Australian Property Pulse - Newsletter #9

Welcome to this week's edition of Australian Property Pulse

In this edition, Australia's housing market continues to defy higher interest rates, reaching a record $11 trillion in September due to rising home prices and increased construction activity. Over the past year, property values have grown by 6.7%, adding $900 billion in wealth to homeowners.

Australia's construction industry is experiencing mixed fortunes, with booming infrastructure projects contrasting sharply with a struggling housing market, according to the latest RLB Crane Index report for Q3 2024.

The Australian rental market has seen unprecedented growth in recent years, with rent prices in cities like Sydney, Melbourne, and Brisbane hitting record highs. House rents in combined capital cities now average $650 per week, up significantly from $430 just five years ago.

Proposed changes to bank lending rules aimed at helping first-home buyers have sparked debate within the financial sector. While the reforms could assist up to 50,000 people, major banks are divided over the potential risks to the broader financial system.

Australia has emerged as the top destination for Asian real estate investors, surpassing the United States and Canada. Despite tighter regulations on foreign purchases, Australia's economic stability, high quality of life, and proximity to Asia continue to attract investment.

Australia’s housing market continues to show remarkable resilience, hitting new heights despite higher interest rates. In September, the total market value surged to a record $11 trillion, driven by rising home prices and increased construction activity, as highlighted by CoreLogic. Over the past year alone, home values have grown by 6.7%, adding $900 billion in wealth to residential property owners.

According to the Australian Bureau of Statistics, 176,000 new homes were completed in the year leading to June, but the growth in home values slowed to just 1% in the September quarter, the softest quarterly rise since March 2023. Despite this, the spring selling season saw a robust start, with new listings rising by 2.1% over the year to October 6—the strongest since 2021.

Investor activity is also at a high, with the share of new investor loans reaching 38.6% in August, the highest since 2017, following tighter lending rules by the Australian Prudential Regulation Authority.

In the past decade, national house values have soared by 85.9%, or $403,349, while unit values climbed 41.2%, or $193,706. Sydney, Brisbane, and Melbourne recorded the largest price gains, with house prices rising by 95.2%, 97.8%, and 70.4% respectively.

Sydney’s premium suburbs like Bellevue Hill and Dover Heights topped the list of gainers, with prices doubling in the past decade. Meanwhile, more affordable areas, such as Leppington and Ruse, also saw significant growth. Melbourne’s Mornington Peninsula and Brisbane’s suburbs D’Aguilar and Robertson were among the strongest performers.

As Australia’s property market continues to evolve, these trends underline both the strength and complexity of the sector, with opportunities for both investors and homeowners across the country.

Australia’s construction sector is facing contrasting trends between booming infrastructure projects and a struggling housing market, as revealed in the latest Q3 2024 RLB Crane Index report.

While the infrastructure boom, fueled by major developments like Victoria’s $36 billion North East Link, pushed non-residential cranes to a record 370, the impact on housing is stark. The number of residential cranes dropped to a two-year low, with a net loss of 42 cranes pulling the total count to 863, down from 869 six months ago.

The effect of rising infrastructure costs, driven by large-scale projects, is making it harder for private developments to remain viable. According to RLB’s head of Oceania research, Domenic Schiafone, these higher costs are evident in enterprise bargaining agreements between contractors and the CFMEU construction union. The strain on housing development is clear, with official figures showing a 6.7 percent drop in apartment, townhouse, and semi-detached home starts in the June quarter, reaching an 18-month low of 14,031. Despite a modest 1.9 percent increase in detached house commencements, total housing starts fell 1.1 percent from the March quarter.

The slowdown is also reflected in residential crane numbers, which dropped from 535 to 493 over the past six months. Over the 2024 financial year, Australia completed 176,131 homes—falling short of the national cabinet’s yearly target by 27 percent.

Regional crane activity paints a mixed picture. Brisbane saw the biggest decline, with 12 fewer cranes, while Sydney and Newcastle lost three each. However, areas like Canberra, Central Coast NSW, Melbourne, and Adelaide saw small gains.

