NAB Morning Call

Weekend Edition: More on Australia’s House Price Quandary

Friday 6th July 2024

Please note this communication is not a research report and has not been prepared by NAB Research analysts. Read the full disclaimer here.

In June, according to PropTrack, Australia’s home prices hit new highs, rising for the 18th consecutive month. But, as Eleanor Creagh, senior economist at PropTrack explains, the growth is far from even. There are some cities where prices are falling. So, what are the factors driving prices up? And how can it be that prices have risen so much in the last year even though the RBA is pursuing such a hefty tightening cycle, pushing interest rates higher.

Eleanor takes Phil through the latest PropTrack data and looks at the inevitable question, where to from here? If buyers have taken a longer-term view, buying when interest rates have peaked, does that mean we are less likely to see a spike in prices when the rates start to fall? Or not? Logic and house prices can be strange bedfellows.

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Duration:: 20m
Broadcast on:: 05 Jul 2024
Audio Format:: mp3

"Australian House prices continue to rise. What's going to stop it? Well, more properties, obviously, would help. Of course, maybe less migration. But it's in more than just good old supply and demand. And how long will prices keep rising for?" A question everyone wants to know the answer to. Of course, we'll try and make some sense of the latest data from Proptrack today. "The Morning Call from NAB with Phil Dobby." "The weekend edition." Yep, Proptrack's latest House price indexes out, showing once again House prices in Australia have reached new highs. 18 months in a row with House prices rising, even though the RBA has interest rates at 4.35%. And it's going to keep them there for some time, it seems, as they even talk about maybe raising them. So what does it take to bring House prices down to make them more affordable, or at the very least, to stop them rising? Well, getting that migration down below half a million. That might help, mind it. But that's obviously just one of the many factors at play. So let's dig into the numbers a bit with Eleanor Cray, senior economist at Proptrack. I mean, Eleanor, it was quite a small rise, wasn't it, in June? So at least we could say the rate of growth is slowing. But some places are actually seeing prices fall as well. So it's a bit of a mixed picture. "Hi Phil, yes, good to be here. And I mean, you're exactly right. We've seen the national home prices hit a fresh record high in June, so that's 18 months of consecutive price increases. Although we are now starting to see that pace of growth that we were seeing was a little bit stronger early in the earlier in the year, is beginning to slow off. And actually that 0.18% lift that we saw in June nationally was the slowest pace of monthly growth since December 2022. So we're starting to see that that's slowing coming to fruition now, although we are expecting that home prices are going to continue to rise over the coming months. We typically do see that the pace of growth does slow. We're in the midst of a seasonally quiet winter period here. And of course, as you mentioned, we've got a bit more uncertainty around the outlook, but interest rates probably also contributing to some of that slowing, but still home prices expected to rise over the months ahead. And there's a number of factors contributing into that, which I'm sure we'll delve into. But it's something they're still slowing, which is great, still 6.5% up on where we were a year ago. So it's by that argument outpacing inflation, but it's also fair to say, not doing as well as the ASX 200 who put that money into shares, you'd have a return twice that. But who is to know that at the time? But it's also it is a very much a capital city phenomenon, isn't there? And even then, only certain capital cities get out into regional Australia or even into Melbourne. And it's a different story. Yeah, look, it's certainly interesting. So I guess it's somewhat akin to how the pandemic really caused this rare convergence of kind of global economies and monetary policy. And we kind of saw that convergence in housing market conditions as well throughout that period. And we're now really starting to see that dispersion. So we've seen a real mixed performance across the various capital cities as conditions differ across the market. So we know that home price growth has consistently been strongest in Perth. Perth prices up 22.5% over the past year. Now that's followed by Adelaide and Brisbane, where prices are up by more than 14% in both those capital cities over the past year. Now, Sydney, it's kind of middle of the pack with growth around 6.4% over the past year. But conditions are very different in markets like Hobart and Melbourne, where we're continuing to see prices fall. So Hobart now cycling through a 27 month downtrend with prices down around 10% from their peak levels. Melbourne, again, a little bit different, but prices down for the past three months with price momentum in Melbourne, having consistently been weaker over the past year. So why is the obvious question? And is it supply and demand? If we look at those cities where prices are going down, for example, is there just a lot more stock going on to the market? Yeah, look, it's a really interesting question. So we know that the key drivers of this continued increase in house prices that we've seen over the past 