Australian property market going wild: Boom or Bubble?

Summary

  • Real estate prices have risen at a rate unseen in over three decades in some regional areas of Australia.
  • Discussions are on the table to improve construction reforms currently in place to reinforce the production of more resilient and durable buildings.
  • There are speculations of housing prices facing more hurdles in their upwards trajectory.

The prolonged boom in the real estate sector has left investors and experts spooked. The current rise in housing prices is being touted as the fastest increase in about three decades. Real estate prices continue to soar despite inflation rates not showing an increase of an equivalent magnitude.

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This housing price boom stems from the excessive demand for houses from first home buyers that began in December 2020. The latest data from the Australian Bureau of Statistics suggests that the total number of dwelling units commenced increased by 18.6% in Australia in the December 2020 quarter relative to the previous quarter. Additionally, the new private sector house commencements soared by a massive 26.6% during the same quarter, while the private sector and other residential building commencements increased by 4.1%.

After a slump of almost two years, dwelling commencements rose to 51,055 in the December quarter. On the construction front, the value of the work done on new residential buildings amounted to AUD 15.4 billion.

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Diverging scenario across cities

While the nation is on the verge of its biggest ever property boom, a fall in property prices has been noted in certain suburban parts. Lack of demand has kept housing prices low in these areas. These include the parts of residential areas that are heavily reliant on foreign students.

Notably, the COVID-19 pandemic has added to this slump, with homebuyers taking advantage of this price drop. Many first-time homebuyers tapped the dip opportunity and opted for a mortgage under subdued prices and low interest rates. Besides, many others lived out their dream of buying a house next to the beach in Sydney or Melbourne.

The fall in international demand has more than offset the increase in domestic demand. Sydney and Melbourne accounted for most of the overseas inflow. However, the current restrictions have changed the course of property for these cities greatly.

On the contrary, regional house prices refuse to simmer down. The price surge has led to many homeowners not being able to pay their mortgage payments. The number of buyers has increased significantly over the last 4-5 months, while the supply has not increased to a similar extent.

Some buyers have resorted to social media to find an appropriate property for themselves. Tired of paying high fees to real estate agents amid already elevated house prices, buyers turned to social media by inviting people looking to sell their property and willing to have private negotiations. The idea comes as no surprise, as the growing popularity of non-fungible tokens has been encouraging many real estate companies to sell their property via the internet.

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Are infrastructural reforms answer to the real estate problem?

Recently, the RBA governor Philip Lowe stated that better infrastructure would open doors for any improvements on the real estate front. While property market reforms are also under the RBA’s radar, the housing market seems to be calling for more resilience.

Although there is a need to build more resilient and tough houses, it should not come with additional costs. The property sector is already dealing with a large queue of buyers, with demand overriding the amount of supply. Thus, new homes should be built with the vision to keep property prices affordable.

Reforms are ongoing on this front, as evident from the theme of the recently held NSW parliament roundtable - “New builds, Codes, Standards and Land Use Planning”. Many representatives from the Australian real estate sector were present at the conference.

Notably, current laws do not mandate any type of assessment to be done or any records to be maintained regarding the resilience of the building. However, this might change soon.

Some of the proposed policies include land use planning reforms that can better integrate data from insurance and building industries, increased government focus on providing funds for the durability of buildings, embracing simpler and cost-effective standards, easier access of information sharing between the government and the industry and the development of resilience information tools.

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Any solution to overcome the supply shortage?

National Australian Bank Limited (ASX:NAB) has advocated the grant of faster approval of houses to curb the supply shortage. The bank sees the delay in approvals to be hindering the buying process and leading to a restriction in supply.

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Moreover, strategic actions can be taken to work on the supply front as overshooting demand can easily rake up property price further. This may emerge as another helpful factor that can slow down the process of the price surge.

What does the future hold for the property space?

Among these proposed factors that could potentially help the real estate sector, there are speculations of housing prices facing more hurdles in their upwards trajectory. The continued economic recovery that is visible in Australia could potentially bring in increased inflation levels.

As soon as the RBA’s target of 2-3% inflation is reached, the interest rate is likely to be back to the pre-pandemic state.  Once interest rates bounce back, the number of potential homebuyers is likely to substantially reduce.

However, a rise in interest rate seems unlikely in the near term, with the central bank ruling out a cash rate surge until at least 2024.

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