Caution advised on Australian property market

The Australian property market has been one of the better performers in the world over the last 12 months. When you bear in mind that Sydney house prices have increased by 19.65% over the last year, with unit values increasing by a more modest 15.27%, this certainly gives the regulators food for thought. Information released by CoreLogic shows other areas of Australia are also experiencing house price increases with Melbourne at 17.15%, Canberra at 13.64% and Hobart at 11.05%. So, why is there caution about the Australian property market?

CoreLogic five capital cities

To give you a flavour of the general direction of Australian house prices CoreLogic keeps track of the five capital cities across Australia including Sydney, Melbourne, Brisbane, Adelaide and Perth. Average growth amongst these five core markets came in at 12.9% when looking at both houses and unit costs. While the variation in price increases between houses and units did vary significantly from area to area, the general trend for both of these types of property was upwards.

There are obvious concerns that this rate of growth cannot last forever and if left unchecked could actually cause long-term imbalances across the Australian real estate market.

Warning by Australian Prudential Regulation Authority

The Australian Prudential Regulation Authority (Apra) sent out an official warning to Australia’s major lenders just last Friday. The advice was quite simply to tighten their lending practices especially in the area of interest only loans which can lead to problems further down the line. This comes at the same time as delinquencies for prime residential mortgage-backed securities increased from 1.57% in December to 1.61% in January. This situation has also been replicated in the car loan industry with delinquencies rising from 1.54% to 1.80% during the same period.

At this moment in time the warning by Apra is more an attempt to head off any problems further down the line but there is obviously a need for greater due diligence.

Economic conditions

Even though many experts have cried wolf about the Australian property market and the Australian economy frequently over recent years, there does seem to be a softening of the economy at the moment. Those who follow Australia will be well aware of its reliance on the mining industry in years gone by (indeed this sector prevented Australia falling into a recession during the 2008 worldwide economic downturn). This weaker economic performance has led to slower wage growth, rising unemployment not to mention higher delinquency rates.

All in all these are not exactly perfect conditions for the Australian property market going forward even if recent performance has been impressive. The real indicator is the increase in delinquencies which if left unaddressed will obviously cause problems for the Australian mortgage sector. This will then lead to an increase in repossessions, distressed sales and reduce upward pressure on both housing and unit prices.

Early warnings

Despite the doom and gloom surrounding the Australian property market it would be wrong to suggest this sector is on the verge of collapse. Experts have tried on numerous occasions to call a halt to the relentless rise but so far to no avail. A period of consolidation for the Australian property market would not be unwelcome as it would take some of the heat out of what has been a very hot real estate sector for many years.

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