18 months, despite the high interest rate environment, have really been, I guess, a confluence of factors or a perfect storm. So to speak, whereby we know we've had upgrade activity incentivized by home equity gains, we've had very strong population growth rental market tightness, incentivizing those, of course, with the means to purchase sooner than they otherwise would have been also encouraging investor activity. All of those factors have added to home-bike demand. At the same time, we've still got that pandemic overhang of smaller household sizes adding to housing demand as well, whilst supply has remained tight and that supply with respect to stock on market, but also the delivery of new homes. We know that construction industry challenges have really slowed the delivery of new homes. And that's also contributed to this chronic shortage of housing that's really been underpinning the housing market. Now, in markets where conditions are different like Hobart and Melbourne, we're seeing that it is that supply side story that is very different. So if we look at Hobart, for example, total listings or the stock available on market are up around 70% since interest rates first began to rise in May 2022. At the same time, we know that demand conditions have also eased up in Hobart. So at this period of weakness in Hobart, this 27-month period of weakness in Hobart follows an incredibly strong period or a period of outperformance. So actually, if we look at growth across the capital cities over the past 10 years, Hobart is still the top performing capital city with prices up a little over 100% over the past 10 years. So it's that starting point of where prices were when interest rates began to rise that's also playing into the conditions we're seeing at the moment. So that run up in prices that we saw before interest rates began to rise really dented affordability and have contributed to that slower growth or that deterioration in conditions that we've seen as interest rates have risen. And yes, Sydney just keeps on rising, doesn't it? So there'll be a whole swag of people in Sydney now living in apartments, but there will also be a lot of people who want the impossible. They want a nice house that's in good order, that's close to school, that's within an easy commute to work. I'm not quite sure such a thing exists. So where is the real shortage? What's the add on the mix of properties available in Sydney? Where's the real weakness? Yeah, look, I mean, Sydney, again, really has kind of defined reason or logic, so to speak, it is that the country's most unaffordable housing market. So just 3.8% of homes sold in Sydney are affordable. The medium income households spending 25% of their income on their mortgage. But we've continued to see that Sydney's housing market is really defying these affordability constraints and the downside factors that could have come from higher interest rates, the weaker economy and could have perpetuated price falls and have really fallen by the wayside or have been offset by this kind of perfect storm or confluence of factors. We know that home prices in Sydney are up more than 30% on pre-pandemic levels. So home prices in Sydney are up actually close to 40% on pre-pandemic levels. I think one of the big drivers of this sustained home buying activity in the market at the moment, we know that upgrade activity is really continuing to be incentivized by those home equity gains. It means that those existing homeowners are less reliant on debt. And we know that we're seeing that reflected in data from APA in terms of the increase in the share of large deposit buyers. So more buyers are active in the market with larger deposit. That means they're less reliant on debt. And that continues to add to the resilience in conditions. At the same time, we know population growth very strong and rental market tightness. So Sydney's rental market has had a rental vacancy rate of not much over 1% for the past couple of years. And with the rental market so tight, conditions have been very challenging. It's been very difficult for many to find an available rental that's pushed more people out of the rental market and into the market to buy and also encourage investor activity. So we've seen that investor activity has peaked up with that strong growth in rental prices that we've seen as a result of very tight rental markets. So all of these factors continuing to contribute to the ongoing lift in home prices in Sydney despite that real deterioration in a portfolio. Despite logic. It's what it is, isn't it? But I mean, we'll talk about rental prices and our rental properties in a second. But that idea that people are putting down big deposits because they're selling a house and then buying another house. But I'm sure there's also a part of it where there's people who have come into inheritance now. We've been through a generation where house prices have been a lot higher. People are inheriting houses, selling those and moving up. But the interesting thing is, as you say, they're not just sticking in that house or something at the same size. There's this aspiration in Sydney, isn't there? So they're taking the inherited property and adding to it. They're still getting a mortgage. And because mortgages for new borrower loan commitments through up the year to April, up 25%. So people are still borrowing as well. So it's like a vicious cycle. When does it stop? Look, I mean, it's certainly an interesting question. And I mean, I think when