Slowing Pulse Bucks Headlines
Spectrum’s latest Property Pulse suggests Australian residential property prices will continue to rise albeit at a slowing pace over the next few quarters. This, in turn, is supportive of the performance of property and property related income securities for 2015.
Our Property Pulse model sees the benefit of falling mortgage rates being largely offset by worsening employment conditions. The resulting outlook for slowing price growth, however, is somewhat at odds with the near euphoria surrounding the strength of the property markets in Australia’s two major cities, Sydney and Melbourne. Sydney auction clearance rates are in the mid 80% range and Melbourne’s are in the high 70% level in recent weeks. Local press reports are calling for further strong price gains.
From our indicators, we would normally be fairly confident of a moderation in price increases. The Spectrum Property Pulse, however, has not adjusted for the impact of two key developments on property demand: the increasing role of the property investor and the strong appetite for Australian property from offshore buyers.
As shown in the graph below, investors are now accounting for nearly as many property loans as owner-occupiers. We believe this is likely to moderate the impact employment conditions have on demand. This is due to the different demographics of these two groups of buyers.
Owner-occupiers depend on income, usually wages and salaries, to meet their mortgage repayments. On the other hand, a large proportion of property investors are either retirees or in the latter stages of their working lives. Hence, the health of employment conditions is less likely to shape their decision to purchase an investment property.
The level of offshore demand for Australian residential properties is also unknown. Anecdotal evidence around Sydney and press reports of Australian property marketing programs off-shore suggest this buyer group may have increased overall demand by a material level when compared to, say, a decade ago.
Combined, these two influences appear to be underpinning a large part of the 7% increase in residential properties prices in Australia in 2014.
Moreover, there is little to suggest that property investor demand will slow any time soon. Falling deposit rates and dividend yields are encouraging investors to seek returns in other asset classes. Should this continue, we may have to reduce the influence unemployment conditions have on the Spectrum Property Pulse.
The case for a sustained level of demand from offshore investors is also not so clear. We note the Federal Government has recently responded to this issue by implementing some reporting and documenting measures. This may act as an obstacle for some buyers and curb demand. Moreover, the government’s recent order to force divestment of one of Australia’s most prominent houses, Villa del Mare, due to its illegal foreign ownership, potentially could dissuade some off-shore buyers from entering the market.
Looking forward rising unemployment is acting as a potential drag on Australian residential price growth. Jobless rates have steadily risen from 5.3% in March 2010 to 6.3% currently. The consensus forecast collated by Reuters is for this trend to continue and reach 6.5% by mid-year.
On the positive side for demand, mortgage rates have fallen and continue to ebb lower. The RBA may help this trend to continue. The local money markets are incorporating a lower RBA cash target rate by year end.
For more information about the background of this indicator please refer to the “About the Spectrum Property Pulse” section on our website.
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