Australians love home ownership and investment in real estate. The unsustainable growth in property prices during the last decade or so has decreased affordability, adversely impacting on the level of home ownership in the country.
According to the census 2016, the rate of home ownership in Australia decreased from 67% in 2011 to 65% in 2016. Homeownership rate in Australia averaged 68.85% from 1966 until 2016, reaching an all-time high of 71.40% in 1966 and a record low of 65% in 2016.
Tasmania has the highest rate of home ownership at 70% and the Northern Territory the lowest at 46%. However, the level of Australian home ownership is still one of the highest in the World.
House and unit prices in the Australian major cities are on the decline during the last two years. In October 2018, AMP produced a forecast that house prices in Sydney and Melbourne are expected to fall up to 20%, with predicted losses of 5% per annum until 2020.
This forecast, if materialises, would take the average home prices back to the first half of 2015 levels. House prices in Sydney are expected to suffer the most as the annual price falls in Sydney have so far reached 6.3%, while Melbourne has declined by 4% in 2018.
Recently, Morgan Stanley also released a forecast that Sydney and Melbourne house prices will fall by 10% to 15%.
Price declines are not uniform across various regions of a capital city. In Sydney, home prices have taken the biggest hit from September 2017 to September 2018 but some suburbs in various regions across the city are experiencing price rises.
In the Canterbury-Bankstown region, prices increased in Bankstown (6.6%), Milperra (3.2%) and Greenacre (3%). Growth in prices is seeing in suburbs of other regions of Sydney such as Inner West, North West, Upper North Shore, lower North Shore, Northern Beaches, city and South West.
A price crash, loosely defined as a 20% or more decline in national average home prices, in the Australian real estate sector is unlikely. This is due to the facts that interest rates are at historically low levels, the rate of unemployment is low, the construction approvals are falling and the level of immigration is not collapsing.
A number of regulatory and market forces caused the recent downturn in home and unit prices. In December 2014, Australian Prudential Regulatory Authority (APRA) enacted a credit growth limit of 10% for loans to investment properties, which served its purpose in reducing demand for investment loans.
This restriction was hence removed as of 30 June 2018. In March 2017, APRA imposed a limit on the flow of new interest-only loans to 30% of total new residential mortgage lending. Within this limit, APRA required strict internal controls on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80% and ensured there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90%.
The legislation to the cutback in foreign demand from Chinese investors, which is down by 70% since 2015, is responsible for a dent in property prices. These policy measures have had and are currently having a profound impact in downward pressure on home prices in Australia.
Possible changes to negative gearing and capital gains tax, if Labor wins the next election, will also have a major drag on property prices.
In the current real estate lending market, there are forces driving down home prices such as fallout from the Royal Commission into banking, tightened credit conditions through serviceability matrix, supply rises from existing constructions and a negative feedback loop from falling prices. In addition, auction clearance rates are constantly declining in capital cities, which fell to just 50.7% in late October 2018.
Home price stability and affordability significantly contribute to the social well-being of Australian populace. It is a good economic condition for home buyers including first home buyers who are the future Australians to drive up productivity in this country.