Investing in Real Estate in Australia: choosing the right property for investment
Australian home prices are now in free fall
After six years of strong house price rises, the Australian real estate market is now cooling sharply. This is mainly due to the introduction of market-cooling measures, including stern restrictions on lending and higher taxes on foreign investment in the housing market.
Real estate prices in the country’s eight major cities decreased by 7.7 percent during the year to Q1 2019 (-8.92 percent inflation-adjusted), based on figures from the Australian Bureau of Statistics (ABS). Quarter-on-quarter, house prices decreased by 3.07 percent (-3.07 percent inflation-adjusted) in Q1 2019.
However, the national figures conceal regional variations in house prices. Sydney saw the biggest decline, with the existing house price index dropping by 11 percent (-12.2 percent inflation-adjusted) year to Q1 2019, led by Melbourne (-10.5 percent). Moderate to minimal house prices were recorded in Darwin, Perth, Brisbane and Canberra. On the other hand, house prices in Hobart and Adelaide continued to rise modestly during the year to Q1 2019.
The average price of residential housing in Australia was AU$636,900 (US$ 433,700) in Q1 2019 , down 7.4% from the same time last year, according to ABS.
New South Wales, especially Sydney, has the most expensive housing in the nation, with the average house price at AU$806,800 (US$ 549,386) in Q1 2019, more than 25% above the national average. On the other hand, Tasmania has the cheapest accommodation in Australia at an average price of AU$412,700 (US$ 281,026) in the same timeframe.
Demand and supply of homes are now falling. Purchases of new dwellings plunged by 28.3 percent y-o-y during the first five months of 2019, according to ABS, and purchases of existing dwellings declined by 13.9 percent.
In the secondary sector, established sales declined by 13.9 percent in January to May 2019 relative to the previous year, or by 16.3 percent in volume.
Development permits fell by 22.2 percent in the first half of 2019 compared to a year earlier, according to ABS. Housing start-ups fell by 25 percent to just 46,267 units in Q1 2019 from the previous year, according to the Housing Industry Association (HIA).
The slowing economy of Australia is not helping. In the first quarter of 2019, the economy increased by 1.8% from the previous year, the slowest growth in more than five years, according to the ABS. The Reserve Bank of Australia ( RBA) recently lowered its economic growth forecast for 2019 from 2.75 percent to 2.5 percent and kept the official cash rate at a record low of 1 percent in August 2019, after lowering it by a combined 50 basis points in June and July in an effort to boost the economy.
Acquisition of residential property by foreign nationals and corporations is subject to FIRB approval. Foreigners are not permitted to purchase a previously occupied home. They may purchase an uninhabited new dwelling, but only if the FIRB feels that the purchase will not add to the shortage of properties available to native Australians.
Rental yields for Sydney apartments are small, at 2.8% to 3.7%
Our Sydney apartment survey is focused on the number of bedrooms, since very few ads discuss square meter dimensions.
As we would imagine, there is a big variation in the cost of Sydney apartments depending on the location, from fairly low-cost Vaucluse to high-priced beloved Point and Potts Point. What is not really different is the now low gross rental return available on the Sydney properties (the rental return is the percentage return on the purchasing expense of the property). This is not going to make the landlords comfortable.
It is uncommon in Sydney to be able to receive more than 4.5 percent, and most of the apartments return less. Keep in mind that normally, expenses of all sorts would consume at least 2 percent of those sales, meaning that the net gains will be much smaller than the gross figures.
Small apartments earn significantly higher rentals yield than large apartments. This is especially true in the more expensive districts, and if you are looking for returns, the table will tell you that the exception to our generally low return figures are 1 bedroom apartments in Camberwell, which are apparently capable of earning a gross rental return of 8.7%.
Surprising, but worth taking a look at.
Roundtrip transaction costs may be high for foreigners buying residential properties in Russia.
Purchasing costs are moderate in Australia
Roundtrip purchase costs are 3.76 percent to 21.15 percent of property value. Stamp duty on property transfers ranges from 1.5 percent to 6.75 percent and is paid by the purchaser. It takes about five days to complete the five procedures required to register a house.
Landlord and Tenant
Tenancy laws are neutral in Australia
Australia’s landlord and tenant laws are generally neutral. The interests of all parties are well covered by the Residential Tenancy Act of each state.
Leases: Leases can be easily agreed upon, but changes can be open to review by the Tribunal if the tenant requests. The rent can not be increased in any state before the end of the first year of the tenancy.
Tenant Eviction: The landlord can terminate the tenancy by giving notice in the accepted form or by using the court. The legal system is very efficient: it takes an average of 44 days to evict a resident.
Slow economic growth; strong trade surplus
In the first quarter of 2019, Australia’s GDP grew by 1.8% relative to the same time last year. The International Monetary Fund (IMF) is predicting real GDP growth of 2.1 percent this year.
The Australian dollar (AUD) depreciated by almost 15% against the US dollar in the previous year, from AUD 1=USD 0.8073 in January 2018 to AUD 1 = USD 0.6894 in July 2019.
The country’s trade surplus grew to AUD 8.04 billion (USD 5.46 billion) in June 2019. In June 2019, exports rose by 1% to AUD42.38 billion (USD28.77 billion), the highest ever reported, while imports declined by 4% to AUD35.63 billion (USD24.19 billion).
It seems like Australia is winning from the current trade war between the US and China, as it is now supplying more to both nations. Australia’s exports to China rose by 35 percent in June 2019, while exports to the US have rose by 15 percent.
Unemployment was 5.1% in April 2019, according to the ABS. Around 703,900 people were unemployed in Australia in April 2019, down 3.7% from the previous year.
Inflation was 1.6 percent in Q2 2019, up from 1.3 percent in the previous period but down from 2.1 percent in the previous year.