Annual house price growth has surged to 18.9% in Sydney and 15.9% in Melbourne according to CoreLogic’s recently released March data. Sydney house price is growing at its fastest yearly rate in 15 years and combined growth across capital cities is at a 7-year high (12.9%). Canberra and Hobart had growths of 12.8% and 10.2% respectively. Brisbane and Adelaide grew at a more modest rate of around 3% while Perth and Darwin had negative growth (mid -4%).
The RBA has kept official interest rates (1.5%) at historical lows now for eight months straight which is hardly surprising as it grapples with surging house prices in the south-eastern centres and a sputtering economy. APRA has again written to banks to tighten lending practices on interest-only and investor loans. ASIC has now also joined in the crackdown of interest-only home loans with a targeted surveillance programme.
RBA governor Philip Lowe has even intervened in the debate ahead of the May budget blaming lax bank lending practices and favourable investor tax arrangements (CGT concessions and negative gearing) for the explosion in house prices. Mr Lowe cited 40% of housing loans and 60% of investment loans are interest-only. This has put the pressure squarely back on the Federal Government to introduce legislative changes.
Approvals for the construction of new homes rose 8.3% (11% surge in apartments and 5.7% for houses) in February beating market expectations of a 1.5% fall according to ABS data. Conversely, the rest of the Australian economy is struggling. Wages grew just 1.9% to December last year, household debt relative to disposable income has reached a record high of 189% and unemployment unexpectedly jumped to 5.9% (highest in over a year) and retail sales fell 0.1% (compared to an expected 0.3% rise) in February.
According to a recent article published by The Australian, almost 80% of Chinese buyers can’t settle on apartments they bought off-the-plan and wished they could walk away from their contracts. This should not come as a surprise considering the level of capital controls now being imposed by the Chinese Government. Settlement risk for off-the-plan apartment purchases is one of the major risks facing the industry.
Given the looming oversupply of apartments in Brisbane in particular, and possibly in some parts of Melbourne and Sydney, a correction or even a collapse in apartment prices is likely. Some experts are predicting Brisbane CBD apartment rents to fall by 10% and apartment prices in the east-coast capital cities to drop by as much as 20% (www.Domain.com.au
). In the event of such a downturn, there are potentially systemic issues for the banking system and the economy in general.
So, are we heading down the path of Australia’s next recession? Who knows. A bright spot for the Australian economy is the recovery of world commodity prices which in turn helps our biggest export and Australia’s current account deficit. But will this be enough to avert a potential downturn? Probably not.
The key to mitigating your risk is always early identification and intervention.
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