Housing Market Falls, but Prices Still Strong

Housing Market Falls, but Prices Still Strong

It finally happened. Property price growth is no longer slowing, it’s in the negative. As reported by The Australian Financial Review this morning:

Australia’s two largest housing markets tipped into negative territory over the month to date, with Sydney values down 1.3 per cent and Melbourne falling 1.8 per cent, CoreLogic figures show.

But let’s not call it the start of a crash just yet.

The AFR continues:

The falls in the data provider’s home value index for the first 29 days of May likely reflected a continuing decline in apartment values, which lost ground in both cities in April, Corelogic head of research Tim Lawless said.

The crackdown on interest-only and investor lending has subdued property prices somewhat. But the long-term trend suggests property prices will continue to appreciate.

The two factors that matter in the Australia Property Market 

The rate at which you can borrow does influence property prices. If interest rates are sky-high, investors will tend to borrow less. However, even though lending rates have increased, cash is still pretty cheap.

A mortgage at 4% is very cheap considering Melbourne and Sydney houses are coming off 17.40% and 16.52% year-on-year growth. While renters are paying your mortgage for you, you’re holding onto an asset rapidly growing in value. And thanks to leverage, you’ve boosted returns on your initial investment.

So while interest rates are important, they’re still too low to deter homebuyers.

Two far more important factors for the moment are wage and population growth.

According to the Australian Bureau of Statistics, wage growth has declined for the past four years. Take a look at the graph below.

wage growth

Source: ABS

On a quarterly basis, wages in both the public and private sector have been decreasing. However, it’s a different story for Australian population growth.

According to the ABS, Australia had around 24.47 million residents as of 30 September 2016. This figure is expected to increase by a million in the next three years. While not all will be potential homebuyers, many will be looking for places to live.

While this doesn’t mean housing prices will continue to climb, it does paint a bright picture for house prices. If wages also start to pick up, Australian property could still rise far above their current levels.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

PS: Phil Anderson believes we are just seeing the start of a real estate boom. In his new report, ‘Why Australian Property Is on the Verge of a Decade Long Boom’, Phil explains how to time your investments using the real estate ‘clock’.

To get your free copy of Phil’s report, click here.

Härje Ronngard

Härje Ronngard

Harje Ronngard is a Junior Analyst at Markets and Money.

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.  

Härje Ronngard

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