The Australian residential property market creates much consternation.
On one level there is the debate about the outlook for home prices with
some real estate spruikers still wheeling out versions of the old “property
will double every seven years” line versus property doomsters at the
other extreme saying it’s overvalued and overindebted and so a crash is
inevitable.
The problem with the former is that it implies the already high
ratio of home prices to incomes will double again over 12 years! The
trouble with the doomsters is that they’ve been saying that for decades.
On another level there is much understandable angst about affordability
with some blaming investors and property tax breaks versus others seeing
it as largely due to poor housing supply relative to demand. As always
with these things there is no black or white answer.
To shed some light on
this here’s seven key charts on the state of the housing market.
First – the property cycle looks to be turning up again
After a brief dip of just 0.3%, national average property prices have been
rising steadily from February (with Cotality data pointing to another 0.5%
rise this month) indicating that they have entered a new cyclical upswing.
Source: CoreLogic, AMP
So far, the gains have been broad based with the soft cities of Melbourne,
Hobart, Canberra, Darwin and Sydney now picking up at the same time
that the boom time cities of Brisbane, Adelaide & Perth remain strong.
Second – interest rates are a key driver
Interest rates matter a lot to the property market because lower rates
boost the relative attractiveness of property as an investment and allow
home buyers to borrow more. And vice versa for higher rates.
Of course,
the impact of interest rates can be swamped by other factors at times, as
was the case in 2023-24 with the population surge and weak supply.
Lower rates are a key driver of the current upswing in prices.
As can be
seen in the next table, the start of rate cutting cycles since 1982 has been
associated with higher home prices over the next 12 and 18 months in
five of the last seven rate cutting cycles, providing there is no recession.
The average gain over the subsequent 12 and 18 months is 3.9% and
8%. Our base case is for 0.25% RBA rate cuts in August, November,
February and May. With increasing signs of labour market weakness this
may occurs faster with back to back cuts in August and September.
Cotality. Australian recessions are in red. The GFC is in blue. Source: RBA, Cotality, AMP
Third – Australian housing is chronically undersupplied
This has been the case since the mid-2000s when immigration levels, and
hence population growth, surged and the supply of new homes did not
keep up.
Our assessment is that the accumulated housing shortfall (the
green line in the next chart) is around 200,000 dwellings at least and
possibly 300,000 depending on what is assumed in terms of the number
of people per household.
Source: ABS, AMP
The economic reality is that when underlying population driven demand
for housing exceeds its supply prices rise and that is what we have been seeing for the last twenty years.
The capital gains tax discount, negative
gearing and foreign demand may have played a role, but they have been a
sideshow to this demand/supply imbalance.
Fourth – home building completion times have surged
Part of the solution is to slow immigration (and hence population) growth
to levels more in line with the ability of the housing industry to supply
homes. And immigration has been falling lately.
But it’s also about
boosting supply and if we want to reduce the accumulated undersupply
it’s critically important that Federal and state governments retain the
Housing Accord commitment to build 240,000 dwellings a year (or 1.2
million over five years), compared to around 180,000 over the last year.
The next chart shows part of the problem. Over the last decade the time
taken to build a house from approval has risen by 57% and that for units
has increased by 65% reflecting increasing regulations, rising costs, labour
shortages, etc.
To meet the Housing Accord target we need deregulation,
measures to boost the number homebuilders, a greater focus on units
and finding more ways to lower costs (like pattern plans in NSW, smaller
houses and greater reliance on wood than bricks and concrete).
Source: ABS, AMP
Fifth – Australian housing is very expensive
Chronically deteriorating housing affordability in Australia has been
evident since the 1990s. It’s clearly evident in rising home price to wage
and household income ratios (with the latter adjusting for the increase in
two income families), a rise in the years taken for an average earner to
save a 20% deposit from around 4 years 40 years ago to around 10 now
and the ratio of home prices to rents (which is a bit like a PE for shares)
adjusted for inflation being around 30% above its long term average level.
Source: ABS, Cotality, AMP
Sixth – it’s also very diverse
While we often refer to “the Australian property market”, in reality there
is significant divergence between localities resulting in diverse cycles. The
divergence is reflected in measures of valuation.
The next table shows the
percentage difference between price to annual rent ratios adjusted for
inflation relative to their average since 1983.
On this basis while houses
are 30% overvalued, units are only 1% overvalued.
And Perth and
interestingly Melbourne stand out as the least overvalued markets in
terms of houses and both are actually undervalued in terms of units.
Source: REIA, AMP
Finally – mortgage arrears are still low
Reports of mortgage stress have been common for the last two decades.
There is no denying housing affordability is poor, debt is high, and many
households are still suffering significant mortgage stress.
But despite this
mortgage arrears rates remain remarkably low at less than 1% on average
which leaves them low in international comparisons too.
They are higher
for those with high loan to valuation (LVR) ratios and high loan to income
(LTI) ratios but even here they are still low and have been falling lately.
Source: RBA Financial Stability Review, April 2025
The low level of arrears partly reflects strong lending standards in
Australia combined with the strong jobs market and a high level of savings
buffers coming out of the pandemic. So absent a shock, like much higher
unemployment, don’t expect an avalanche of distress listings.
Where to now?
Forecasting property prices is fraught. But our base case is for property
prices to rise 5-6% this year driven by rate cuts and the chronic housing
shortage but with poor affordability constraining the upswing.
The main
downside risk is that rising unemployment and a delay in rate cuts
depresses buyer demand, but the main upside risk is that another bout of
FOMO takes hold as rates fall. The key for savvy investors, is to look for
properties offering decent rental yields.
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