All Signs Point to an Active Spring Season

Over the last three decades Australian house prices have recorded periods of extreme growth contrasted with periods of weakness. With the benefit of time, the peaks and troughs of house price growth tend to even out, with Australian house prices recording an average annual rate of growth of 8.4%.

The Australian property market moves in cycles which are influenced by a wide range of factors including unemployment, interest rates, consumer confidence and of course previous rates of growth that impact on rental yields and levels of affordability.

Over the last three decades Australian house prices have increased at the average annual rate of 8.4%. That’s a pretty decent rate of growth when you consider that prices double every ten years based on an annual compounding rate of 7.2%. In comparison, the rate of inflation has averaged about 4.6% over the last 30 years and 3.2% over the last decade.

Of course, there have been some periods where growth rates have well and truly eclipsed this average rate of growth and periods where prices have well and truly underperformed.

As an example of one of the weakest periods for Australian house prices, over the five years from 1990 to 1995 the median house price across Australia increased by just 2.8% per annum. The soft market conditions came at a time when Australia was entering the “the recession we had to have” and unemployment raced upwards from 5.8% in January 1990 to peak at 10.9% in December 1992. Mortgage rates during this five year period averaged 11.75% and peaked at 17%.

At the other end of the spectrum, the most spectacular five year run was recorded during the ‘boom’ which ran from 2001-03 around most areas of Australia. Despite a slowing in growth rates between 2004/05, the five year period ending July 2005 saw average house price growth of 13.9% per annum.

Currently the residential housing market is transitioning out of a strong growth phase, however economically the country is just starting to ramp up. Gross domestic product figures show the economy is once again growing at about 3.2%, unemployment is trending downwards, consumer confidence remains high and rental yields are showing the first signs of improvement after being eroded by value growth and lower rental rates during 2009.

In contrast to the broad market drivers outlined above, we can expect there also to be factors that will dampen market demand. Interest rates are likely to increase at least once over the coming 6 months after increasing by 150 basis points since October last year. Population growth appears to have peaked and will most likely fall further as the proposed cuts to migration are implemented and housing affordability is likely to become more of an issue in the larger metropolitan markets around Australia.

For prospective buyers it is worthwhile considering the long term trends in the market. The average length of tenure for Australian home owners is about 7.3 years; a time frame that is likely to smooth out the peaks and troughs of price growth encountered through the cycles. The economic and demographic foundations of the market remain solid which suggests that we are likely to see ongoing improvements in Australian house prices, albeit at a much more modest rate that what was seen between 2009 and the first quarter of 2010.

Source: RP Data Property Pulse