelines. The RBA’s rate cuts are helping boost affordability and reduce the number of Australian home owners missing payments on their mortgages, Fitch Ratings said in a December 24 report. The proportion of mortgage payments more than 30 days late dropped to 1.36 per cent in the three months ended Sept. 30 from 1.54 per cent in the previous quarter, it said. “Fitch expects the Reserve Bank of Australia rate cuts in October and December 2012 to provide relief to borrowers, improving affordability for existing borrowers,” Hai Duong Le, a Sydney-based analyst at Fitch, said in the report. “The agency expects this to be reflected” in mortgage performance in the following two quarters, he said. About half of Australian borrowers are ahead of schedule on their mortgages, with prepayments equal to more than 10 per cent of outstanding home loans, or 1.5 years of repayments, the RBA said in its Financial Stability Review in September. “It’s still early days but you could say the worst for the housing sector is behind us and it’s a steady crawl upwards now,” said CBA’s Sebastian. “It’s more about creating affordable homes than going out and seeing a price surge. So we expect modest growth, rather than extravagant growth.”