Residential Property Market in Australia
Australian has seen of the one highest boom in the residential houses market over the last couple of years. Additionally, the house prices have been on the rise. Particularly, the Australian Bureau of Statistics (ABS) indicated that the house prices in the country increased by an average of 11.4% before inflation adjustment throughout the major cities in the year 2015 (Chamberlain, Johnson & Robinson 2014). Notably, despite the modest economic growth experienced in Australia, the housing market continued to rise, and there has been a consistent increase in the house prices (Ley 2011). For instance, the eight major cities experienced a rise; however, the rate of price rise differs from one city to the other. For instance, the residential property rise in Sidney rose by 19.9%, which was the highest in the country (Sourceable 2016). On the other hand, Hobart had a slight rise amounting to 3.5 % (Sourceable 2016). On the other hand, some cities witnessed a drop in the residential house prices such as Perth (-3.3%) and Darwin (-2%) in the same period (Sourceable 2016).
The approximated average price of the residential house prices in Australia in the year 2015 in September was estimated at US$429,734; this indicated a 10.2% from the same month in 2014 (Sourceable 2016). It is important to note that the averages differed among the cities; in Sidney, the prices averaged to US$548,152 in 2015, which represented a 30% upward margin from the national mean in Australia (Chamberlain, Johnson & Robinson 2014). On the opposite direction, Tasman had the lowest house prices averaging to US$225,396 (Crook, Kemp and Crook 2014). In this case, many factors explain the changes experienced in the house prices, both from the demand side and the supply side causing the differing prices and rate of development across different cities in Australia.
As such, the paper investigates the supply and demand factors causing the growth and differing prices in the Australian housing market. In the first section, the paper will investigate the factors influencing the demand side in the Australian residential property market (Crook, Kemp and Crook 2014). It will look at the effects of increased emigrants, effective monetary policies, wealthy households and the attractive destination conditions such as education and common law. Additionally, the study will evaluate the supply side of this market (Crook, Kemp and Crook 2014). For instance, it will look at the role of politics/government, affordable credit, and land availability, economic forces and anticipation in shaping the supply side of the residential market.
Demand side in the Australian residential property market
On average, the purchase of completed dwellings in the country rose by 8.4% in the year 2015 as compared to the same period in 2015 (Hoboken, NJ & Wiley 2016). Indeed, 46,868 units were sold in 2015 as indicated by the Australian Bureau of Statistic. This led to the increment of the value of dwelling places to US$12.71 billion, compared to 2014 (House price Rises accelerating in Australia 2016). Still, the purchase of the new residential houses increased to 8.9 % in the same year (Crook, Kemp & Crook 2014). Particularly, 2,953 units of new house were purchased. Consequently, their value rose by 32.4%, which was valued at US$0.88 billion (Crook, Kemp & Crook 2014). This growth defied the low economic growth in the country. Therefore, there are many drivers in the demand side of the Australian residential market as discussed below.
Increased number of foreigners in Australia
The foreigners seek comfortable life in comparison to their country of origin, favorable markets as well as destinations with growth potential. Therefore, that Australia is relatively under populated attracts many foreigners. Additionally, its economy has a high growth potential because of the natural resources endowment, skilled labor, political stability and high security (Organization for Economic Co-Operation and Development 2011). Still, the country is ranked among the countries that are most suitable to do business in varied areas; this contributes towards stable growth in the property market. As such, foreigners, mostly the Chinese, have found the country quite attractive regarding investments (Megalogenis 2016). Figure.1 below illustrates that the Chinese are had the highest value of investments in the Australian economic in comparison to other nationals. Still, there are other investors from other nationality that inject cash in the Australian real estate market. During the year 2013-204, the investments in the real estate rose to US$24.36 billion from US$11.93 billion in the previous financial year (Crook, Kemp & Crook 2014). Clearly, the large number of the foreign buyers in the country contributed towards this increase (Crook, Kemp and Crook 2014). In this period, the nationals of Chinese descent invested US$8.7 billion, which was the highest among all the foreigners in the country. It is vital to note that any purchase by the foreigners is subject to the FIRB approval. More particularly, the foreigners are not allowed to buy an established house. Furthermore, any purchase of the new unoccupied dwelling must take into accounting the housing needs of natives. Therefore, upon the fulfillment of the basic requirements, the Chinese got the highest number approvals among the foreigners. The increment of the foreigners in the country provides both the demand force and investments capital.
Figure 1: Foreign Investment in Australian Real Estate-2013
Source:http://www.businessinsider.com.au/this-is-why-mainland-chinese-love-australian-property-2014-10
Wealthy investors seeking to diversify investments
The major factors leading to the demand of houses in Australia by the wealthy immigrant from China is the need to diversify the investment portfolio. There are projected political and economic risks in the mainland China. This acts as a catalyst to the Chinese to demand other investment opportunities that hold relatively low risks. Owing to the low risks in the real estate as compared to other commodities and the service industry, most of these emigrants prefer to channel their money in the real estate (Newell and Sieracki 2010). This explains the high average prices in the New South Wales (NSW) and Victoria that have received the highest number of foreigners that demand the residential property investment.
