Australia is the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund. Photo: Supplied
There are signs home ownership could get more affordable, as lower interest rates, increased construction activity and a growing population threaten to stabilise property prices and rental income.
According to National Australia Bank data, Australia’s population growth has surged in recent years, helped mainly by growing migration. This has provided an added boost to construction in a low interest rate environment.
Growth in rental accommodation has slowed over the past year, and appears to be facing a further decline.
“A better balance should eventually also show up via a slowdown in house price appreciation,” said NAB global head of research Peter Jolly.
“Recent house price appreciation has been driven by more than simply a strongly growing population. Low interest rates have encouraged domestic investors to make asset allocations into housing. Foreign investors have also been buying. A reduced rental return on housing would eventually discourage domestic investors but that probably comes with a lag.
The apparent equalisation between an under supply of housing versus strong demand for dwellings in major metropolitan areas comes as the official cash rate remains at a record low of 2.5 per cent, and as the major banks lower their fixed rate home loans in an attempt to entice more people to borrow more.
Australian property prices are viewed globally as expensive. In fact Australia is the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund.
The average capital city property price rose 16 per cent as of June 30 from a May 2012 trough, the RP Data-Rismark Home Value Index showed.
A surge in housing construction, led by unprecedented building of higher density housing, has helped to narrow the gap between housing supply and demand. It has also led to reduced demand for rental accommodation, which could weigh on rental returns in years to come.
More will be known about building approvals on Thursday with a key economic data release set to provide further evidence that supply in residential construction has finally caught up to the quickly growing population.
But Australia and New Zealand Banking Group senior property analyst David Cannington said that stronger population growth also means that it could take some time between supply and demand forces do equalise and take the heat out of the property market.
“Comparing long-term growth in population to housing construction shows our estimates of underlying housing market balance estimate that 14 years of under construction relative to population growth has built up a cumulative shortage of around 300,000 dwellings at the national level - around two years of housing construction - which would take years of excess construction to unwind.”
In January this year approvals reached 17800 in the month – a 37-year high and second highest of all time. Around a quarter of all approvals were for four storey or more apartments – particularly in Sydney and Melbourne, cited Mr Jolly in a NAB research report.
But Andrew Wilson senior economists at Fairfax-owned Australian Property Monitors is hesitant about recent data pointing to a break down in the supply and demand tension. Rather he said it was important to look at individual markets and submarkets as there are diverse supply demand dynamics at work.
The Reserve Bank of Australia has repeatedly indicated that it is watching the property market given historically low interest rates, and a slowing in demand for rentals is likely to be a concern if more people are buying and building property.
The consensus of economists expect June building approvals, due on Thursday, to show that approvals remained strong. NAB economists are looking to see a 4 per cent gain in total approvals for the month and 28 per cent surge for the year.
The population of Australia stood at 23.3 million in December 2013, according to the Bureau of Statistics. Growth slowed in the fourth quarter but through the year increased by 396,200 people, or 1.7 per cent.
The bulk of the increase came from a 236,000 increase in net migration, compared to a natural birth-related increase of 160,000.
“The 1.7 per cent growth in Australia’s population during 2013 is not only rapid compared to Australia’s history but it is almost uniquely quick for a developed country. As a comparison, during 2013 Japan’s population shrunk 0.2 per cent, Europe was flat, and the US grew +0.7 per cent,” said Mr Jolly.