Moody’s analysts, Steven Hess and Bart Oosterveld put this in very simple terms, ‘This trend poses some medium-term risks as Australia’s real estate market appears to be overheating, with both price-to-income and price-to-rent ratios reaching levels well above the historical averages,’.
Is the Australian real estate market on the edge of a precipice?
There is no doubt that property prices across Australia, and indeed more so across Australia’s more prominent cities, have seen dramatic price rises over the last few years. It is worth noting that even after the 2007/8 mortgage crisis, which led to a worldwide downturn, the Australian economy managed to avoid any period of recession. Despite this interest rates in Australia are still extremely low which has effectively fed the rising demand for real estate.
At this point it is worth noting that the average cost of real estate across Australia’s eight larger cities over the last year has increased by 8.3%. This is the largest growth in real estate prices in approaching four years and would seem to suggest that the market is yet again set for further significant growth.
Housing stock a major problem
Even if investors were to take the advice of experts such as Moody’s it seems there is little real chance of a major correction in real estate prices at this moment in time. One of the main issues within the major real estate markets of Australia is the lack of housing stock which would likely see more investors join the party in the event of a short-term reduction in prices. It is this pent-up demand which is against supporting a very buoyant Australian property market and when you bear in mind low interest rates are helping the economy, a rise in rates might slow the economy as well as the property market?
There are fundamental issues which need to be addressed within the Australian real estate market, as there are in many other markets such as the UK, and these will take time. The problem is that with low interest rates, high demand for real estate and an economy which is performing better than many others, there is not only domestic demand but also international demand for Australian property.
Amidst the growing demand for Australian real estate it is also worth noting that there has been a significant rise in DIY expenditure. Indeed the Housing Industry Association is today forecasting expenditure approaching AU$29 billion on renovations over the next 12 months. Not only does this increased the value of property, at least in principle, but also means there will be less housing stock available which will further squeeze prices higher and higher.
There are fundamental issues which need to be addressed sooner rather than later with regards to the Australian property market. Low interest rates, high domestic and overseas demand together with a lack of housing stock is making a difficult situation even worse. The average Australian is now in danger of being priced out of major city real estate markets and with even less housing stock outside of the major cities in Australia, where do they go?