News: Australian home prices up 9.8% last year
Australian home prices up 9.8% last year
Rise in home building, as interest rates remain low, to power economy this year
The Business Times. Published January 3, 2014
[SYDNEY] Home prices across Australia’s major cities rose over 2013 at the fastest pace in four years as record low interest rates fuelled demand from investors who went on a binge of borrowing in the last few months.
Figures from property consultant RPData-Rismark showed overall dwelling prices rose 9.8 per cent in 2013, more than reversing two years of decline.
The year also ended on a bang with prices up 1.4 per cent for December alone, accelerating from a 0.1 per cent pace the previous month. For the fourth quarter, prices rose 2.8 per cent.
While higher prices have stirred talk of a bubble, they are considered by policymakers as necessary to encourage a much-needed revival in home building.
The Reserve Bank of Australia (RBA), which cut interest rates to an historic low of 2.5 per cent last August, has been counting on home construction to provide vital support to the economy as a long boom in mining investment cools.
Higher prices have also boosted household wealth, confidence and spending, exactly what easy monetary policy is meant to do.
Neither is the price appreciation exceptional by Australian standards. RPData’s Cameron Kusher noted that since 1996 there were seven years where prices grew faster than in 2013. “The rate of growth was not that startling given the low interest rate environment and the previous successive years in which home values fell,” he said.
The gains have also been largely concentrated in a few hot spots, with four of Australia’s eight major cities seeing price growth of just 3.5 per cent or less.
In contrast values in Sydney jumped 14.5 per cent last year, while Perth enjoyed gains of 9.9 per cent.
That growth owed much to investors attracted by relatively high rental yields, further boosted by a tax regime that allows investors to offset losses from investment property against income from other sources, and a favourable capital gains tax setup.
The value of mortgages for investment has been rising quickly for some time and reached a record high in October, up almost 29 per cent on the same month a year earlier.
Such was the escalation in borrowing that it drew the displeasure of the central bank, which warned Australians against buying property in the hope of making a quick buck.
“The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply,” said Craig James, chief economist at CommSec. “It is clear that home construction will play a key role in driving the broader economy in 2014.”
Also reassuring policy makers is that total growth in credit has remained very subdued despite the rush into property investment. Credit outstanding rose by only 3.8 per cent in the year to November, far below the long-run average of 12 per cent.
While new lending for housing has risen strongly it has been offset by homeowners paying off their mortgages more quickly, a unique feature of the Australian market.
As interest rates have fallen in the past two years many mortgage holders chose to maintain their payments. The RBA estimates that no less than two thirds of the savings from lower rates has gone to repay debt.
“Old credit is being siphoned out much more rapidly than is usual, due to a swift pace of amortisation in existing owner occupier mortgages,” said Ben Jarman, an economist at JPMorgan. “Reduced interest burdens have freed up cash that existing mortgage holders have, to an unprecedented extent, elected to save rather then spend.” – Reuters