Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses home prices.
Key points
- CoreLogic data shows that monthly average home price growth was just 0.1%mom in November, after a downwardly revised 0.2% rise in October
- The pace of gains remains highly diverse ranging from falls in Melbourne, Sydney and Hobart, to still strong but slowing gains in Brisbane, Perth and Adelaide.
- The national housing shortage and the still solid jobs market are providing support to the property market, but ongoing high interest rates, poor affordability and poor sentiment towards property are dominating again driving a renewed slowdown in prices.
- Rental growth has also peaked with national asking rents up just 0.2%mom in November and annual growth slowing to 5.3%yoy, its slowest since April 2021. Poor rental affordability leading to some reversal of the pandemic driven decline in average household sizes and easing student arrivals appear to be weighing on demand for rental property.
- Further home price weakness is expected over the next 6 months as continuing high interest rates along with a rise in unemployment pose a key constraint and downside risk to property prices. After 5% growth this year, we expect average property prices to rise somewhere between 2% to 5% in 2025, but expect a year of two halves with weak conditions in the first half but stronger conditions in the second half as lower interest rates eventually provide a boost.
- We are assuming that the RBA starts cutting rates by May with three 0.25% rate cuts through next year.
Australian dwelling price growth
Source: CoreLogic
The 0.1% gain in national average home prices took them further into record territory. However, the gains have slowed to a crawl with recent months also being revised down by CoreLogic, suggesting that November’s 0.1% gain could be revised down too. Conditions in Perth, Brisbane and Adelaide remain strong, helped by momentum and strong interstate migration in the case of Brisbane and Perth. However, they are slowing as poor affordability impacts – particularly as they are all now more expensive than Melbourne, including in terms of price to income ratios. And all the other cities are seeing weak conditions with a falling trend in prices measured over 3 months in Melbourne, Sydney, Darwin and Canberra.
Source: CoreLogic, AMP
The extreme housing shortage remains…
The chronic housing shortage got the upper hand over high interest rates last year as immigration levels surged on the back of record immigration driven population growth. Government forecasts for a sharp fall in immigration and hence population growth point to some easing in underlying housing demand over the year ahead, but so far it looks like immigration levels are coming in stronger than forecast.
The housing shortfall is expected to remain significant for a long while yet as building approvals running around 175,000 dwellings a year indicate that 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. The accumulated shortfall of dwellings in Australia is estimated to be around 200,000 dwellings at least, but 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.
Source: ABS, AMP
..but poor affordability and ongoing high rates are dominating again
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 ongoing high mortgage rates. The continuing rise in average home prices means that the ratio of average prices to incomes is at or around record levels. See the next chart.
Source: ABS, CoreLogic, AMP
This combined with the surge in mortgage rates from around 2-3% in early 2022 to around 6-6.5% now means that there is a huge divergence between buyers’ capacity to pay for a property and current home prices. See the next chart. Since early 2023 the drag on property prices from high rates has been swamped by the impact of the housing shortage, the “fear of missing out” and access to saving buffers, “the bank of mum and dad” and help from the strong labour market which allowed stressed homeowners to take on extra hours of work.
However, in the absence of rapid interest rate cuts this divergence between buyers’ capacity to pay and current prices continues to point to a high risk of lower average property prices at some point as saving buffers run out, access to “the bank of mum and dad” slows and unemployment rises. The risks here appear to be rising. Access to the “bank of mum and dad” is likely to continue but savings buffers for lower income earners appear to have fallen sharply and falling job vacancies point to higher unemployment ahead which may also make it harder for struggling homeowners to work extra hours to help service their mortgages.
Source: RBA, CoreLogic, AMP
There are numerous signs of softening in the Australian property market
Apart from the slowing momentum in national average home price growth and falls in prices in several cities, there are numerous signs of softening in the Australian property market: auction clearance rates have cooled from their highs; new listings are up in most cities by more than normal seasonal considerations would suggest reflecting rising distressed listings as high mortgage rates bite; unit prices and lower quartile prices are now leading growth in most cities as affordability and borrowing constraints are pushing buyers into lower priced property; properties are staying on the market for longer; and sales activity is down.
Expect a further slowing in the next 6 months
The national housing supply shortfall will continue to provide some support for home prices, but further home price weakness is expected over the next 6 months as continuing high interest rates along with a rise in unemployment pose a key constraint and downside risk to property prices. After rising around 5% in 2024, we expect average property prices to rise somewhere between 2% to 5% in 2025, with weak conditions in the first half followed by stronger conditions in the second half as lower interest rates by May eventually provide a boost.
Divergence is likely to remain wide though across Australia with continued stronger but slowing conditions in Brisbane, Adelaide and Perth for now and weaker conditions in other cities including further modest price falls in Sydney, Melbourne, Canberra and Darwin over the next 6 months.
The ongoing delay in rate cuts and rising unemployment risks more significant weakness in property prices as its likely to continue to cause buyers to hold back and distressed listings to rise further.
The key to watch will be interest rates, unemployment and population growth. Further delays in rate cuts, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a much sharper fall in property prices reflecting the divergence between home buyers’ capacity to pay and current home price levels.
For the RBA, the downturn in the property cycle with falling house prices in several cities increases the case for a start to cuts in the cash rate in the first half of next year as a rising wealth boost to consumer spending from rising home prices is now fading and giving way to a negative wealth effect in some cities, albeit so far its modest.
Ends
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