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Home prices rose 0.6% in Apr – supply shortfall continues to outweigh negative impact of high rates

Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses home prices.

Key points:CoreLogic data showed national average home prices rose another 0.6% in April, the same as in February and March.Average monthly price gains are well down from their highs around May last year as high rates and poor sentiment impact, but the housing market remains resilient with the housing shortage and solid jobs market providing support.We expect home prices to rise around 5% this year as the supply shortfall continues to dominate the downwards pressure on prices from higher rates, but the pushing out of rate cuts and the possibility of rate hikes with higher unemployment poses a key downside risk.Home price gains are likely to remain widely divergent though with continued strength likely in Perth, Brisbane and Adelaide partly helped by better affordability and interstate migration but softness in other cities, particularly Melbourne.Australian dwelling price growth

Source: CoreLogic

The continuing gain in home prices has taken national averages to a new record high driven by Perth, Brisbane and Adelaide. The other capital cities remain below their previous record highs though.

While monthly momentum is up from lows late last year, it remains well down from its May high last year as high mortgage rates and poor sentiment constrain buyer demand to some degree. The gains also remain very diverse with strong increases in Brisbane, Adelaide and Perth (helped by relatively better affordability, relatively lower levels of new supply and strong interstate migration in the case of Brisbane and Perth) contrasting with still far more constrained conditions elsewhere, particularly in Melbourne.

Source: CoreLogic, AMP

The property market remains caught between high rates and the extreme housing shortage, with the latter dominating

The big negative influence on the property market remains poor affordability and high mortgage stress. For decades property prices were supported by ever lower interest rates but due to the rebound in interest rates from May 2022 and high home price to income ratios there is now a wide divergence between buyers’ capacity to pay for a property and current home prices – with the capacity to pay down by nearly 30% on our estimates over the last two years. See the next chart. In the absence of rapid interest rate cuts this continues to point to a high risk of lower property prices ahead. 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 high rates.

Source: RBA, CoreLogic, AMP

Against this though is the chronic housing shortage which got the upper hand over the last year as immigration levels surged. Put simply the surge in population growth to a record 660,000 over the year to the September quarter last year 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 as the home building industry struggled to keep up with rising costs and material & labour shortages and as approvals to build new homes fell. So the shortfall of homes expanded by another 70,000 or so dwellings and is expected to see the accumulated shortfall rise to around 200,000 dwellings by June this year (which is itself a conservative estimate).

Source: ABS, AMP

At the same time access to “the bank of mum and dad” and 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” reached a record over the last year.

After an average 8% gain last year, we expect that national average home prices will rise 5% this year as the supply shortfall continues to dominate, but as still high interest rates act to constrain 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.

Some signs of softening

Interestingly, there are some signs of a softening at the margin: auction clearance rates are cooling again; subdued housing finance data point to constrained home price gains with a possible slowing; stronger gains at the lower price end of most cities and in units relative to houses are signs that affordability constraints are starting to bite; and after seasonal adjustment capital city home prices rose just 0.2% suggesting much of the 0.6% rise in April was seasonal.

Source: Domain, CoreLogic, AMP 


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