Favorable destination conditions
There are pulling factors in the Australian economy that makes it attractive to the foreigners. Notably, the consumers with high social status have higher utility margins and thus they can optimize the utility derived from consumption of the real estate products. Particularly the Chinese are looking for high-quality education and common laws in their destination. Given that Australia has a robust common law and high-quality education in all fields makes it a perfect destination for the Chinese. In this case, the main factor leading to increased demand of the residential houses by the Chinese is that they are endowed financially; this pushes them to seek green pastures. In fact, about 45% of the 70 million residents in the high social profile in China mainland are expected to migrate (Crook, Kemp & Crook 2014).
As of 2015, the wave of the clients of Chinese decent in Australian market has been quite significant, and the domestic agents have recognized this fact. Indeed, the John McGrath agent has factored these changes its operation. For instance, the agency has a Chinese customer’s service desk that publishes McGrath Magazine in the Chinese language.
Effective monetary and fiscal policies maintained by the Reserve Bank of Australia (RBA)
The Reserve Bank of Australia (RBA) has been instrumental in promoting policies that cater for the mortgagors and the mortgagees in the country. This ensures that the clients access loans to purchase residential houses in the country. Indeed, the mortgage market has continually grown as shown in the bar graph in Figure 2. This has been possible through the low-interest policies pursued by the RBA (Gans 2011). Thus, it induces demand in the housing market through the borrowed money. The ABS figures show that the mortgage loan grew by 8% that approximates to US$1.09 trillion (Crook, Kemp & Crook 2014). This explains the continued demand of residential house in Australia.
Figure 2: Mortgage Loans
Source: http://www.globalpropertyguide.com/Pacific/Australia/Price-History
Based on the factors highlighted on above discussion, it is clear that the demand of the residential houses in Australia will continually rise in the foreseeable future. This is explained by the high emigration rate, favorable economic conditions, and the effective policies by the Reserve Bank of Australia (RBA) that promote investments and economic stability.
Supply side of the Australian residential property market
The supply side looks at the factors that promote the investors to take a mortgage or use their savings to construct residential houses, which they may rent or sell to other investors. Notably, many factors lead to the promotion of the supply side in-house market; however, there these factors vary depending on locations and other endowments. The discussion below illustrates.
Foreign capital investment
As illustrated in the Figure 1 above, the country has been receiving some of the highest number of foreigners in the world, particularly from China. The emigrants are primarily looking for investment opportunities for diversification purposes. Thus, there is the availability of investment capital from the foreigners is channeled in the residential property market in Australia (Cortes 2012).
Favorable economic conditions
Several economic factors promote the investments in the Australian residential property market. Firstly, there are the national economic policies that promote investments from both the domestic and international business people. These include security, fast document processing, and few red-tapes. This improves the ratings of the country's suitability to do business. As such, there are many suppliers in the industry attracted by these policies. Additionally, the stable economy and the effective monetary and fiscal policies are instrumental in attracting lager number of investors in the industry (Moak and Lee 2015). The investors are conscious of the financial risks resulting from inflation, high-interest rates, and the existing demand. However, these risks are mitigated in the Australian market since there are low-interest rates offered by the banks, thus providing the investors with loans to invest in the real estate (Chamberlain, Johnson and Robinson 2014). Still, low interests rates increase the demand for the housing products; this induces the investors to invest more. Finally, the per capita in the Australia is high. Thus, most of the natives are financial endowed to purchase both established and new dwellings, which promotes the growth of the residential property market due to existing market gap.
Political and government factors
The political climate in Australia promotes the supply side of the real estate market. It is important to note that political risks are influential in making investment choices. As such, the peaceful transition of the governments, democratic rule, corruption free systems and tax credits to encourage investment act as pulling factors to the investors. The government is also willing to promote the industry growth through fair and favorable policies in term of registration. This attracts both the local and global players in the industry.
Anticipation
Some projections are driving the supply side of the real estate in Australia; indeed, the growth is expected to be even higher in future. For instance, the Chinese among other foreigners are expected to migrate into the country in future as they seek diversity and quality education (Steffen 2009). This will provide a ready market for the residential property, as such; the investors are continually pumping money in the residential property market to optimize on the projected openings.
Availability of land
Australia has expansive land across the country that is readily available for construction purposes. This has both the direct and indirect effects on the supply side of the residential property market. For instance, the investors will acquire land at fair prices due to availability. This lowers the financial costs in the industry compared to other places such as Hong Kong. Still, there are diverse growth factors such as mining, industries and technology firms. Therefore, the growth of these diverse activities improves the attractiveness of the supply side.
The factors highlighted on the supply side have contributed to the growth of the residential property market in Australia. As a general rule, the factors in the demand and supply side must intersect to create a real market condition for the suppliers and the buyers (Stoft 2001). Many studies show that the outlook in the year 2016 is positive due to such favorable forces as the increased population, increase household wealth as well as availability and accessibility of the finances.
References
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