The House Price Index in Australia is the measure of the weighted average of prices across residential properties located in eight cities - Adelaide, Brisbane, Canberra, Darwin, Hobart, Melbourne, Perth and Sydney. Residential properties are defined as detached residential dwellings on their own block of land regardless of age.
According to the most recent data reported by the Australian Bureau of Statistics, the price index for residential properties for the weighted average of the eight capital cities rose 2.0 percent in the June quarter 2016. The index rose 4.1 percent through the year to the June quarter 2016. Further, the home prices in Australia have been said to rise for the 10th month in October in a row led by a sharp fall in borrowing costs and robust demand in cities such as Melbourne and Sydney, which recorded an annual growth of around 10 percent individually, as per CoreLogic. The October price index rise of 0.5% is being said to be witnessed post the 2 percent increase in the June quarter this year and a 4.1 percent rise through the year leading to the June quarter 2016.
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Property Prices (Source: Australian Bureau of Statistics)
While property prices in Australia continue to surge, there are serious concerns that the boom in prices may be leading to a property bubble. Industry experts are of the opinion that a prolonged rise in property prices may not be sustainable for the following reasons:
Lower Rental Yields: Surging home prices have not led to an increase in rental income in the two biggest Australian cities - Sydney and Melbourne. On the contrary, rental yields have either remained steady or dropped, indicating that investors purchasing properties in these cities are more focused on capital growth rather than earning from rental income. Even the national average saw a rental growth of only about 1 percent during the year. While the current boom in property prices is similar to the one at the start of 2001, the price rally lasted a few years before tapering off. The rise in property prices were much steeper then, especially in Sydney. However, the downturn which followed in 2005 led to a steep decline in property prices and it took five long years for them to recover.
Regulations from APRA: In an effort to cool surging prices and excessive borrowing by property investors, the Australian Prudential Regulation Authority (APRA) has asked banks to restrict growth in property loans and thereby reduce economic and financial risks.
Rise in debt of Australian households: Property prices are increasing at more than three times the growth in average household incomes, thereby increasing the debt of Australian households who are looking to keep up with property increases and according to a recent survey, the Debt- GDP ratio of Australian households has risen to a mammoth 125 percent, leading to restrictions on high risk borrowers, tighter lending conditions and blacklisting of properties in certain suburbs.
With the low interest rate regime supporting domestic demand, additional measures have to be put in place to curb the sharp rise in housing prices, thereby preventing a hard landing if and when it occurs.
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