The factors affecting Australian property prices can generally be boiled down to factors impacting the demand for Australian property and factors impacting the supply of Australian property. In this article we look at these factors.
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All three levels of government (federal, state, and local) have an enormous influence on Australian property prices.
Policies that can have a significant impact on Australian property prices include :
- Foreign investment rules
- First Home Owners Grants
- Tax concessions including capital gains tax, rental property depreciation and negative gearing
- zoning laws
- new infrastructure projects
- development application rules and processes
Rules around foreign investment and negative gearing are also politically charged with the Liberal and Labor parties having quite different approaches at times meaning a change of government can have a significant impact on Australian property prices either on a macro level or certain locations. The Australian Labor Party currently proposes some major changes to negative gearing rules which we reviewed in this article.
Successive Australian governments have put in place tax incentives for Australians to purchase their own home or invest in housing to be made available for rent. As we just mentioned, the Australian labor party is proposing some quite dramatic changes to the tax incentives related to investment properties, and in the 2017 Australian federal budget there were a number of changes that impact Australian property investors. Changes to the following tax incentives could have significant impacts on property prices for different property categories :
- Negative gearing – currently investors can deduct any “losses” on their investment property against other Australian taxable income
- Capital Gains Tax – investment properties held for more than 12 months attract a 50% capital gains tax discount for Australian residents, and there is no currently no capital gains tax on the family home
- Depreciation – Australian property investors can deduct the rental property depreciation (the reduction in value of the building and fittings over time) against other Australian income
Foreign buyers are getting a lot of attention lately in the media and from our politicians. Foreign buyers (predominantly Chinese nationals) accounted for around a quarter of all new dwelling purchases in the past 12 months. These foreign investors are sitting on a lot of cash, pushing up demand and Australian property prices with it.
In the 2017 Australian Federal Budget, the government announced a number of new restrictions in relation to foreign buyers. These subtle measures are intended to slow the growth of foreign property investment in Australia. Some state governments are also putting in place measures to slow foreign investment (eg. higher stamp duty), and the Chinese government is also putting in place restrictions on the amount of money Chinese citizens can take out of the country.
If foreign investment was to slow, the property markets in cities like Melbourne and Sydney would probably be impacted the most.
When consumers are confident about the outlook for the Australian economy, and that they don’t need to worry about losing their job, rising interest rates etc they will tend to spend more money and take on more debt to buy not only luxury items (like new TV’s or cars) but also property. Strong consumer confidence tends to be correlated with a strong property market, and when consumer confidence weakens so too does the property market.
If you only read the tabloid media or watch the television news its either all doom and gloom or boom boom boom. When was the last time you read an article in the daily newspapers that provided a more nuanced evaluation of what is happening in the property market? The problem is boring news stories don’t sell newspapers, and so the media will focus on the more sensational headlines or happily grab sensational quotes from “visiting experts” (who by the way are also seeking attention).
With the mass media having enormous audience reach, the media has the power to affect Australian property prices (both positively and negatively).
If the media is spreading rumours about imminent adverse changes to tax rules there might be a surge in investor activity, or reports of economic doom and gloom or rising interest rates may encourage more people than normal to put their properties on the market.
So when it comes to the media, it is important to inform yourself of what they are saying and whether that may have any impact on consumer sentiment or property buyer or owner behaviour. However, research the facts and look through the eye catching headlines and “fake news” to make an informed long term investment decision.
Global and Local Events
Global and local events can influence Australian property prices quite considerably. Events like the GFC and 9/11 impacted global consumer confidence and interest rates, whilst natural disasters like Cyclone Debbie can have significant impact on local property prices as contractors arrive to help re-build towns.
Industry and Infrastructure
Certain towns and regions are very reliant on a small number of industries or employers. As some of Western Australia’s mining towns (like Port Hedland) have experienced, a surge in activity can have a dramatic impact on property prices and rents, but when the boom turns to bust it works in the opposite direction as well.
Similarly, infrastructure projects can also have significant impacts on property prices. Infrastructure projects stimulate both direct employment (people working on the infrastructure project) and indirect employment (people providing services to the employees and families involved in the infrastructure project – shops, schools, etc). Depending on the type of infrastructure project, there may be a drop off in the local economy (eg. new road) at its completion or it may lead to further economic activity (new hospital, university, airport) and an ongoing boost to property prices.
The official cash rate is set by the Reserve Bank of Australia. The RBA uses interest rates to slow or speed up the economy in response to inflationary pressures and other economic activity. Rising interest rates generally indicates the RBA is trying to cool the market down and falling interest rates indicates the RBA is trying to boost economic activity and thus support house prices.
When we talk about migration we don’t just mean people moving to Australia from overseas. It also refers to regional migration, people moving from one state to another or within a state. The general laws of supply and demand hold in the property market. Increasing population in a particular region through migration creates an increase in demand for housing and associated shortfall in available properties. Consequently there will be pressure for house prices to rise.
The inverse also holds and as we discussed earlier, when people leave a particular region (for example at the end of the mining boom), the region can experience a significant drop off in property prices.
Re-zoning can have a material impact on the supply side of the property market over time, whether it is rezoning industrial land to residential, or single dwelling blocks to higher density residential land.
All of the factors mentioned above play a part in determining property prices. The Australian property market tends to follow a standard cycle. In any property cycle there will be a period where demand for housing exceeds supply and so prices will rise. Rising house prices encourage a wave of new developments and supply to enter the market. The government and RBA will take action to reduce the excesses of the price rises (eg. increasing interest rates, reducing tax incentives) and at some point the new supply entering the market will exceed demand causing the market to peak. Stagnating or falling house prices will reduce new supply entering the market (eg. new apartment projects won’t get approved) and after a period of time the market will find a new equilibrium whereby demand again exceeds supply and prices start the next upward trajectory.
These property cycles occur both at a macro level (national / state) and regional level. While one state may be at the peak of the cycle, another state may be at the bottom of the cycle.
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Sources : Bloomberg, Quartz, UBS Global Real Estate Index, Australian Tax Office, Herron Todd White
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.