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Australia and New Zealand Worry About Downturn

Australia and New Zealand Worry About Downturn

With house prices falling significantly in the major cities in Australia, the inevitable question is,
“will the downturn spread to New Zealand in 2019.” The two real estate markets are very different,
so we need to examine the fundamentals to see what is likely to happen in each country.

In Australia, population growth is strong and supports the demand for real estate. On the supply side, the number of new homes built this year in Australia is expected to drop, which will lead to demand not being met by new construction. This will lead to a shortage of homes for sale and upward pressure on real estate prices. In contrast, there is a growing oversupply of apartments in the upmarket cities of Sydney and Melbourne, which have seen prices drop sharply over the last 18 months.

The year-over-year median price decline in Sydney is close to 6% and in Melbourne, around 2%. Unemployment in Australia is declining, and this is expected to support the stabilization of the market and negate any prospect of a crash. Interest rates are always a critical factor in the real estate market, and, as the Australian economy shows signs of softening, historically low interest rates will provide support for property prices.

Comparison: New Zealand

In New Zealand, banks have been offering several competitive fixed-rate deals. About 80% of mortgage debt in New Zealand is on fixed rates, which allows them to structure their finances ahead of any future increase in rates, unlike Australia, where fluctuating rates dominate. Cities of Brisbane, Canberra, and The Gold Coast are showing consistent growth in prices as Sydney investors look elsewhere for better returns.

Sydney and Melbourne’s markets are still expected to weaken further in 2019 with tightening lending criteria and the abolition of negative gearing on resale properties.

According to the CoreLogic House Price Index, property values in New Zealand have grown over the last year by 3%. Values in Auckland, the major city, have dropped due to high property values, and sellers are adjusting prices downward to get a sale. A key topic is The New Zealand Tax Working Group’s report, which recommends the introduction of a more competitive Capital Gains Tax for residential investment properties. Investors are waiting for the Government to respond to the recommendations.

The New Zealand market, however, looks strong with significant value declines less likely. Australia’s GDP has eased slightly in 2019 but is still one of the highest of the international economies at a 2.8% forecast for 2019. The country has not been in recession for 28 years, and the indicators are that this market will continue for another two years, at least.

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