Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP, discusses home prices.
The key points are:
- CoreLogic data shows national average home prices rose 0.4% in March, their second monthly rise after a brief downturn of just 0.5% late last year into January. They are now at a new record high.
- The upswing has been supported by the RBA’s rate cut in February which boosted buyer confidence.
- Annual growth in rents slowed to 3.8%yoy, the slowest since 2021. Slowing student arrivals along with poor rental affordability leading to rising average household sizes have led to some slowing in demand for rental property.
- More RBA rate cuts along with the ongoing housing shortage are expected to drive a further upswing in average prices this year. However, its likely to be modest as we are starting from a point of very poor affordability, interest rates are only likely to fall modestly, population growth is slowing and divergence across cities will continue.
After 4.9% growth last year, we expect average property prices to rise around 3% this year.
Home prices rose again in March
CoreLogic data shows that national average property prices rose again in March, with buyer sentiment supported by the RBA’s rate cut in late February.
Source: CoreLogic
All cities saw price gains except Hobart, with the recent losers of Melbourne, Canberra and Sydney continuing to pick up. Interestingly the booming cities of the last two years are mixed with Adelaide still seeing very strong gains (although they have been getting revised down), Brisbane recording modest growth and revised data for Perth now showing it to have seen falls in prices after a peak last October and now seeing weak gains.
Source: CoreLogic, AMP
Expect further modest gains in average property prices
Further gains are likely as interest rates fall further and the shortage of property remains, provided unemployment remains relatively low.
- We expect three more RBA 0.25% rate cuts by early next year – in May, August and February. Lower rates take pressure off existing homeowners leading to less distressed listings and boost demand for property as they increase the amount a borrower can borrow from a bank and hence pay for a property. Rate cuts also provide a boost to buyer sentiment and that is evident in stronger sentiment towards property seen in various surveys since late last year. Roughly speaking each 0.25% rate cut when passed on to variable mortgage rates will add about $9000 to how much a buyer on average earnings can borrow. Further rate cuts into early next year will drive a further increase in the capacity of buyers to pay for a property. See the next chart, which also allows for wages growth over the year ahead.
Source: RBA, CoreLogic, AMP
- There is still an ongoing housing shortage which provides a source of support for prices. We estimate the accumulated housing shortfall to be around 200,000 dwellings at least, and possibly as high as 300,000 dwellings and, with home building running well below the Housing Accord objective for 240,000 homes a year, the shortfall is likely to remain for some time to come.
However, the upswing it likely to be modest
Just as the downswing was mild the upswing is likely to be too. This is because it’s starting from a point of still poor affordability, interest rates are only likely to fall modestly, and population growth is slowing.
- Despite the 13 rate hikes between May 2022 and November 2023 average home prices still made it to a record high last year and then just had a flick of the top into their January low, which means that housing affordability remains very poor without the usual improvement rate cuts can drive via lower prices. This is evident in the ratio of home prices to wages & incomes being around record levels.
Source: ABS, CoreLogic, AMP
- While interest rates are likely to fall further, in the absence of recession and much higher unemployment we only expect about 4 or maybe 5 rate cuts in total, taking the cash rate back to a low of around 3.1 to 3.35% next year and mortgage rates to around 5 to 5.25%. This will leave mortgage rates well above their record lows seen in 2021 of around 2 to 3%. As such, the buying capacity of home buyers is expected to improve but remain well below the levels seen in 2021-22. See the second chart above. This will limit the upside in property prices.
- Slower population growth, reflecting a crackdown on student visas and a return to the normal pattern of students leaving after they complete their degrees (after disruption from the pandemic), will likely lead to a further easing in the rental market which will help take some pressure off the home buyer market. Population growth has already slowed from a peak of 663,000 over the year to September 2023 to 484,000 over the year to September last year.
- Divergence is likely to limit the upswing in national prices. While the weak cities of the last year – Melbourne, Hobart, Canberra and Sydney – are likely to benefit from lower rates the most – their gains may be partly offset by cooling conditions in the boomtime cities of the last two years – Perth, Adelaide and Brisbane – as they have higher price to income ratios than Melbourne.
So just as the downswing in property prices was modest, the upswing is likely to be modest too. After 4.8% growth last year, we expect average property prices to rise around 3% this year.
What about the election? Don’t expect much impact
Using CoreLogic data since 1980, residential property prices have risen 7.7% pa under Coalition governments and 4.5% pa under Labor. That said, policies with respect to housing have not been particularly different under both sides of politics.
During the election campaign it’s likely that uncertainty as to the outcome may weigh on buyer demand keeping sales and auction clearance rates below average levels. But the impact is likely to be marginal as the Coalition is not offering a radical change in housing policies, unlike say Labor in the 2019 election where it’s proposed changes to curtail negative gearing and halve the capital gains tax discount could have cut average prices by 5-10%.
Both sides of politics are now offering a mix of demand side and supply side policies. On the demand side Labor has a Help to Buy Scheme with 10,000 places a year which will see the Government take a 40% equity stake and the Coalition will allow first home buyers to access $50,000 of their super. Both may be good for the lucky few who get in early but ultimately will just lead to higher home prices – which is great for existing homeowners but not much else. On the supply side, Labor is focussed on trying to build 1.2 million new homes under the Housing Accord through incentives with the states and a Housing Australia Fund to supply 30,000 social and affordable homes. The Coalition promises to invest $5bn in housing infrastructure and cut permanent migration by 25% or 45,000 places. Both have merit but it’s not clear which one will be most effective in boosting supply.
What to watch?
The key things to watch will be interest rates, unemployment and population growth. For example, a return to RBA rate hikes or less cuts than we are forecasting, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a resumption of property price falls reflecting the divergence between home buyers’ capacity to pay and current home price levels. On the flipside a faster fall in rates on the back of weaker than expected inflation could drive a stronger upswing in property prices.
Ends
