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Economic And Financial Market Update: Stronger for Longer

14 October 2021

Summary:

House prices are on track for the strongest year of growth in over 30 years;
Very low interest rates, easy availability of finance, strong demand and undersupply of standalone houses have all played a role in boosting prices;
High house prices is leading to higher supply;
I expect house price growth nationwide to be 8% next year, and 4% in 2023.

We have to go back over thirty years to see house price growth stronger than what we have seen over the past year. Price growth has been uniformly strong for standalone housing. The performance of units has been more mixed. That house price growth has been strong across states and territories indicates they are common drivers (very low interest rates and easy availability of finance). But the pace of growth has not been the same. This reflects differences in the strength of population growth, the state of the economy, supply of housing and affordability. These differences become starker at the local level.

According to industry feedback the biggest impediment to growth in the established residential real estate market is the lack of supply (or stock). The history of the housing market is that higher demand leads to higher prices. And in time higher prices leads to higher supply. But the supply pickup has been less certain on this occasion than it has been for the past twenty years. The main reason is the impact of lockdowns has had on both the willingness and ability to sell a house.

New listings has increased in a number of market segments in some cities over the past year. Most of the large rise in listings has taken place in units in the four largest cities. In some cases though higher prices has not led to rise in the number of listings. In the Adelaide, Canberra and Hobart standalone housing market (and the Hobart unit market) the number of listings has fallen.

High house prices should encourage the building of more new homes (along with very low interest rates) to help alleviate some of the supply problems. That has been the case in WA, SA and Tasmania. In Sydney, Melbourne and Brisbane the big increase in residential construction has been mainly standalone housing. Greater supply of housing is on the way, much of which will hit the market by the end of next year.

The combination of strong demand and a lack of supply has led to house prices rising more than units over the past year in many capital cities. The outperformance of houses over units has been a long-term trend reflecting strong population growth, the desire of many people to live close to the CBD in the major capital cities and the scarcity of land in those major cities (notably Sydney). With affordability a growing issue across all states the better value of units is likely at some stage to find stronger demand.

Housing prices have been on a tear over the past year. This momentum will almost certainly continue for the rest of this year. But price growth is likely to slow over the next couple of years. Interest rates are unlikely to be heading any lower. It won’t be getting easier to get a loan any time soon. Population growth has been slow. More supply is hitting the market. Affordability is a growing issue.

The economy is likely to have a decent couple of years. Consumer confidence in the economic outlook is high. And interest rate changes over the next couple of years will be modest. All of this suggests that house prices are still likely to go higher. But not as fast as we have experienced over the past year. And from a sustainability standpoint, that is a good thing.