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 0.3%mom in October, unchanged from the prior three months which were revised down.
- The pace of gains remains highly diverse ranging from falls in Melbourne, Canberra, Darwin and now Sydney which saw its first fall since January 2023, 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 getting the upper hand again.
- Rental growth also looks to have peaked with national asking rents up just 0.2%mom in October and annual growth slowing to 5.8%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.
- Continuing high interest rates along with a rise in unemployment pose a key constraint and downside risk to property prices in the near term. Next year we expect average property prices to rise 5% as lower interest rates should provide a boost.
Australian dwelling price growth
Source: CoreLogic
The 0.3% gain in national average home prices took them further into record territory. However, the gains are moderate 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, they are all showing some signs of slowing as poor affordability impacts – particularly as they are now all more expensive than Melbourne despite having lower average income levels. And the other cities are seeing weak conditions with even Sydney prices now slipping.
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 on the back of record immigration driven population growth. This meant we should have built around 250,000 new homes last financial year but instead completions were just 176,000 pa as home builders struggled with rising costs and material & labour shortages and higher mortgage rates depressed 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, but so far it looks like immigration levels are coming in stronger than forecast.
Immigration slowdown or not, the housing shortfall is expected to remain significant for a long while yet as building approvals running around 170,000 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
…but poor affordability and ongoing high rates appear to be getting the upper hand again 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 ongoing high mortgage rates. There remains a wide divergence between buyers’ capacity to pay for a property and current home prices. See the next chart. In the absence of rapid interest rate cuts this 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
Signs of softening beyond slowing home prices
Apart from the slowing momentum in 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 the big cities as affordability and borrowing constraints are pushing buyers into lower priced property; and properties are staying on the market for longer.
After 8% national average property price growth last financial year we see property price growth of around 5% through 2025 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 more significant weakness 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 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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