CoreLogic data showed national average home prices rose 8% over 2023-24, up from a 2% fall in 2022-23.However, trend monthly growth has slowed from the highs seen mid last year with prices up 0.7% in June.And the pace of gains was highly diverse ranging from a small fall in Hobart to booming conditions in Perth.The housing market remains remarkably resilient with the housing shortage and still solid jobs market providing support, offsetting the downwards pressure on prices from high interest rates and poor sentiment towards housing.We expect home prices to rise around 5% this financial year as the supply shortfall continues, but the pushing out of interest rate cuts and the possibility of further rate hikes along with the rising trend in unemployment pose a key constraint and downside risk.Home price gains are likely to remain widely divergent though with continued strength likely in Perth, Brisbane and Adelaide for now partly helped by interstate migration but softness in other cities, particularly Melbourne.
Australian dwelling price growth
The 8% average gain in home prices over the last year was a big turnaround from the 2% fall in 2022-23 which was on the back of the initial rise in interest rates and provided an average wealth gain per property of $59,000 based on CoreLogic data. The positive wealth effect partly explains the resilience of consumer spending although I wouldn’t push this too far as consumer spending per person has still been going backwards!
The further 0.7% gain in national average home prices pushed them further into record territory. However, the gains remain highly diverse. Conditions in Perth, Brisbane and Adelaide continue to be very strong, helped by relatively lower levels of supply evident in total listings running more than 30% below their five-year averages, and strong interstate migration in the case of Brisbane and Perth. But this contrasts with far more constrained conditions elsewhere. Sydney has only just made it above its 2022 record high and the other capitals remain well below their record highs. Melbourne and Hobart are seeing total listings well above their five-year average.
Source: CoreLogic, AMP
Mean reversion at work
The strong dwelling price performance of Brisbane, Perth, Adelaide and regional areas over the last five years relative to Sydney and Melbourne should be seen as a catch up after their relative underperformance seen last decade. Of course, the surge in prices in Brisbane, Perth and Adelaide will in time worsen their attractiveness for interstate migration eventually leading to slower property price growth in those cities.
Source: CoreLogic, AMP
The extreme housing shortage remains the key driver of prices
The chronic housing shortage got the upper hand over high interest rates last year as immigration levels surged and this continues to be the main driver of rising property prices. The surge in population growth to 650,000 in 2023 driven by record immigration levels meant that around an extra 250,000 new homes needed to be built, but instead completions have been running around 170,000 pa as home builders struggle with rising costs and material & labour shortages. Government forecasts for a sharp fall in immigration and hence population growth point to some easing in underlying housing demand over the year ahead. See the next chart.
The chart assumes a sharp fall in net migration levels in line with Government forecasts and some improvement in completions. Source: ABS, AMP
However, the housing short fall is expected to remain significant as completions are likely to run below government objectives for 240,000 pa (or 1.2 million over five years) for some time to come and may never reach that objective. In fact, approvals are currently running around 160,000 new dwellings a year, ie way below the 240,000 target. Over the last year the shortfall of homes expanded by another 80,000 or so dwellings and the accumulated shortfall is now estimated to be around 200,000 dwellings. See the next chart. This is a conservative estimate – if the decline in the average number of people per household seen in the pandemic years is sustained then the accumulated shortfall could be around 300,000 dwellings. Which would be above where we were before the unit building boom got underway around 2015.
Source: ABS, AMP
At the same time that housing has been in short supply, access to “the bank of mum and dad” and a run down in savings buffers built up through the pandemic appear to have protected the property market from high rates over the last two years. Anecdotes suggest that all cash purchases and access to “the bank of mum and dad” has reached a record.
But higher for longer rates are a key constraint and source of downside risk
However, the big negative influence on the property market remains poor and still worsening affordability and high mortgage stress on the back of high prices, high debt levels and high mortgage rates. Thanks to the surge in interest rates and average home prices there is now a wide divergence between buyers’ capacity to pay for a property and current home prices. See the next chart. In the absence of rapid interest rate cuts this continues to point to a high risk of lower property prices at some point if saving buffers run out and access to “the bank of mum and dad” slows. This is reinforced by ultra-low sentiment towards property. A sharp rise in unemployment in response to weak spending in the economy would add to the downside risks flowing to property prices from higher for longer interest rates. And so could a collapse in net immigration if the Government’s cut back in student visas results in population growth overshooting on the downside. (International students rarely buy Australian homes directly, but they compete in the market for rental property which pushes up rents and over the last 18 months has displaced people into the home buyer market. So, changes in student arrivals can’t be ignored.)
Source: RBA, CoreLogic, AMP
However, for now the supply short fall continues to dominate. So, after an average 8% gain last year, we expect that national average home prices will continue to rise in the current financial year but by a more constrained 5% as still high interest rates act to restrict demand and rising unemployment boosts distressed listings. The supply shortfall points to upside risk, but the delay in rate cuts and talk of rate hikes risks renewed falls in property prices as its likely to cause buyers to hold back and distressed listings to rise.
The experience of Melbourne – where Victoria is seeing the second fastest population growth in the country (of 2.8% last year, second only to Perth at 3.3%) and rental vacancy rates below average like elsewhere and yet property prices have barely increased over the last year – highlights that the housing shortfall is no guarantee that prices will continue to surge at a time when mortgage rates are well up from their lows.
Some signs of softening
In fact, there are some signs of a softening at the margin: auction clearance rates have cooled from their highs; new listings are up in most cities and up sharply in some possibly reflecting rising distressed listings as high mortgage rates bite; and after leading early in the property upswing, top quartile property price gains are the weakest as affordability and borrowing constraints are starting to bite pushing buyers into lower priced property. For example, in Sydney nine of the top 10 local government areas for price growth are now in the somewhat more affordable southwest.
The key to watch will be interest rates, unemployment and population growth. Even higher for longer rates, a sharply rising trend in unemployment and a sharp slowing in net migration would be negative for property prices.
Source: Domain, AMP
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