FEATURE ARTICLE: THE AUSTRALIAN RESIDENTIAL PROPERTY MARKET


INTRODUCTION

Residential property ownership, either as an owner occupier or investor, is embedded in Australia’s culture. It is often referred to as “the great Australian dream” to own residential property. A relatively high proportion of Australians live in owner occupied households. Home ownership rates have been fairly stable at around 70% for many decades (footnote 1).

For most Australians the purchase of residential property is their single largest financial investment. It is therefore logical that residential property prices will be closely monitored by individual property owners. In addition, policy makers, market analysts and researchers closely monitor residential property prices for a range of economic and social reasons.

Understanding the condition of the Australian residential property market requires the analysis of a broad range of indicators. This reflects the complexity of the residential property market. Prices, while attracting a lot of media and community attention, are just one indicator.

This article provides a framework and a set of indicators to assist users to assess the condition of the residential property market. The framework and indicators utilise a broad range of ABS and non-ABS data.


BACKGROUND

The residential property market is an important part of the Australian economy, with the total value of Australia’s 9.6 million residential properties being worth 5.9 trillion dollars at the end of the September quarter 2015. Residential land and dwellings are also the single largest component of household net worth (65%), comprising more than twice the value of the next most significant component – superannuation (27%) (footnote 2). The significance of the residential property market can also be seen from the perspective of employment as the construction industry is Australia’s third largest employer, employing just over a million people, with a quarter of these being in residential building construction (footnote 3).

Framework

The Australian residential property market is integral to the Australian economy and as such, the factors that influence its condition are numerous and varied. The examination of individual economic or financial indicators only illustrate part of the picture and can in fact suggest different conclusions as to the state of the market. Using composite indicators, by combining multiple indicators into a single number, offers too simplistic a perspective since it relies on the assumption that the chosen data is comprehensively descriptive and that the chosen weights are correct.

Therefore, the current state of the Australian property market cannot be explained by one unique indicator or even by a composite indicator – rather, a range of statistics should be examined. One framework (footnote 4) for assessing the state of the property market is a dashboard of indicators across the dimensions of price, financial and real economic variables.

This article will explore a range of primarily ABS statistics that can be used to assess the conditions of the residential property market (footnote 5). The following analysis will focus on data from the last ten years, from September 2005 to September 2015. The analysis will bring together various indicators under the following three dimensions:

Price Indicators	Financial Indicators	Real Economic Indicators
Residential property prices in Australia Price-to-income ratio for Australian households Price-to-rent ratio for dwellings in Australia	The standard variable mortgage rate on housing loans The ratio of investor to owner-occupier finance commitments (loans) for the purchase of housing The value of loans for the purchase of housing by owner-occupiers and investors in Australia The level of household assets and debt as a proportion of household disposable income in Australia	Growth in Estimated Resident Population in Australia The total number of dwelling transfers in Australia The total number of building approvals for dwellings in Australia

ANALYSIS

Price Indicators

Over the past ten years, the price of Australian residential dwellings as measured by the Residential Property Price Index (RPPI) has grown, on average at 1.5% a quarter and 5.8% a year (Graph 1). Several growth cycles have been observed over this period of analysis, for which the peak growth rate was realised in the December quarter 2009. Although the current growth cycle has been sustained for twelve quarters, the June quarter 2015 appears to have represented the turning point, with the September quarter exhibiting a slower rate of growth in the RPPI.

The price-to-income ratio is calculated as the median price of total dwelling transfers in Australia divided by the annualised gross disposable household income per household. It can be considered a measure of the affordability of housing. When dwelling prices are rising at a faster rate than household disposable incomes, this indicates that an increasing amount of income is being spent on housing.

The price-to-rent ratio is calculated as the median price of total dwelling transfers in Australia divided by the median weekly rent. It can be considered a simple measure of the return on investment in the property market. When dwelling prices are rising at a faster rate than weekly rents, this indicates a decreasing return on new investments in the Australian property market.

Although both the price-to-income and price-to-rent ratios have both been trending upwards for the past three years (Graph 2), suggesting the decreasing affordability of property and decreasing return on investment in the Australian property market, it should be noted that neither indicator is currently at its peak level within the ten year reference period.

Based on data from September 2005 to September 2015	Peak	Trough	Current
RPPI Quarterly Growth Rate	Dec-09 5.5%	Sep-08 -2.2%	Sep-15 2.0%
Price-to-Income Ratio	Jun-10 4.16	Mar-09 3.55	Sep-15 3.97
Price-to-Rent Ratio	Dec-07 1630.31	Sep-12 1367.43	Sep-15 1501.08

Financial Indicators

Interest rates are currently at historic lows. The Reserve Bank of Australia (RBA) commenced its monetary policy easing cycle in late 2008 in response to the Global Financial Crisis. This period of falling interest rates has stimulated demand in the Australian property market, evidenced by sustained growth in the value of both owner-occupier and investor housing loans (Graph 3).

The recent growth in loans has been driven by investors, with the ratio of the value of investor loans-to-owner occupier loans growing steadily, particularly since mortgage rates on housing loans began falling in late 2011 in response to the RBA lowering the cash rate (Graph 4). The ratio reached its peak in the June quarter 2015, and has since been followed by a downturn.

Housing is the single largest asset owned by households. This asset comprises around 500% of annual household disposable income and equates to just over 50% of total household assets; and more than 80% of total household non-financial assets (Graph 5). Housing assets as a proportion of income have been rising steadily for the past three years, although they have not yet returned to the heightened level that was observed in 2007.

Household debt as a proportion of household income has grown steadily over the past ten years. Housing debt comprises the most significant component of household debt, hovering around 80% over the past five years.

