Australia’s main economic indicators have trended unfavourably and confidence in the Australian economy is falling.
The annualised GDP growth rate is down to 2 per cent, unemployment is at 6.2 per cent and above its 10 year average, and wage growth is at a historically low 2.3 per cent.
Commodity prices are down, with iron ore trading at an average of AUD$76 per unit over August.
August also saw a fall in the price of crude oil of 14.5 per cent to AUD$64.43.
Thermal coal fell marginally from July to August, to AUD$85.26.
This has led to a decline in dwelling prices in the resource state cities of Perth and Darwin, while east coast dwelling markets have performed counter-cyclically.
Table 1 presents the summary of the major markets for August.
Table 1: August Summary
Perth and Darwin dwellings suffered further declines in the quarter to August, however value reductions were not as significant as that which occurred in the quarter to July.
The median value of Sydney houses has once again increased, with quarterly growth of 7.88 per cent bringing the median value to $1,037,000.
This translates to a real dollar value increase of $76,000.
Similarly, quarterly growth for Melbourne houses (3.13 per cent) has brought the median value up to $700,000.
If you own property in Brisbane you will be delighted to see that houses and units in the greater Brisbane region experienced steady growth over the year to August, with houses doing particularly well with growth of 6.78 per cent.
This is expected as cyclical movements in Brisbane historically follow movements in the Sydney and Melbourne markets.
The future of Australian real estate seems uncertain
It is clear that the recent weak economic performance is impacting confidence in the Australian economy.
Ivan Colhoun, Chief Economist for National Australia Bank, recently reported that international clients in Europe and the Middle East have turned bearish on Australia.
A lack of economic diversity puts the Australian economy at further risk.
Since 2013, the media heralded the housing market as offsetting some unemployment and economic downturn from the decline of the mining boom (you may remember the mining boom as the sector we were dependent on before real estate).
Professor Hans Hendrischke from the University of Sydney Business School estimated that the value of real estate transactions in the housing market Australia wide was $270 billion in 2014.
While Hendrischke himself admitted there were limitations to the accuracy of that figure (which was calculated using ABS price and sales data), if that figure is taken for granted, it represents approximately 14 per cent of GDP.
Fourteen per cent of GDP. Just from buying property.
Higher economic diversification would mitigate some risk, should property in Sydney and Melbourne become less appealing.
Meanwhile, Perth and Darwin dwellings are still dropping in value in the wake of the declining mining boom and slowed growth from China.
Are the East Coast Booms Coming to an End?
This environment of economic uncertainty has had many wondering whether the east coast markets can continue growing as they have since 2013.
In light of historical data and academic insight, here are my thoughts.
It is too early to tell.
Sydney units suffered a slight decline in value in the month of August, from a median of $670,000 in July to $666,000 in August.
This is the first time in 18 months that Sydney units saw a reduction in value.
The value of Melbourne units remained virtually unchanged in August.
This could be a sign that units in Sydney and Melbourne are finally (finally!!!) beginning to slow.
However, everybody needs to calm down because monthly data can be volatile.
This trend will be clearer if it continues over the next quarter, especially as we move into spring, which historically yields higher capital growth rates than winter.
In other words, it is too early to tell whether the east coast markets of Melbourne and Sydney have peaked.
A few weeks of low clearance rates at auction, in the context of a 2.5 year housing boom, is not going to tell us much either.
Just because the economy is under-performing, does not always mean housing will
While a lack of confidence in the Australian economy can soften capital inflows into real estate, this is not necessarily going to be the cause of a decline in dwelling values.
Australia’s GDP, employment and wage growth have been trending down since 2012, but these are yet to cause a dampening effect on the Sydney and Melbourne housing boom.
Economic performance does affect dwelling demand in the long term, but these signals are distorted by the system in which property transacts.
Real estate operates in a unique framework of borrowing and taxation.
This means that dwelling values can grow counter cyclically to the economy, even as wage growth and employment levels deteriorate.
This is supported when plotting the median Sydney and Melbourne house value increases against GDP increases, as shown in Graph 1 below.
Graph 1: House Movements versus GDP Movements
Historically, downswings don’t matter
It is impossible to know what is going to happen in the future.
However, in the past, our east coast markets have been fairly resilient.
To demonstrate this, I have put together the HPI for houses and units in Sydney, Melbourne and Brisbane.
Unlike plotting growth rates, these graphs clearly show that sustained downturns in the value of houses and units over the last 35 years have been rare.
Graph 2: East Coast Houses – HPI
Graph 3: East Coast Units – HPI
What these graphs do highlight however, is that houses and units perform well over a long period of time.
The ironic thing about speculative investment in something ‘as safe as houses’ is that the investment ends up making returns more volatile.
It is likely the underlying demand for residential dwellings from job growth and economic diversity that has contributed to long term growth in these east coast markets.
In February 2014, the median unit reduced in value by 0.44%. This did not stop them increasing by 12.28% over the following 12 months.
The 20 year average capital growth rate for houses sold in Sydney and Melbourne during the spring period is 2.42% and 2.76% respectively, as opposed to winter where growth rates are 1.57% and 1.52% respectively.
The ‘House Price Index’ (HPI) is a number that represents, at any point in time, how much house prices have increased since the first data in 1985.