Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses home prices.
Key points:
- CoreLogic data showed national average home prices rose 0.8% in September, up slightly from 0.7% in August.
- The CoreLogic home price series have been revised to give more weight to more recent sales which has had the effect of now showing the bottom in national home prices being in January (previously February) and a faster recovery since then. The past 12 months are also subject to revision each month.
- As a result prices are now up for eight months in a row and by 6.6% from their January low. They are now just 1.3% below record levels reached in April 2022.
- Monthly gains are down from 1.2% in May but remain strong.
- This is particularly the case in Adelaide, Brisbane and Perth where supply is the weakest. Prices are continuing to fall in Hobart which has fallen out of favour with reopening as have regional areas albeit to a less degree.
- The rebound in prices since January reflects a surge in underlying demand on the back of much faster than expected immigration and constrained supply dominating the negative impact of higher interest rates.
- So expectations for a further fall in prices this year have been wrong and national average home prices now look likely to see an 8% or so gain this year, with Sydney home prices likely to rise 12% or so. This will take prices to record, or around, record levels.
- Our base case is that property prices will see a further rise of around 5% next year as interest rates start to fall.
- However, our confidence in this forecast remains low as the risk of another leg down in prices is high as interest rate hikes continue to impact and the economy slows pushing up unemployment. So there is a high risk that just as this year turned out to be far stronger than expected next year might turn out to be far weaker than expected.
Australian dwelling price growth
Home price gains down from their recent high but still strong
CoreLogic national average home price data shows a 6.6% rise from their January low, with the monthly rate of increase down from their May high but still strong at 0.8%mom nationally and 0.9%mom on average in capital cities.
Source: CoreLogic, AMP
The fundamental supply shortfall is still dominating
The rebound in prices since January this year in contrast to expectations for a further fall in prices reflects a worsening shortfall of supply relative to underlying demand for homes as a result of the rebound in immigration driving the fastest population growth since the 1950s at the same time that the supply of new dwellings has slowed. As a result, the property market has moved back into a significant undersupply. See the next chart. This in turn accentuated already very tight rental markets, forcing rents up and driving renters to consider buying earlier than they otherwise would have. At the same time foreign demand is returning. So, buyer demand has been strong but supply remains weak with total listings up from their lows but still below normal. Talk of rising prices and shortages has in turn further boosted demand with an element of FOMO attracting less interest rate sensitive buyers into the market. Expectations that interest rates are at or close to the top has likely also helped.
Source: ABS, AMP
As a result of the strong rise in prices so far this year national average prices now look likely to see an 8% or so gain this year, with average Sydney prices likely to rise 12% or so. Our base case is that property prices will see a further rise of around 5% next year as interest rates start to fall and supply remains tight.
However, the uncertainty around the property outlook is very high
On the one hand the chronic housing undersupply is a strong force pushing home prices higher. Against this, the impact of the rise in mortgage rates since May last year is still feeding through and unemployment is likely to rise significantly over the next year.
- Even though rates may have peaked, there has been a big hit to home buyer “capacity to pay” which remains in place – we estimate that the capacity to pay for a home for a borrower with a 20% deposit on full time average earnings is around 29% lower than it was in April last year. The rapid reversal in the capacity to pay since May last year due to the surge in mortgage rates threatens a downwards adjustment in home prices at some point unless incomes rise dramatically or mortgage rates fall dramatically.
- There is a high risk of increased listings by distressed sellers – this may come from variable rate borrowers and the rollover of fixed rate mortgages. On the RBA’s estimates more than 15% of variable rate borrowers (which covers about 1 million people) will have negative cash flow by year end. All of which when combined with higher unemployment as the economy slows could lead to an increase in listings by distressed sellers. In fact, we have seen an unseasonal rise in new listings through July which may reflect some combination of homeowners just concluding that now is a good time to sell and/or a pick-up in distressed selling. So far though the rollover of fixed rate borrowers to much higher rates appears to be occurring without major problems, but there is still a way to go yet as the rollover is only about 40% complete.
- In the last three major cyclical upswings in home prices lower interest rates have been required to drive a sustained rise in home prices and we have now pushed out our expectation for the first rate cut from around March to around June. So, the rebound in home prices so far this year looks premature relative to the normal cyclical relationship with interest rates.
- Softish home lending growth and a downtrend in auction clearance rates since May also points to points to some loss of momentum in housing demand.
Source: RBA, CoreLogic, AMP
So, while our base case is for further increases in home prices ahead, there remains a high risk of another leg down in prices or, if not, that the higher level of interest rates will act as a constraint on how far home prices can rise even in the face of the shortfall of supply relative to underlying demand.
Ends
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