A downturn in Australia’s property market will only contribute to concerns of a two-speed economy in the resource-rich nation. Mining profits are bursting at the seams due to heavy demand from China and other fast-growing Asian countries, while consumer businesses and manufacturing have gone into hiding from concerns about the prospect of growing rates, the high value Australian dollar, trading near 30-year highs to the US currency, as well as the economic misfortunes of Europe and the US.
This situation may well worry foreign investors who have poured more than $20 billion into the market every year since 2004, on average, according to data from Australia’s Foreign Investment Review Board.
While many overseas investors are still optimistic one can well ask the question of how long this will last?
“That said, at this point, it has to feel like a long-term investment.”
The combined average price of homes and apartments in Australia’s capital cities is off 2 per cent from a year ago and 2.7 per cent this year, checking in at $462,500, according to property research firm RP Data-Rismark. This comes as Australia’s economy starts to cool, with the central bank recently downgrading its average growth forecast for the year to 2 per cent from 3.25 per cent.
Home Loans in arrears by 30 days or more reached an all-time high in the first quarter of 1.8 per cent, according to ratings firm Fitch Ratings. However, that level is still well under the home loan arrears experienced by the US, which saw 8.4 per cent in the June quarter, according to the US Mortgage Bankers Association.
According to the Australian Bureau of Statistics, new-home construction in Australia has jumped 26 per cent in just the last year, as of June, to about 165,549 units, and is up 10 per cent from 2006. A large part of this increase comes from Victoria, where home construction is up 40 per cent since 2006 at 54,476 units last year in the state capital, Melbourne, Australia’s second-largest city.
About 10 per cent of the 120,000 new homes approved for construction by city governments in Australia in the past year were apartments in Melbourne, according to city administrators and the bureau of statistics.
Home and apartment prices in Melbourne are down 3.9 per cent this year to $485,000. In the Western Australian capital of Perth, prices are down 2.4 per cent to $461,000, according to RP Data-Rismark. Sydney has side-stepped some of the weakness, up 0.5 per cent over the past 12 months, but still off 1.3 per cent since the start of this year to $515,000.
So far, Australia’s big four banks – ANZ, Commonwealth Bank of Australia, Westpac and National Australia Bank – appear to be weathering the turn, though scrutiny could increase if the market worsens. The four hold more than $850 billion, or more than 80 per cent, of Australia’s home loans, though Fitch estimated last year that they could withstand a price drop of up to 40 per cent.
“The big question is where does unemployment go, that’s when you get the forced selling,” said Ivan Colhoun, head of Australian economics and property research at ANZ, who finds solace in Australia’s still-low 5.1 per cent unemployment rate.
Locally, buyers have already started to wane. In the last year, there were 90,210 first-home buyers across Australia, 35 per cent lower than the previous year and a seven-year low, according to BankWest, a Western Australia-based lender and unit of Commonwealth Bank.
Mr Donnelly, whose firm has sold residential property in Australia worth more than $1.2bn to mostly overseas investors, says the market in Sydney and Brisbane could sidestep some of the weakness, largely because both fell behind in the recent development push.
Brisbane has also been weak, with prices off more than 6 per cent this year, but much of the drop stems from the devastation to the capital of Queensland state earlier in the year from a series of floods.