By Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP.
Australian home prices up again
Key points:
- Cotality (formerly known as CoreLogic) data shows national average home prices rose again in May, their fourth monthly rise in a row, with the pace of increase accelerating to 0.5%mom.
- The upswing got underway in February when the RBA first started cutting interest rates with the anticipation and then reality of another cut in May, along with expectations of more cuts to come, providing further support. In fact, the pace of gains appeared to increase in the period following the RBA’s latest cut on 20th
- The trend in annual growth in rents continued to slow and is running below 3%yoy in Sydney and Melbourne. 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 and the anticipation of more support for first home buyers are expected to drive further gains in average prices this year. Poor affordability, slowing population growth and a dampening impact on economic growth from Trump’s trade war will act as a constraint.
- But with the RBA looking like it might cut interest rates faster than we had been expecting it now looks like home prices will rise around 5 or 6% this year, up from our expectation for a 3% rise.
All capital cities saw home prices rise in May
Cotality data shows that national average property prices rose again in May, with buyer confidence given a further boost by another RBA rate cut and expectations that more rate cuts on the way.
Source: Cotality
All cities saw price gains, with Hobart and Darwin up strongly, Sydney and Melbourne continuing to recover and the booming cities of the last two years, ie Brisbane, Adelaide and Perth, seeing solid gains.
Source: Cotality, AMP
Rate cuts, undersupply and more support for first home buyers ahead are expected to drive further increases
Further gains are likely as interest rates fall further, the shortage of property remains, and election policies boost first home buyer demand.
- Our base case is for 0.25% rate cuts in each of August, November and February taking the cash rate to 3.1% but with the risk that the cuts come faster, and we reach 2.85% by early next year. The July RBA meeting is “live” for another rate cut. This is a bit more aggressive than we earlier expected and reflects good news on inflation and the RBA’s new found dovishness on the back of the threat to growth from Trump’s trade war. Rate cuts are normally positive for home prices as it boosts how much buyers can borrow and hence pay for a property, although sometimes this can show up after a lag following several cuts depending on economic conditions. Roughly speaking, at present each 0.25% cut in variable mortgage rates will add about $9000 to how much a buyer on average earnings can borrow. As can be seen in the next chart the start of RBA easing cycles usually precedes a period of higher home prices.
Source: RBA, Cotality, AMP
This can also be seen in the next table, with the start of rate cutting being associated with higher average home prices over the subsequent 12 and 18 months in five of the seven rate cutting cycles. Note that we have not shown the 2019 RBA cut as a first cut as it was not preceded by rate hikes and was really part of the rate cutting cycle that started in 2011.
ASX 200. Australian recessions are highlighted in red. The GFC is in blue. Source: RBA, Cotality, 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. While home building approvals are up from their lows their recent annualised pace of around 187,000 is just below underlying demand and well below the Housing Accord’s goal and the level needed to significantly reduce the accumulated housing shortfall.
Source: ABS, AMP
- Finally, the Government’s Help to Buy Scheme with 10,000 places a year which will see the Government take a 40% equity stake is starting up and anticipation of next year’s startup of its election promise to expand the low deposit guarantee allowing most FHBs to get in with a 5% deposit will likely provide some boost to housing demand from first home buyers looking to get in early.
However, it’s not all blue sky for home prices
Just as the downswing in average home prices into early this year was mild the upswing may be constrained too because it’s starting from a point of still poor affordability, interest rates are likely to remain well above their 2021 record lows, and population growth is slowing.
- While interest rates are likely to fall further, the table above shows that while home prices tend to rise over the subsequent 12 to 18 months following the first rate cut in an RBA easing cycle the average response masks a wide array of outcomes ranging from falls in the recessions of the early 1980s and 1990s to big double digit gains and sometimes the gains only come through with a lag.
- Fortunately, recession is unlikely but near-term uncertainty and slightly lower economic growth and higher unemployment flowing from Trump’s trade war may be a bit of a dampener on buyer demand.
- What’s more in the absence of recession and much higher unemployment we only expect about 5 or maybe 6 rate cuts in total in this cycle, taking the cash rate to a low of around 2.85% to 3.1% next year and mortgage rates to around 5%. 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. This will limit the upside in property prices.
- Housing affordability remains very poor without the usual improvement via lower prices that might have been expected to flow from the rate hikes seen in 2022 and 2023. This is evident in the ratio of home prices to wages & incomes being around record levels.
Source: RBA, Cotality, AMP
- 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 with the Government’s immigration forecasts implying a fall to around 365,000 in 2025-26.
So just as the downswing in property prices was modest, the upswing may be constrained too. That said, with the RBA looking like it might cut rates faster than we had been expecting it now looks like home prices will rise around 5 or 6% this year, up from our expectation for a 3% rise.
What to watch?
The key things to watch will be interest rates, the impact of Trump’s trade policies on Australian economic growth, 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 and faster than expected population growth could drive a stronger upswing in property prices.
Ends
