In only seven months, overall Australian real estate value has risen half a trillion dollars to a 13-year high, hitting AUD 6 trillion this July. The main drivers of this growth are the capital cities of Sydney and Melbourne. In these capital cities, the respective market values rose 3.3% and 4.9% this month. The growth is consistent with the three-year growth records of Sydney at 48%, and Melbourne at 32%.
These record highs are partly linked to China’s economic slowdown and its effect on the Australian economy. China’s demand for Australian ore has been in decline for the last few years, lowering one of Australia’s main sources of government revenue and export earnings. China is Australia’s main export market, accounting for over a quarter of Australian exports.
To combat a possible downturn in the Australian economy because of lowered exports to China, the Federal Reserve is keeping across-the-board interest rates low. The most recent cut was in May of this year, where the Federal Reserve lowered overall interest rates to 2%, down 0.25% from February. The resulting increase in investment will cause a projected 3.2% GDP increase this year.
However, all eyes are on the booming real estate market. This sector, more than any other, could counteract the positive investment environment by causing a housing bubble. Due to the boom, demand is driving real estate prices up. The situation is worsened by foreign investors joining the game.
Interestingly, while the Chinese public sector is forced to import less ore from Australia, its private sector is investing in Australia’s real estate. Chinese investors spent a projected AUD 44 billion in 2014 alone for property. Since they are often willing to outbid Australian buyers, Credit Suisse estimated that 12% of new homes being built have Chinese buyers. The effect is mostly seen in Sydney and Melbourne, where Chinese nationals are buying 18% and 14% of the new homes in those respective cities.
Wary of an oversupply of housing, both policy-makers and banks are taking preliminary measures to slow the real estate market growth. While demand remains high, particularly in Melbourne, the possibility of a housing bubble is slowly being lessened. The Australian Prudential Regulation Authority (APRA), for one, set an annual property credit growth of 10% in December, to prevent unstable inflation rates.
Policy-makers are also requiring stricter standards for housing loans, while banks are increasing mortgage rates and loan deposits for property investments. These measures benefit owners of rented properties, since rental growth rates in Sydney and Melbourne are being far outstripped by the growth in the actual real estate values. For example, while the rental rates in Sydney increased by 2.5% in 2015, the real estate values rose by 18.4%.
In the wake of these figures, house buyers in Sydney and Melbourne face the question of waiting until the market peaks and drops, or taking their chances on the current market situation. Since the mad mortgage rush seems to be plateauing, buyers may cautiously make their way back to the market. A responsible approach would be to contract the services of mortgage brokers on 1300HomeLoan, to gain an in-depth understanding of the current housing market and the best mortgage rates for home ownership.
