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 0.5%mom in July, well down from the highs seen around mid-last year.The pace of gains remains highly diverse ranging from falls in Melbourne, Hobart and Darwin to still booming conditions in Perth, Adelaide and to a lesser degree Brisbane.The national housing shortage and the still solid jobs market is continuing to provide support to the property market, but it may be starting to wane with interest rates staying high for longer and sentiment towards housing remaining poor.We expect home prices to rise around 5% this financial year as the supply shortfall continues, but the pushing out of interest rate cuts 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, still strong but slowing conditions in Brisbane and Adelaide and softness in other cities, particularly Melbourne.
Source: CoreLogic
The 0.5% gain in national average home prices pushed them further into record territory. However, the gains now look to be cooling again and they remain highly diverse. Conditions in Perth, Brisbane and Adelaide remain very strong, helped by relatively lower levels of supply evident in total listings running well below average levels for this time of year, and strong interstate migration in the case of Brisbane and Perth. However, Brisbane is starting to slow as poor affordability impacts – the average dwelling in Brisbane now costs $95,000 more than in Melbourne! And the other cities are seeing constrained conditions with Sydney slowing again and Melbourne prices appearing to accelerate to the downside. Melbourne and Hobart are seeing total listings well above average levels.
Source: CoreLogic, AMP
The extreme housing shortage remains the key upwards pressure on 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 an extra 250,000 new homes should have been built 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 now 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
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.
Of course, the housing short fall varies from state to state with estimates by my colleague Diana Mousina indicating that Queensland and New South Wales have significant shortfalls, Victoria still has an oversupply on the back of relatively high home building and population loss through the pandemic and other states are around balance. This partly explains the relative strength of Queensland and NSW property prices compared to Victoria.
Source: ABS, AMP
But high for longer rates are a growing 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. As a result of high interest rates and high house price to income ratios at the same time, there is 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 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 overshooting on the downside could also add to the downside risks for property prices.
Source: RBA, CoreLogic, AMP
However, for now the national supply shortfall is likely to continue to provide support for prices. So, we expect that national average home prices will continue to rise in the current financial year. But with poor affordability, high rates for longer and rising unemployment we expect a more constrained 5% gain this financial year down from 8% last financial year. The supply shortfall points to upside risk, but 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.
Divergence is likely to remain wide though across Australia with continued boom time conditions in Perth, strong but slowing conditions in Brisbane and Adelaide as poor affordability bits, soft conditions in other cities but further price falls in Melbourne as over supply conditions impact.
Signs of softening to keep an eye on
There are some signs of a further 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 unit prices and lower quartile prices are now leading growth 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 in the somewhat more affordable southwest.
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.
Source: Domain, AMP
Ends
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