With infrastructure surging and housing under pressure, balancing both sectors will be critical to meeting Australia’s long-term building goals.

Over the past four years, the Australian rental market has seen unprecedented growth, with skyrocketing rent prices in capital cities. According to the latest Domain Rent Report, house rents in cities like Sydney ($775 per week), Melbourne ($580), Brisbane ($625), and Perth ($660) are at record highs, while unit rents are not far behind. The median rent for houses in combined capital cities has reached $650 per week, a significant jump from $430 just five years ago. Similarly, unit rents have surged to $630 per week, up from $450 in 2019.

One of the driving forces behind this rapid increase has been the sharpest interest rate hikes in a generation. These hikes have left many mortgage holders facing interest rates up to three times higher than before, contributing to the pressure on rental prices. Despite a recent slowdown in rent growth, experts predict that a return to lower rent levels is unlikely without drastic measures, such as major interest rate cuts, a significant increase in housing supply, and a smaller

rental affordability continues to be a major concern, the landscape for both renters and investors remains challenging in Australia’s evolving property market.

A potential overhaul of bank lending rules aimed at benefiting first-home buyers has sparked divided opinions within the financial sector. While new analysis suggests these changes could help up to 50,000 people enter the property market, the nation’s largest banks remain split on the risks this could pose to the broader financial system.

Investment bank Barrenjoey, in its submission to a Senate inquiry into financial regulation and homeownership, found that easing lending rules could increase the borrowing capacity of first-home buyers by 1 to 3 per cent. For someone with an average mortgage of $500,000, this would add between $5,000 and $15,000 to their purchasing power. Barrenjoey also estimated that such changes could reduce interest rates by 0.3 per cent for those building or buying off-the-plan, saving $37,000 over a 30-year loan. Buyers of existing homes could see a rate reduction of 0.14 per cent, saving approximately $18,100 in interest.

Despite the potential benefits, the proposed changes have met with mixed reactions. Commonwealth Bank and Westpac, Australia’s two largest lenders, back the current lending standards set by APRA, including the 3 per cent buffer that ensures borrowers can service loans even if interest rates rise. ANZ, meanwhile, argued that the buffer and high property prices restrict credit access for wealthier households. In contrast, National Australia Bank has advocated for a reduction in the buffer and for student debt to be excluded from loan assessments for first-home buyers.

As housing affordability continues to be a significant political issue, the debate over lending rules underscores the delicate balance between supporting first-home buyers and maintaining the stability of the financial system.

Australia has solidified its status as the leading choice for Asian real estate investors, surpassing traditional markets like the United States and Canada. Despite the federal government implementing stricter controls on foreign purchases, the allure of Australian property remains strong, driven by its economic stability, high quality of life, and proximity to Asia.

A recent report from Juwai IQI identified Australia as the “focal point” for a post-pandemic surge in cross-border transactions from Asia-based buyers. The report revealed that the country’s significant intake of migrants has drawn international investors’ attention. In the first nine months of 2023, Asia-based investors without resident status in Australia spent a remarkable $5.1 billion on real estate Down Under. Notably, mainland Chinese investors accounted for nearly half of this expenditure, investing $2.5 billion in Australian properties. Hong Kong, Taiwan, and Vietnam also made substantial contributions, each contributing $300 million during the same period.

Daniel Ho, co-founder and group managing director of Juwai IQI, noted that Australian property’s impressive returns - evidenced by a 42% increase in prices over the past four years - are a key draw for foreign investors. Current regulations permit foreign buyers without residency to purchase only new builds and subject them to higher tax rates.

As we move further into 2024, Australia’s real estate market continues to attract strong interest from Asian investors, reinforcing its position as the premier destination for cross-border real estate investment. This trend reflects the enduring appeal of Australia as a stable and lucrative market for international buyers.

If you're interested in securing your first home, expanding your investment portfolio, or exploring property investment through your Self-Managed Super Fund, please don't hesitate to contact Steven at 0414 759 733.