we're thinking about, I guess, the outlook for home prices, we know that we're really facing this chronic shortage of homes. So that's one of the main drivers or the primary drivers that we're seeing in terms of offsetting the current higher interest rate environment and deterioration and affordability. So not only do we have quite limited stock on market in some capital cities, now that's particularly the case in Brisbane Adelaide and Perth, where we are consequently seeing the strongest growth in home prices at the moment. But we're really continuing to face this chronic undersupply of homes. And this home shortage at the moment is being exacerbated by current industry constraints. And that's resulting in continued under construction, first population growth. And this housing short or really looks set to continue. We've got labour shortages, we've got higher financing costs, higher materials costs, materials costs up more than 30% on pre-pandemic levels. And at the same time, we've seen the approvals, commencements and completions have all trended lower. So building activity at decade low levels at the moment. And that all points to an outlook whereby we're going to continue to face into this housing shortage. Unless we significantly uplift the pace of building activity over the next few years, this housing shortage is set to remain in play, which will provide a fundamental support to home prices or put a floor under home prices. But we've been facing that for decades, and we all know people saying, well, we need more houses, we need to pick up the building programme. And yet, the lack of logic to all of this is, I mean, first of all, that's not happening, but also the fact that even with those supply and demand constraints, you'd think you'd still hit that affordability question, where prices might just level off. And yet here they are, they keep on rising, people keep on borrowing, which has to be that fear of missing out, doesn't it? Because people think, well, if I don't buy now, even though I can't really afford it, I'm just going to have to borrow more because if I don't, prices are just going to go up. Because I mean, we've got cycles, but historically, those cycles just seem to be slower growth, not really dipping into declines. I mean, if it does not very far for very long, so less than 10% lower generally followed by a big bounce back. So it's in Sydney in particular, if you don't buy now, you're going to pay more later. I mean, people just know that, don't they? So that, and that, well, I'm sure it's part of what is pushing prices higher and higher. Yeah, I mean, I think you're exactly right there. We've actually done some analysis on kind of previous market declines. And we've never really seen what we have never seen, a cycle where prices have fallen more than 10% nationally. And in every down cycle, the following upswing has been larger than that proceeding downswing. And I certainly think that it is that kind of continuous rising home prices that does also motivate many to really overcome affordability challenges and transact, given the expectation of further growth. And we know that that's one of the reasons why housing prices exhibit persistence. We know that many buyers and sellers also anchor their expectations from recent and current sales momentum, which really embeds trends in housing prices. And what about investors then? So we're seeing a bit of a spike now in investors buying into the market. Their borrowing is up at 36% over the last year. So more than people buying their own properties. And I guess that's because rents are going up so much. So investors see this as an opportunity. So I mean, certainly that would be a case in Sydney, isn't it, where they're getting a large part of the migrant intake? But is that mirrored around the country? So you see that although growth in rental prices has begun to cool off or ease off from the faster pace we've seen over the past couple of years, rental price growth is still incredibly strong. And rents have grown generally at a faster rate than property prices. And that's continued to push up gross rental yields to the highest point in almost four years at the moment. And this strong growth in rents, and of course, increasing property prices at the prospect of capital gains have attracted investors to return to the market. Now, that's particularly the case in Queensland, South Australia and Western Australia and New South Wales, where the value of new lending to investors has continued to reach high levels. So when we look at, say, Queensland, South Australia and Western Australia, we've seen that the value of new lending to investors has hit record highs. Those states are also home to the tightest capital city rental markets in the country and the strongest housing markets with both prices up. More than 22% over the past year, and Brisbane and Adelaide also continuing to record strong growth. So part of that also reflects probably the need for larger loan sizes after that strong growth in property prices. But certainly, we're seeing that with vacancy rates around 1% in each of those three capital cities reflecting very tight rental markets. That means a low likelihood of a property sitting unteneted. And of course, I think the relative affordability that those capital city markets offer, versus Sydney, are also attractive to inter-state investors. So looking at the share of inquiry from interstate investors on realestate.com.au, we can see that we've also seen an