22 Mar Property Market March 2018 – My thoughts
There have been various media reports that Australia is looking at a property bubble bursting by various newspapers as well as from experts and commentators, both overseas and in Australia.
We would like to share our thoughts around the property market in Australia. The writing here represents our thinking based on interpretation of the data available and does not constitute financial or professional advice. Please conduct your own due diligence and seek professional advice before making any decision.
Below is a chart that shows the quarterly changes in property values since 1990. The growth in property prices in capital cities are slowing down while growth in the regional areas are picking up.
This should come as no surprises as property prices in some capital cities, especially Sydney and Melbourne have been growing at a high rate for the last few years.
This recent slowdown in property price growth may have contributed to the lifting of rental yields*¹ from record low level in the capital cities as can been evidenced in the below chart.
The increase in rental yield could be attributed to the fact that more people are looking to rent instead of buying as they cannot afford the high property prices.
However, as rent increases over time, tenants are likely to start considering owning a property as the rental expenses potentially might exceed the mortgage repayment, especially in this low interest rates environment.
This will then result in demand for property to increase hence pushes property prices up again.
These are just the result of a simple Economics theory of Supply and Demand. As more people look to rent, rental prices will go up. Similarly, as more people look to purchase, property prices will increase, and the reverse is true as well.
Lastly, I don’t believe a property market crash is pending as our population across Australia is still increasing as per chart below.
A recent report by UDIA has mentioned that just in Victoria alone, 60,000 new homes*² are required each year in the state to cope with the population growth. However, as per the chart below shows, the number of dwellings approved for construction in Australia is only sitting at approximately 19,000. This represents a massive shortfall required just for Victoria alone.
This increase in population coupled with the lack of new housing is likely to result in pent up demand not being met by supply, hence put further pressure on property prices increasing in the long run. Remember, it is just a simple theory of Supply & Demand.
*¹ Rental Yield is calculated as a % of annual rental income divided by the property price.