What’s happening in these very different real estate markets?
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 different, so we need to examine the fundamentals to predict what is likely to happen in each country.
In Australia, population growth is strong and supports 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 percent and in Melbourne around 2 percent. 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.
In New Zealand, banks have been offering several competitive fixed-rate deals. About 80 percent of mortgage debt in New Zealand is on fixed rates, which allows them to structure their finances ahead of any future increase in rates. This is unlike Australia where fluctuating rates dominate. Cities of Brisbane, Canberra, and the Gold Coast are showing reasonable 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 should the government change in the Federal Elections to be held in May 2019. Negative gearing is an Australian tradition and investors hope to secure negative gearing arrangements ahead of the election as all existing negative gearing arrangements at the time of the election will not be affected.
According to the CoreLogic House Price Index, property values in New Zealand have grown over the last year by 3 percent. Values in Auckland, the major city, have dropped due to high property values, and sellers have to adjust 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 property. 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 2.8 percent forecast for 2019. The country has not been in recession for 28 years, and the indicators are that this will continue for another two years at least.
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