uptick in more investors heading into state to buy with that share of inquiries from buyers looking to purchase property interstate increasing. And actually, South Australia has been one of the most popular states with interstate buy. And Queensland and Western Australia again, not far before. So, Eleanor, the fact that we are buying up properties at elevated prices, despite high interest rates, I mean, that must mean people are looking at the longer term. They're thinking, well, okay, we'll buy now because prices are only going to rise. That would suggest, when rates do eventually come down, it doesn't necessarily follow that we're going to see the prices rising at a faster rate again, because people know that's going to happen. So, the factoring that in with what they're prepared to pay now, presumably. To a degree, yes, but also at the same time, historically, it's typically been a good time to buy when interest rates have peaked. And before they start to fall, as we do typically see that home price growth accelerates, as interest rates begin to fall, as the RBA lowers the cash rate. But there have been cycles where rate cuts have generated a much more muted response with respect to home price rises. So, for example, the 2011-2012 easing cycle, interest rate cuts promoted a much more subdued price increase cycle. And I think that that scenario is probably what we're headed for, given the affordability starting point we're at now. So, with affordability as constrained as it is heading into an easing cycle next year, it's unlikely that we're going to see substantial price rises. Right. Famous last words, Ellen, we can all be experts, can't we? And then all of a sudden, because the housing market, I mean, it does tend to surprise us sometimes, doesn't it? But what about if the RBA does lift rates? I mean, I don't think they will, but they'd being talked about, is that going to be a shock to the market? Or will people just assume it's a one-off and it's not really going to impact demand or prices at all? I think certainly the current stable interest rate environment has been one of the drivers of confidence in current conditions this year. So, we know that we cast our minds back to this time last year. Housing market conditions were quite different. The recovery in home prices was underway. But there was an air of disbelief, I think. I remember we put our own price index report out monthly. And much of the feedback we would get was, is this really happening? Interest rates are continuing to rise. It took a while for people to really, I guess, digest what was actually going on, what the drivers of market conditions were, and that we actually were seeing that the housing market conditions in the housing market were as resilient as they have been. Now, certainly the current stable interest rate environment, I think, is probably contributed to that continuation in confidence in market conditions this year, with buyers having more certainty around future borrowing costs. And it's likely that if we were to see the RBA increase interest rates again, that probably some of that confidence would be dented. But that said, we know that we've got some other factors coming into play in the second half of this year that are going to provide upside support for prices. So, we know that the tax cuts from this month, a lot of home buyers are going to get the advantage of any increase to their borrowing power as a result of higher after tax income. So, that's potentially going to increase buyers budgets and further support price growth. Now, that might be more of a boot to the lower end of the market given those buyers are typically more constrained by borrowing capacities, but nonetheless, as support for prices over the second half of this year. So, I think, again, with that demand supply and balance still in play and not going away anywhere anytime soon, it is likely that we would see prices continue to rise, although that pace slowing if the reserve bank were to lift interest rates again. So, in answer to that question, you must get asked this all the time from people. Should a buyer has now or should they wait for interest rates to fall? I think the answer is always if you can afford it by now, isn't it? That seems to be particularly in Sydney, if you snooze, you lose. I think that's probably one of the drivers of that strength in home buying demand that we've seen really remaining so resilient in the pace of the substantial adjustment in interest rates, weaker economy, softening labor markets, is that continuous rise in home prices. So, people look out over the next 12 months or say, and think that home prices are going to continue to increase from here. That's going to motivate many to pull forward their purchase decision and transact now, if they can. Exactly, which gets back to that whole thing about fear of missing out, supply and demand, definitely an issue, but overlay that with fear of missing out, and that's the driver, which is contingency prices rise. Eleanor, great to talk. I'm sure we'll get you on again soon. If you're happy to come back on, it's been fantastic having you on. Thank you for having me. Next week, more on transitioning to net zero, Rochelle Hoffman from Deloitte, will be my special guest on the weekend edition next week. And of course, we're back again on Monday morning with our regular week edition of the morning call. I'm Phil Dobby from Knapp. Have a great weekend. Thanks for listening in. The Weeknd Edition. (upbeat music)