Australia | Jan 16 2007
By Chris Shaw
Commonwealth Bank suggests the fact housing finance figures for the Australian market for November reported yesterday were in line with expectations indicate the market is holding up reasonably well despite the three increases in official interest rates last year.
In the bank’s view favourable demographics have proven to be a big support for the housing sector in Australia as it deals with higher interest rates and as high levels of immigration are driving support particularly in the first home buyer space. At the same time, low vacancy rates and the upward pressure this is placing on rents is also proving supportive.
At the same time the actual level of construction activity bodes well for higher prices, as average annual housing starts of 151,000 are well below the bank’s estimate of underlying demand, which is for 175,000 new properties a year.
On the bank’s numbers this positive environment has improved the returns achieved from investment in the sector, as after record low rates of return were achieved in 2004 there has been an improvement to a level last year only slightly below long-term averages.
A major area of concern when looking at the housing sector is the impact higher rates may have on debt levels and on the ability of households to service their debt, but the bank sees some of this concern as slightly misplaced.
In its view much of the change in debt levels can be attributed to a shift in debt preference as households adjusted to the lower inflation environment. As a result, a large portion of the rise in household debt is a reflection of more households carrying debt, rather than simply an increase in average debt levels
The bank notes there has also been a trend towards larger houses and those made of more expensive materials, which has the effect of distorting traditional valuation measures.
So while agreeing household debt levels are higher, the bank sees the situation as more manageable given many borrowers are repaying debt faster than necessary and wealth gains from rising property and equity prices have created a solid buffer against debt levels.
Looking forward, the bank suggests some caution is required given ongoing changes to legislation in Australia, particularly as pertains to superannuation. With cuts to the top marginal tax rate and changes to the tax thresholds, as well as additional incentives to invest in superannuation, it is possible in its view the relative attractiveness of investing in property may fall over time.