The Reserve Bank of Australia (RBA) has warned that Australian property could see another price boom given the current increasing population in major capital cities and the ongoing slowdown in the construction sector. This could mean that as demand continues to rise, there simply won’t be enough stock available on the market leading to another price surge. This week we explore the data to uncover what’s truly happening in Australia’s property market, and then assess what this could mean for Australian property investors.
Let’s start with the last 7 years of property prices in Australia
As you can see, property prices in Melbourne and Sydney in particular rocketed between 2012 and 2017, with Sydney rising approximately 75% and Melbourne aby approximately 58%. Of course, these figures could be much higher in some of the more sought after areas. For example, North Bondi in NSW has grown by approximately 9.8% per annum for the last 25 years, with Malvern in Victoria growing by 10.0% per annum over the same period.
Over this same period, we saw new construction rally, particularly for high density housing as is reflected in the following chart.
What’s happened to property prices more recently..?
Following the sharp growth, we saw the regulators step in to tighten borrowing conditions, particularly to developers, which led to a sharp decline in new building approvals. This created some relief for those in Sydney and Melbourne and particular who were aggressively saving for their deposit with the recent pullback over the past 18 months in both of these capital cities.
At present, these steep price declines appear to have come to an end, particularly in sought after locations, following the Federal election outcome, reductions in interest rates from the RBA and loosening lending conditions making it more possible for borrowers to get access to finance.
What does the data tell us about construction activity and supply levels..?
The Australian Industry Group’s Performance of Construction Index, which means the overall activity levels in the sector, has declined to 42.6 points. This is the equivalent to the lowest reading since June 2013. 50 points is considered to be neutral, while any figure below 50 signals a contraction in the industry. Commercial and residential construction have both been in decline for 9 and 13 months, with the construction for apartments showing the worst results with a reading of 33.4 points (Source: Ai Group).
The following chart provides an outline of the Ai Group’s index reading:
What is happening with population growth in Australia..?
One of the key drivers for property price growth is an increasing population, so let’s explore what the data is telling us here. The Australian Bureau of Statistics (ABS) expects Australia’s population to growth from approximately 24.9 million to between 37.4 and 49.2 million people by 2066. New South Wales is expected to remain the largest state achieving a population of 10 million between 2033 and 2039, with Victoria expected to generate the fastest growth rate increasing to 7.5 to 7.9 million people by 2027. The other state and territory forecasts are reflected in the following table:
Figure 1 – Australian Bureau of Statistics
As we can clearly see, Australia’s population will continue to grow from both new births as well as immigration. Australia remains a very attractive destination for many across the world, and we would expect this to continue as the relationships with many of our Asian trading partners continues to strengthen.
What does this mean for property investors..?
Based on the current data, it would appear that supply is forecast to continue to decline and demand from our increasing population is forecast to rise. Does this mean that all property prices will rise from their current levels..? We’d expect not. But it is likely to mean that those properties that meet the relevant investment criteria, in sought after locations, will continue to perform well.
As always, when it comes to investing, seek professional advice from qualified people who can guide you on your investment journey and review your own personal financial situation.
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