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 remained moderate at 0.4%mom in September, with previous months revised down.The pace of gains remains highly diverse ranging from falls in Melbourne, Hobart and Canberra, only very weak growth in Sydney and Darwin, and still booming conditions in Brisbane, Perth and Adelaide although they are showing signs of slowing too.The national housing shortage and the still solid jobs market is continuing to provide support to the property market, but ongoing high interest rates, poor affordability and poor sentiment towards property are weighing.Rental growth also looks to have peaked with national asking rents up just 0.1% in the September quarter, with poor rental affordability and easing student arrivals weighing on demand.We expect home prices to rise around 5% this financial year as the supply shortfall continues, but continuing high interest rates along with the rising trend in unemployment pose a key constraint and downside risk in the near term. Lower interest rates should provide a boost next year.
Source: CoreLogic
The 0.4% gain in national average home prices took them further into record territory. However, the gains remain moderate, with prior monthly gains being revised down, and highly diverse. Conditions in Perth, Brisbane and Adelaide remain strong, helped by relatively lower levels of supply and strong interstate migration in the case of Brisbane and Perth. However, Brisbane is slowing as poor affordability impacts – the average dwelling in Brisbane now costs nearly $104,000 more than in Melbourne! Perth and Adelaide are also starting to see some slowing albeit they remain very strong. And the other cities are seeing constrained conditions with Sydney and Darwin weak and prices falling elsewhere. Note that Melbourne is now the 3rd “cheapest” capital city.
Source: CoreLogic, AMP
The extreme housing shortage remains a key source of support for home 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. Population growth is now starting to slow but at 615,000 over the year to the March quarter it is still very strong. It meant that an extra 245,000 new homes should have been built over the last year but instead completions have been running around 170,000 pa as home builders struggle with rising costs and material & labour shortages and higher mortgage rates depress new home sales. Government forecasts for a sharp fall in immigration and hence population growth point to some easing in underlying housing demand over the year ahead.
However, the housing shortfall is expected to remain significant as building approvals running around 160,000 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. See the next chart. 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. This is above where we were before the unit building boom got underway around 2015.
Source: ABS, AMP
Of course, the housing short fall varies from state to state with Queensland and New South Wales having significant shortfalls but Victoria having an oversupply. This partly explains the relative strength of Queensland and NSW property prices compared to Victoria.
Access to the “bank of mum and dad”, the tight labour market and the tax cuts are also sources of support.
Poor affordability and high rates point to downside risk in the near term
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. There remains a wide divergence between buyers’ capacity to pay for a property and current home prices. In the absence of rapid interest rate cuts this continues to point to a high risk of lower average property prices at some point if saving buffers run out, access to “the bank of mum and dad” slows and unemployment rises significantly. 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. A sharp fall in net immigration if the Government’s cut back in student visas results in population growth undershooting on the downside could also add to the downside risks for property prices.
Source: RBA, CoreLogic, AMP
Signs of softening
Apart from the slowing momentum in home price growth compared to last year’s highs, 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 as affordability and borrowing constraints are pushing buyers into lower priced property; and properties are staying on the market for longer.
Overall, after 8% national average property price growth last financial year we see property price growth of around 5% this financial year with the national supply shortfall likely to continue to provide support for prices, but monthly price growth slowing further in the next few months as poor affordability, high rates and rising unemployment impact. The ongoing delay in rate cuts and rising unemployment risks renewed falls in property prices as its likely to cause buyers to hold back and distressed listings to rise further. 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. The Sydney property market is at risk of falling prices in the next few months.
Interest rates cuts are likely to provide a boost to property prices next year, assuming unemployment doesn’t rise too far, driving a renewed cyclical upswing. This could see underperforming markets like Melbourne start to spring back relative to the booming but increasingly less affordable property markets in Brisbane, Adelade and Perth all of which are now more expensive than Melbourne (see the table above showing median dwelling prices).
Source: CoreLogic, AMP
The key to watch will be interest rates, unemployment and population growth. Further delays in rate cuts beyond next February, a sharply rising trend in unemployment and a sharp slowing in net migration would be negative for property prices.
Ends
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