Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses home prices.
CoreLogic data shows that average home prices were flat in January, with a rise in regional prices offsetting a continued fall in average capital city prices.
The property market remains diverse ranging from further falls in Melbourne, Sydney and Canberra, to modest but slowing gains in Brisbane, Adelaide and Perth.
Rental growth picked up a bit in January, but momentum looks to have peaked, with a now falling trend in rents in Sydney and Melbourne and annual growth slowing further to 4.4%yoy. 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.
Australia continues to have a chronic shortage of homes, estimated to be around 200,000 dwellings and possibly as high as 300,000. This partly explains the resilience of property prices despite the rise in mortgage rates since early 2022.
After a shallow downswing in average prices, RBA rate cuts are expected to drive an upswing this year. However, just as the downswing has been modest thanks to the ongoing undersupply of property, the upswing is likely to be modest too as while there is still a big housing shortfall in Australia, the upswing will be starting from a point of still poor affordability, interest rates are only likely to fall modestly, and population growth is slowing. After 4.9% growth last year, we expect average property prices to rise around 3% this year.

Source: CoreLogic
The downturn in the home price cycle continued in January with prices falling further in Sydney, Melbourne and Canberra and average capital city prices down, with a rise in regional prices preventing another fall national average prices. What’s more, recent month’s gains are continuing to be revised down by CoreLogic, suggesting that January’s flat outcome in national average prices could be revised down to show a fall. Prices are continuing to rise in Perth, Adelaide and Brisbane, helped by momentum (or FOMO) and strong interstate migration in the case of Brisbane and Perth. However, they have slowed too as poor affordability impacts – particularly as they are all now more expensive than Melbourne.
The downturn in the property price cycle reflects poor affordability on the back of high home prices and the lagged impact of “high mortgage rates” weighing on buyer demand and boosting distressed listings. The slowdown is also evident in: auction clearance rates being down from their highs; a rise in listings; unit prices and lower quartile prices leading growth in most cities as affordability and borrowing constraints are pushing buyers into lower priced property; and sales activity is down.

Source: CoreLogic, AMP
The downswing looks like it will be shallow, giving way to a modest upswing this year
The slowdown may have a bit further to go but is likely to be shallow as lower interest rates – with the RBA expected to start cutting this month – and the ongoing shortage of property are expected to provide support for property prices driving an upswing in prices this year, provided unemployment doesn’t rise too far. The upswing is likely to be more clearly apparent through the second half of the year.
Following a bigger fall in trimmed mean underlying inflation in the December quarter than the RBA was expecting, it is expected to start cutting interest rates this month.
The accumulated housing shortfall is estimated to be around 200,000 dwellings at least, and possibly as high as 300,000 dwellings. It is likely to remain significant for a while yet as building approvals running around 180,000 dwellings a year indicate that housing completions are likely to run below government objectives for 240,000 homes a year (or 1.2 million over five years) for some time to come and may never reach that objective

Source: ABS, AMP
However, just as the downswing looks like it will be shallow the next upswing looks like it will be mild too as it will be starting from a point of still poor affordability, interest rates are only likely to fall modestly, and population growth is slowing.

Source: CoreLogic, AMP
The ratio of average home prices to wages and rents is still around record levels as prices have not fallen enough to drive much improvement.

Source: ABS, CoreLogic, AMP
While interest rates are likely to start falling this month, in the absence of recession and much higher unemployment we only expect about 4 or 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%. This will only partially reverse the 13 rate hikes since May 2022 and leave mortgage rates well above their record lows 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. And with a huge gap likely to remain between average prices and the capacity of borrowers to pay for a new home leaves a downside risk hanging over the market if something goes wrong – like a sharp rise in unemployment.

Source: RBA, CoreLogic, AMP
Slower population growth, reflecting a crackdown on student visas and increasing departures as the post pandemic surge in long term visas expire, will likely lead to a further easing in the rental market which will help take some pressure off the home buyer market.
Divergence in the property market is likely to remain but with the strong cities of the last few years (Perth, Adelaide and Brisbane) slowing further on the back of poor affordability, potentially partly offsetting an improvement in momentum this year in Melbourne, Hobart, Canberra and Sydney.
So just as the downswing in property prices looks like it will be shallow, the upswing is likely to be modest too. After 4.9% growth last year, we expect average property prices to rise around 3% this year with the upswing becoming more noticeable in the second half.
We are assuming that the RBA starts cutting rates this month, but a delay to May is a risk (particularly if the $A keeps falling) and would see further modest falls in property prices and delay the start of the upswing by three months or so.
The key to watch will be interest rates, unemployment and population growth. Further delays in rate cuts, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a much sharper fall in property prices reflecting the divergence between home buyers’ capacity to pay and current home price levels.
The mild downturn in the property cycle with falling house prices in several cities supports the case for a start to cuts in the cash rate soon as the rising wealth boost to consumer spending from rising home prices is now fading and giving way to a negative wealth effect in some cities, albeit its modest.
Ends
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