Executive Summary

Although enjoying comparatively strong economic conditions, relative to most other established economies, Australia has not been immune from the effects of global economic uncertainty. This has played on consumer confidence, which has, until quite recently, remained surprisingly low, with Australians, collectively, becoming more focussed on paying down debt and rebuilding bank balances. The national savings rate is at its highest level for 25 years.

A record low level of growth in private sector housing credit in 2012 was reflective of both lower demand for new housing loans and an emerging mood among home owners to pay off their home loans at a more rapid pace.

Nonetheless, the positive sentiment contemplated as a consequence of the long and deep interest rate easing cycle, initiated by the Reserve bank of Australia (RBA) in November 2011, is gradually flowing through, as evidenced by an improvement in housing market conditions and consumer sentiment. Although official interest rates have scope to fall further, the cash rate is at the same level as it was in the middle of 2009, when sharp rate cuts were made to lessen the initial impact of the financial crisis.

The early signs for 2013 are encouraging, however. The economic factors tracked by rpdata seem to suggest that there has been a delayed response to the ongoing cuts to interest rates over the past 18 months or so.

The number of house and unit transactions in 2012 was estimated by rpdata to be lower than the five year average. And although values have continued to decline on an annual basis, the rate of decline has slowed, with values increasing by 1.8 percent between May and December 2012. Early data for 2013 has seen dwelling values, based on the combined capital cities index, move into positive territory on a rolling annual basis.

Other lead indicators have shown recent improvement. Auction clearance rates have risen steadily throughout 2012 while the levels of vendor discounting and average time on market have been trending lower over the second half of 2012. Further, since September 2012, the proportion of homes selling at a loss has eased, while a rise in the proportion of homes selling for more than double their initial purchase price has been evident.

This year, pressure is again building to support home prices. Population growth is one of the keys, as Australia has been experiencing a chronic shortage of houses for some years. In percentage terms, Australia’s total population increased by 1.6 percent over the past year, in line with the five year average. Net long term overseas arrivals continued to increase and in December 2012 reached their highest annual level since December 2009. The increase in population translates to greater demand for housing across the country.

Further, the highly centralised nature of the Australian population creates significant demand for housing in the major centres, particularly in the more desirable areas closer to city centres, major working nodes and essential infrastructure.

This goes some way to explain why capital city home values in Australia appear to be high on an international basis.

The fact that a large majority of Australian home loans are variable rate mortgages has also proven to be a positive factor for the market over recent years, as changes to monetary policy by the RBA have an almost immediate impact on household balance sheets and consumer behaviour.

A negative for the economy is the possibility of growing underemployment, implied by the fact that much of last year’s 0.9 percent jobs growth was in part-time employment (1.8 percent) rather than full-time (up 0.5 percent). If so, such a fall in labour force participation may have shielded the country from a higher unemployment rate over the past year than 5.3 percent.

Nevertheless, first home buyers have returned to the housing market, although current numbers are well below the ten year average and half their historic peak. This was in the 12 months to November 2009, after many incentives were introduced.

The number of buyers returning to the market increased by 3.5 percent over the year, while refinance commitments were up by 6.4 percent. This was indicative of competition amongst lenders after exit fees were abolished in July 2011, with borrowers shopping around for lower mortgage rates.

Investment activity in the housing market may continue to improve over the coming year on the back of a number of factors namely: recent falls in home values, lower mortgage rates, rising rental rates in certain areas, the subsequent improvement in rental returns and the recent improvement in equities markets.

This is the Executive Summary of the full report. The rpdata Property Capital Markets Report - Summer 2013 includes:

Introduction Executive summary Economic overview Floor price Standard price Payback time Housing market overview State by state analysis