“I’m not sure if I paid too much,” said Wong, an accountant at the University of Sydney, after winning the bidding war for the investment property in an inner-west suburb where prices have tripled in the past 15 years. “Since I can, and have capacity to borrow money, I should utilise it.”
Australia, where housing accounts for about 60% of average household wealth compared with a global average of 45%, joins countries from Canada to Sweden to China seeing rapid price gains amid low borrowing costs that are sparking fears of a housing bubble. For now, constrained housing supply and demand from investors are driving prices higher, overpowering the downdraft from slower economic growth and a rising jobless rate.
“It’s easy to see how bubble-like conditions could emerge,” said Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne. For now, while prices are climbing, the increase isn’t being accompanied by a rapid rise in borrowing or building, he said.
In Sydney, the nation’s most populous city, the average home price surged 13% in the 10 months to Oct 31 to a record A$718,122, according to the RP Data-Rismark home value index. That compares with US$806,000 (RM2.6 million) in New York as at Sept 30, according to the Real Estate Board of New York, and £331,338 (RM1.7 million) in London, according to the Nationwide Building Society.
Australians are used to high home prices and debt. Average household debt has hovered near 150% of annual income since 2006, compared with 135% in the US. House prices haven’t fallen more than 10% in any one year for more than 40 years, according to data cited by the Reserve Bank of Australia (RBA).
In Newtown — a former working-class suburb 5km from the city centre where Wong bought the property, her first as an investor — prices have risen 13% this year, according to researcher Australian Property Monitors (APM).
More than 81% of homes that went to auction in Sydney over the Nov 2 weekend were sold, even as the number of properties for sale rose to 739, the highest number in three years, according to APM.
The average home price across Australia’s biggest cities was A$605,336 as at Oct 31, after recovering from a decline of 7.4% between October 2010 and May 2012, according to the RP Data-Rismark index. While that’s a record, it’s about the same level in real terms as at the end of 2010, based on the statistics bureau’s inflation calculator.
Houses in Sydney took 26 days on average to sell in the week ended Nov 3, down from 36 days six months earlier, according to RP Data. In Melbourne, houses took 34 days to sell, down from 46 days.
Investors like Wong and self-managed pension funds, along with foreign buyers, are spurring the recovery. The value of loans to investors rose a seasonally adjusted 26% in August from a year earlier, while those to owner-occupiers increased only 9.7%, government data show.
Rising sales to investors puts the housing market in a more precarious position if economic conditions unexpectedly sour, Eslake said.
“Investors aren’t as committed to their properties as owner-occupiers,” he said by telephone. Changes in the outlook for home prices, rising interest rates or unfavourable changes in regulation could lead them to “dump their properties, putting sharp downward pressure on prices,” he said.
Australia’s tax structure, which allows property investors to claim deductions on investment losses and offset them against other income, encourages investors to buy when they otherwise wouldn’t, Eslake said.
Among investors, self-managed-superannuation funds — pensions managed by individuals rather than large money managers — have been boosting purchases of homes. Investment by SMSFs in residential property has risen 65% since mid-2008 and 10% in the 12 months to June to A$17.5 billion, according to data from the Australian Taxation Office (ATO), which oversees regulation of the small funds. The ATO’s June 2013 data are extrapolated from the funds’ tax return filings for the year through June 2012.
While do-it-yourself pensions borrow on average about 70% of the value of a home, compared with about 90% for regular borrowers, based on Australia & New Zealand Banking Group Ltd figures, they could “potentially exacerbate property price cycles,” the RBA said in its Financial Stability Review last month.
Foreigners accounted for 12.5% of purchases of new homes in the three months to Sept 30, compared with about 5% through most of 2011, according to a survey of more than 300 property professionals by National Australia Bank Ltd. The government doesn’t publish data on the level of foreign investment in residential property.
While Australia is the world’s sixth-largest country by size with a land mass of 7.7 million sq km, about two-thirds of its 22 million people live in its eight state and territory capitals, which occupy less than 0.5% of the total area, according to the statistics bureau.
“This population concentration puts upward pressure on capital city dwelling prices,” Michael Blythe, chief economist at Commonwealth Bank of Australia, said in an Oct 15 report. Valuations based on capital city home prices and Australia-wide incomes “will have a natural upward bias,” he said.
Sydney now has 122 suburbs — or one in five — with a median home price above A$1 million, a 31% jump from a year ago, according to researcher APM. — Bloomberg
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