Based on data from September 2005 to September 2015	Peak	Trough	Current
Standard Variable Mortgage Rate Housing Loans	Jul-08 9.30%	May-15 5.20%	Sep-15 5.25%
Loans Ratio Investor Loans-to-Owner Occupier Loans	Jun-15 1.17	Mar-09 0.59	Sep-15 1.01
Investor Loans Total Value	Jun-15 $38,252m	Sep-05 $16,378m	Sep-15 $36,799m
Owner Occupier Loans Total Value	Sep-15 $36,381m	Sep-08 $22,174m	Sep-15 $36,381m
Housing Assets As a per cent of Household Disposable Income	Sep-07 522%	Mar-09 427%	Jun-15 501%
Housing Debt As a per cent of Household Disposable Income	Jun-15 142%	Sep-05 114%	Jun-15 142%

Real Economic Indicators

Population and the rate of population growth contribute to explaining the demand for property, with increases in population generally leading to increases in the demand for housing. Australian population growth over the past ten years has averaged 1.7% annually, peaking at 2.2% in June 2008 (Graph 6). For the past nine quarters the rate of growth has been slowing, with the March 2015 annual growth rate of 1.4% being only 0.1 percentage points above the September 2005 annual growth rate at the start of the period of analysis. It should be noted that the rate of population growth at the state level can vary and may be influenced by interstate migration.

Dwelling transfers (footnote 6) can be interpreted as the realisation of demand in the secondary property market. Growth across established house transfers and attached dwelling transfers has followed a similar pattern, with established house transfers comprising the majority (around 70%) of total dwelling transfers. Over the past ten years dwelling transfers have tracked quite closely to population growth with movements in the number of transfers tending to exhibit a slight lag behind population growth. Currently the number of dwelling transfers is continuing to rise despite slowing population growth.

Building approvals provide an indicator of changes in the supply of property. The total number of building approvals has exhibited a particularly strong upward trajectory in recent years, reaching a peak in the March quarter 2015 (Graph 7). This recent growth has been predominantly driven by approvals for dwellings excluding houses, with approvals for houses exhibiting more subdued growth, particularly over the past year.

Based on data from September 2005 to September 2015	Peak	Trough	Current
Population Annual Growth Rate	Jun-08 2.2%	Sep-05 1.3%	Mar-15 1.4%
Dwelling Transfers Total, Quarterly Number	Sep-07 144,349	Mar-11 91,617	Sep-15 103,091
Dwelling Transfers Houses, Quarterly Number	Jun-07 100,357	Mar-11 63,872	Sep-15 70,059
Dwelling Transfers Attached Dwellings, Quarterly Number	Sep-09 48,615	Mar-12 27,210	Sep-15 33,032
Building Approvals Total, Quarterly Number	Mar-15 59,468	Mar-09 31,180	Sep-15 57,833
Building Approvals Houses, Quarterly Number	Dec-09 30,879	Jun-12 21,422	Sep-15 28,955
Building Approvals Dwellings Excluding Houses, Quarterly Number	Mar-15 30,619	Mar-09 8,563	Sep-15 28,877

CONCLUSION

The sources of data analysed show that property price growth is at a heightened level, with price-to-income and price-to-rent ratios indicating decreasing affordability and decreasing returns on investment in the property market. Record low interest rates have stimulated sustained growth in housing loans, and have coincided with a steady increase in housing assets as a proportion of household disposable income. Despite slowing population growth over recent quarters, the number of dwelling approvals and transfers remains high.

The condition of the residential property market cannot be explained by any individual indicator or composite indicator as these will only illustrate part of the picture. A range of statistics have been presented in this paper using a dashboard of indicators across the dimensions of price, financial and real economic variables. This framework has provided a broader perspective in assessing the underlying complexity of the residential property market and developing a more informed view of the longer term conditions of the Australian property market.


FOOTNOTES

1 As measured in the ABS Census of Population and Housing, in 1971 the home ownership rate was 69% and in 2011 it was 67%, with small fluctuations around 70% in the intervening Censuses. <back
2 5232.0 – Australian National Accounts: Finance and Wealth, June 2015. <back
3 6291.0.55.003 – Labour Force, Australia, Detailed, Quarterly, August 2015. <back
4 The basis for this paper is the Deutsche Bundesbank framework presented at the 14th Meeting of the Ottawa Group in Tokyo, 20-22 May 2015, ‘How should we measure residential property prices to inform policy makers?’. <back
5 Note that this is not an exhaustive list and a range of other indicators are available from private data providers (such as auction clearance rates, vendor discounts, days on market and sentiment). <back
6 Dwelling transfers refer to the record of sale for established houses and attached dwellings. <back


REFERENCES

Mehrhoff, J 2015, ‘How should we measure residential property prices to inform policy makers?’, paper presented at the 14th Meeting of the Ottawa Group, 20-22 May, Tokyo.

Residential Property Price Indexes: Eight Capital Cities, September 2015 (cat. no. 6416.0)

Australian National Accounts: National Income, Expenditure and Product, September 2015 (cat. no. 5206.0)

Household and Family Projections, Australia, 2011 to 2036 (cat. no. 3236.0)

Consumer Price Index, Australia, September 2015 (cat. no. 6401.0)

Lending Finance, Australia, September 2015 (cat. no. 5671.0)

RBA Indicator Lending Rates – F5

Australian National Accounts: Finance and Wealth, June 2015 (cat. no. 5232.0)

Australian Demographic Statistics, March 2015 (cat. no. 3101.0)

Building Approvals, Australia, September 2015 (cat. no. 8731.0)