No matter how you see it, Australian housing is experiencing boom conditions. Weekend news reports highlight record auction results and there is a sense of FOMO amongst new property buyers.
According to Core Logic, housing values are up by 6.8% over the past 3 months to May and 10.2% higher than the COVID low in September 2019.
However, how sustainable are these rises? I recently attended a Westpac economic presentation on the future of the Australian property market with some compelling reasons on why it will start to moderate.
Increased Property Listings
You may recall in my article in June last year, I mentioned that with all the uncertainty caused by COVID-19 and the (correct) perception that it was going to be a short-term contraction, many vendors were willing to delay the sale of their property rather than risk a lower price.
This led to a then 25% reduction of housing stock compared to the previous year. As a result, there was already a lot of unsatisfied demand as cities came out of lockdown. This pre-existing demand, coupled with new buyers encouraged by lower rates, led to higher prices as buyers bought limited stock. This in turn created higher prices, encouraging further supply to come to market which in turn will allow a more balanced approach of supply meeting demand.
As property prices go up, so have loan balances. According to the ABS, the average Australian owner-occupied loan amount has increased from $456,543 in March 2020 to $478,822 In March 2021. Whilst lower interest rates have provided some comfort in the short term, higher loan repayments will have an impact on future affordability.
As borrowers are limited to borrow by their income, slower growth in wages will further restrict credit growth in the future.
The issue of affordability is also having an impact in regional Australia.
With more flexible work arrangements and acceptability of working from home, there has been a shift of owner occupiers moving from the capital cities to regional arears. Whilst probably a temporary shift, this has led to higher prices in Regional cities and towns which has impacted local buyers in these areas.
In its regular statements, the RBA has acknowledged higher property prices in an environment of low interest rates. However, it has not expressed any major concern as credit growth has been occurring in the owner-occupied market, particularly from first home buyers The Bank has however stated that it will be monitoring trends in housing borrowing and ensuring that lending standards are maintained.
If there is a trend towards higher investment lending, the Bank it is likely to introduce lending measures similar to what was in place between 2015 and 2017 when there was a tightening up of loan assessment procedures to as to reduced borrowing capacity. This would have the same effect as reducing credit growth and a softer landing compared to a blanket rise in floating interest rates which would impact the wider economy.
Apartment Stock Oversupply
Based on current construction projects underway, there are some 240,0000 dwellings (mostly apartments) coming on the market in 2022:
Migration has long been a contributor to property growth in Australia. However any prolonged border closure will mean that housing construction must half or substantial oversupply issues will emerge.
The Australian housing markets is the midst of an extra-ordinary broad-based boom but the pace of gains will moderate:
- As listing catch up with demand
- Affordability pressures start to bite
- Later, as macro-prudential tightening targets a soft landing, and as
- Oversupply potentially becomes a problem.
Whilst demand for apartments will be subdued in the medium term, houses will continue to attract demand in a post COVID-19 environment.