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The residential property market is Australia’s single largest, and most valuable asset class with a total estimated value of $5.2 trillion as at January 2014. In comparison the total value of listed equities is almost 3.5 times smaller at $1.52 trillion. Over the past year, national gross domestic product (GDP) was recorded at $1.53 trillion indicating that the total value of residential housing is significantly larger than the annual output of the Australian economy. Clearly most Australian’s accumulate their wealth through residential property.
As a result, Australian authorised deposit taking institutions (ADIs) are highly leveraged to residential property. According to data from the Reserve Bank (RBA) 60.2 per cent of all borrowings are for the purposes of housing, compared to 33.4 per cent for business and 6.4 per cent for personal loans.
Combined capital city home values reached a recent low point in May 2012 and over the 21 months from May 2012 to January 2014, home values have increased by a total of 13.2 per cent.
Demand for higher density product is likely to increase over the coming years as the relatively high prices of detached houses deter potential buyers and force them to consider more affordable unit product. Recently released dwelling approvals data supports this notion with more than 50 per cent of all capital city dwelling approvals over the past year being for units rather than houses.
The reduction in the availability of affordable homes within Australian capital cities is a significant policy challenge which, in order to meet this affordability challenge, must involve a range of policy response initiatives. Investors accounted for 37.3 per cent of total borrowings during 2013 and owner occupier purchasers (excluding first home buyers) accounted for 36.8 per cent.
Refinancing of loans by owner occupiers accounted for 17.6 per cent of all lending over the year and first home buyers borrowed just 8.2 per cent of all housing finance which had been committed.
As a proportion of all dwelling approvals throughout the year, multi-unit dwellings accounted for a record high 43.9 per cent. The climb in the proportion of dwelling approvals that are units is being driven by densification of capital city regions.
More broadly, given the current level of inflation, it seems unlikely that there will be further reductions in official interest rates, especially over the short-term and in light of the higher than expected rate of inflation over the past six months.
Labour force data for January 2014 recorded the national unemployment rate at 6.0 per cent which was the highest national unemployment rate since July 2003. The unemployment rate has been slowly trending higher since reaching a recent low, increasing from 5.4 per cent at the beginning of 2013.
As at June 2012, 65.5 per cent of Australians (slightly more than 15 million) lived within a capital city. Of this 65.5 per cent, 38.9 per cent lived in either Sydney or Melbourne with 56.8 per cent of Australians located in Sydney, Melbourne, Brisbane or Perth.
The rebound in credit growth is largely being driven from the housing sector; year-on-year, total housing credit has increased by 5.4 per cent compared to a 0.9 per cent increase in other personal credit and a 1.7 per cent increase in business lending.
The rebounding levels of consumer sentiment have clearly assisted in the improvement in housing transactions and aided the rise in capital city home values. If home owners, as well as prospective home owners feel that economic conditions and their financial circumstances are improving they are likely to have a greater propensity to invest, whether that be within the housing market or other asset classes such as equities. The recent weakness in the index may lead to a slowing of demand for housing by consumers.
Mining provides the greatest industry contribution to GDP at 10.0 per cent. As investment in the mining sector falls, mining’s contribution to GDP is also likely to fall. With falling investment and lower commodity prices the Government is looking for other sectors of the economy such as housing investment, retail and tourism to pick up the slack from the mining sector.
As at December 2013, exports of goods and services had increased by 15.1 per cent over the year with goods increasing by 16.6 per cent and services rising by 7.9 per cent. Total imports of goods and services were 6.4 per cent higher over the year with goods imports up 7.0 per cent and services imports down 4.2 per cent.
This is the Executive Summary from the CoreLogic & RP Data Property Capital Markets Report. The report includes: