Factors For High Property Prices

A new study conducted by Galaxy Market Research on behalf of State Custodians revealed the six factors Australians blame for the high property prices in the country’s biggest capital cities.

While respondents across various age groups couldn’t agree on what caused the boom, foreign investment was seen as the biggest culprit for high house prices. Fifty-nine percent of respondents across all age groups believe that foreign investment was the main cause of the housing boom.

Among Generation Y, 49% believe that foreign investment was the main cause of the housing boom. This percentage increases among older age groups. Fifty-four percent of Gen X respondents, 66% of Baby Boomers, and 72% of those aged 65 and older blame foreign investment for the housing boom.

Respondents across the various age groups listed the following five factors as also contributing to the housing boom: overpopulation (42%), domestic property investors (41%), high transaction costs (35%), low interest rates (32%), and low supply of houses for sale (28%).

While all these factors likely had an impact, it was “the perfect storm of all of them together [that likely led] to the market we are experiencing today,” said Joanna Pretty, general manager at State Custodians.

Foreign investment was targeted in the federal government’s 2017-18 budget. Among other changes, foreign investors who keep their properties vacant for at least six months will face a levy of at least $5,000 per annum. As for new developments, only 50% of stock can be sold to foreign buyers.

Low interest rates likely had a bigger impact than foreign investors

While it’s easy to blame foreign investors for skyrocketing house prices in Sydney and Melbourne, many experts says low interest rates likely had a bigger impact than foreign demand for Aussie real estate.

Hans Kunnen, chief economist at Compass Economics, agreed that foreign investors shouldn’t be blamed for rising house prices in the south eastern capitals. However, he did say foreign investors could be causing apartment property prices to rise. “Foreign investors buy apartments more than houses and when you’re looking at house prices it’s not foreign investors pushing prices up,” he said.

Kunnen also noted that house prices were rising far more quickly than apartment values, suggesting that other forces were responsible for Sydney and Melbourne’s affordability crisis.

Although dwelling valuations in Australia are 5-15% above historical averages, the risk of a catastrophic collapse in the housing market is low, argues Merlon Capital Partners, a Sydney-based boutique fund manager.

In its latest paper, entitled Some Thoughts on Australian House Prices, Merlon acknowledged that the nation is currently at a cyclical high point, with “house prices, housing finance activity and building approvals … all at historically elevated levels.” At the same time, interest rates are at record lows and have begun to hike, particularly for investors.

“We think the housing market is 5-15% overvalued relative to ‘mid-cycle’ levels. Contrary to recent commentary, we do not find this over-valuation to be concentrated in the Sydney market,” said Hamish Carlisle, analyst at Merlon Capital Partners.

Carlisle doesn’t find the modest system-wide overvaluation to be particularly surprising at the current point in the economic cycle, and notes that the nation is a long way off from what are considered to be “mid-cycle” interest rates. “Rising interest rates - as we are currently experiencing - are likely to be a precursor to a turn in the cycle so it is likely we will enter into a phase of more subdued house price inflation.”

Favourable tax treatment of housing, coupled with historically low interest rates and favourable fundamentals (i.e. income and rental growth), mean that it’s highly unlikely that house prices will retrace to “mid-cycle” levels in the foreseeable future.

Carlisle further asserts that regulator concerns about house prices are “overblown”. Growing regulatory restrictions, which force banks to ration lending, particularly to property investors, are probably unnecessary and will achieve little other than improving the short-term profitability of banks via higher interest rates for borrowers.

“As with all our investing, we work on the basis that, over time, interest rates will revert back to long term levels as will aggregate housing valuation metrics. Against this, we think aggregate rents and household incomes will continue to grow which will cushion the overall impact on dwelling prices and that the exposure of the household sector to higher interest rates means that the time frame over which interest rates will rise could be quite protracted. As such, we think the risk of a catastrophic collapse in the housing market is low,” he said.

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