Buying Property in Australia

Australians love property, prices are very high. But despite the high prices, prices are once again going up. Is it worth buying property in Australia or is it too risky?

Australia was one of the few countries that managed to avoid a property crash after the global financial crisis. Given that Australian property prices were very high, this was surprising. Property prices stalled for a while and then went down a few percent but now prices are going up again. The current buying frenzy is due to the low interest rates but is it really worth paying so much for real estate. After all, sooner or later interest rates will go up again.

First we should mention that if you are not an Australian citizen or a permanent resident, you can only buy off-plan residential real estate. The Australian dollar has appreciated against most other currencies since the global financial crises, making it more expensive for foreigners to buy in Australia.

If house prices are too high has been a hot topic in Australia for decades. One thing is clear, house prices have just gone up and up. Compared to household income, Australian house prices are almost ridiculously expensive. At least if compared with other western countries. After the recession in the early 1990s, the ratio between house prices and household income has reached alarming levels. But the upward trend started much earlier, in the 1960s Australian property prices were reasonable. When talking about average household income, it is worth remembering that earlier many households had only one income, nowadays the typical household has two incomes. But despite that Australian households spend more and more of their income on housing.

Another thing that has increased the average house price is the mining boom. Property prices in the big cities, especially Sydney, have been expensive for generations but outside the big cities house prices have been relatively cheap. But the mining boom has increased prices in many places, in some cases to ludicrous levels, on the countryside.

As mentioned earlier, after a few years of property prices going sideways, prices have started to increase again. Is it the right time to buy property in Australia? Two of the main reasons for the increased prices are low interest rates and a fast growing population. Especially the big cities are growing fast, for western standards.

Buying residential real estate outside the big cities is quite clearly a risky investment. If you are looking for a good investment, you missed the race. Prices in most part of rural Australia are far too high nowadays to make it a sound investment.

The big cities are a safer bet but the differences are big. At the moment, house prices in Sydney, Melbourne and Perth have started to go up again. Sydney is very expensive but a safe bet, they don’t build enough new houses in Sydney. But both capital growth and rents are likely to be limited due to the already high house prices and rents. Thanks to the mining boom, house prices in Perth have reached very high levels. If the prices will continue upwards is a very good question, few people can explain why house prices in Perth should be almost as expensive as in Sydney.

Residential property in Melbourne is a very risky investment at the moment. Melbourne is the fastest growing city in Australia at the moment. But property developers in Melbourne are building a lot, especially apartments close to the CBD and houses far away from the CBD. Even worse, new apartments and houses will be flooding the market for the next couple of years. Australian developers have stopped building in Melbourne, instead developers from Asia with deep pockets have taken over. Quite clearly, unless you know the Melbourne real estate market very well, don’t buy anything in Melbourne at the moment. In a couple of years prices may have fallen a lot.

If you are a foreigner, who can only buy off-plan, does it make sense to invest in Australian property at the moment? In most cases, the answer would be no. Off-plan in Australia is almost always very expensive, with very few exceptions the asking price is well above market price. Often off-plan projects are being promoted by people working on commission-only basis and some of them are looking for people with no knowledge about the local market. Remember that you, as a buyer, will be paying their commission. The same goes for rental guarantees and most other stuff put in to sweeten the deal, the developers increase the asking price to get their money back.

Another thing to be aware is that a lot of off-plan is sold to Asia, to people who want to have some of their money outside their home country. Their primary concern is not the return on the investment, they want to have some money in a safe place. The Gold Coast is a good example of what often happens with off-plan buyers in Australia. Far too much was being built and heavily promoted both in Australia and abroad, prices were well above market prices. A couple of years later, buyers have realized that they paid too much and many have sold their units, losing a lot of money. Hanging on to a unit is not much better, the rental market is slow due to oversupply of apartments. Unless inflation increases a lot, it will take a long time before the buyers get their money back.

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