Property boom to continue, but hot price growth tipped to slow down

Australia’s booming property prices are expected to continue rising for some time, but economists predict the red-hot pace of growth will slow down from here.

Prices have surged this year with further growth expected over the rest of 2021 and into 2022, although factors such as affordability, rises in fixed mortgage rates and likely action by regulators are set to cool the market.

Property prices will continue to rise for some time yet, just not at the same pace, according to director of economic research Cameron Kusher.

Mr Kusher said the housing market boom is continuing with demand close to record highssales volumes at elevated levels and prices rising rapidly.

The Australian housing boom is continuing, although some heat is coming out of the market. Picture:

“While the market is still booming, some of the heat has already come out of the market,” he said.

“We expect that although prices will continue to rise, they will rise at a slower rate over the coming months.

“In stating that, I still fully expect that prices will continue to rise for some time.”

While homes were selling at record speeds as demand outstripped the supply of properties for sale, Mr Kusher said peak price growth conditions had passed.


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AMP Capital chief economist Shane Oliver said the market had passed the peak period of strength in terms of clearance rates and price gains, which was probably in the March quarter and the month of March.

“Clearance rates are still strong but they have slowed down and it looks as if we’ve lost a bit of momentum in price gains,” Dr Oliver said.

“Price gains are still pretty high, but it’s off its peak.”

More price gains ahead but pace slows

Economists at the big four banks expect property prices to surge by at least 10% and as much as 17% this year. Growth is forecast to slow to a still-solid 5% or 6% in 2022.

Dr Oliver said a lot of the factors that drove the rebound in prices were still in place: the economic recovery, strong jobs market, ultra-low interest rates, various government incentives and buying now out of fear of missing out.

He said those factors pointed to further home price increases ahead, although there would be a gradual slowing in the price gains.

Dr Oliver forecast an 18% surge in average home prices this year. He expected a slower pace of growth in the second half of 2021, calculating that prices were already up by 12% in the first six months, with further slowing next year.

“We’ll probably be looking at price gains in total for the whole year [2022] of about 5%,” Dr Oliver said.

Mr Kusher also expected the market to slow over the second half of this year and then slow further until at least the middle of next year, noting predictions for 2022 were harder as it depended on the timing of international borders reopening and macroprudential “speed limits”.

“Given the current setting, I would expect further increases and assuming international borders reopen mid-next year, that could add to housing demand.”

The pace of property price gains is expected to slow down in the second half of 2021 and in 2022. Picture:

Mr Kusher expected double-digit price increases of between 10% and 15% for 2021 followed by single-figure growth rates in 2022.

Both Mr Kusher and Dr Oliver pointed to possible price falls in 2023, but cautioned that forecasting that far out was difficult.

Mr Kusher said the introduction of macroprudential policies, which he believed was more likely in 2022 than this year, could cause prices to fall.

“I believe the market will slow in 2022 whether we have macroprudential policies introduced or not – in fact I think the market will start to slow before they’re needed,” he said.

“If they were to be introduced they could lead to price falls in 2023. However, absent their introduction, I would expect prices will continue to rise in 2023, albeit at a fairly slow pace, but a fall is also a possibility especially if borrowing costs are increasing.”

Dr Oliver said prices will probably fall in 2023, pencilling in a 5% decline.

“It would be against the backdrop of the property market being somewhat oversupplied as the result of several years of solid home building but at the same time several years of zero immigration,” he said.

Here are seven key reasons why price growth is expected to slow down.

1. Fixed mortgage rates are starting to rise

While the Reserve Bank of Australia will keep official interest rates on hold for some time yet, longer-term fixed mortgage rates for owner occupiers have started to rise from record lows below 2%.

The RBA’s term funding facility, a pandemic measure providing low-cost funding to the banks, expires at the end of June, which Mr Kusher said may lead to further increases in mortgage rates.

“That is likely to see some increase in borrowing costs for lenders and, in turn, any increase is also likely to be passed on to consumers,” he said.

“While rates are likely to remain low, they are also likely to increase from their current levels and that may impact on the willingness of people to take on mortgage debt.”

Longer-term fixed mortgage rates for owner occupiers have started to increase. Picture:

Dr Oliver said the increase in fixed rates, which reflected a rise in bond yields and longer-term funding costs, was significant given they now accounted for about 40% of new housing finance.

While RBA governor Philip Lowe has repeatedly said the economic conditions for an increase in the cash rate are unlikely to be met until 2024 at the earliest, last week he said the board is reviewing a range of possible scenarios although the required wages growth “still seems some way off”.

Economists at AMP, ANZ and Westpac now expect the RBA will begin raising the cash rate in 2023 on the back of the continuing stronger-than-expected economic recovery. Commonwealth Bank economists on Wednesday forecast the RBA will deliver the first in a series of rate hikes in November 2022.

Dr Oliver expected the first rate hike to be in 2023 but said there was a risk it could be late 2022, after strong May jobs data.

“I suspect as we get closer and closer to that, the pace of price increases will start to slow down more significantly, so next year will probably be a much tougher year than this year in the property market,” he said.

2. Regulators may step in to cool market

At its latest quarterly meeting, the Council of Financial Regulators said overall lending standards remain sound but there have been signs of some increased risk taking recently.

Mr Lowe said the options being considered by the Australian Prudential Regulation Authority included restrictions based on debt-to-income and loan-to-valuation ratios, as well as previously-used measures like limits on investor and interest-only lending.

“We’ve got some way to go, though, before that’s likely to happen,” Mr Lowe, who chairs the council, said.

Regulators are expected to step in to cool the market if lending standards deteriorate. Picture:

Dr Oliver expected APRA to announce a tightening in lending standards in the next six months, likely in the September quarter.

He said it may involve small steps initially such as making lenders increase the interest rate buffers used to test whether people can repay their loans at a higher rate, but limits on high LVR and DTI loans were also possible.

CBA economists do not expect macroprudential policies to be reintroduced in 2021, noting the RBA and APRA had emphasised they were monitoring lending standards rather than dwelling price movements.

Mr Kusher said unless there was a deterioration in lending standards, there should be no need to introduce macroprudential policies.

“While many are calling for such policies at the moment, mainly because of price growth, I believe that lending standards will remain heightened and the growth in the market will slow before such time as regulators have to use these types of policies.”

3. Some government stimulus has been wound back

Mr Kusher said the end of the federal government’s HomeBuilder grant has led to a fall in the volume of lending to first-home buyers and a tapering of enquiry for new housing.

“I would expect that we will see a further slowing of first-home buyer demand over the coming months, however, this will be offset by an increase in investors who continue to return to the market.”

Dr Oliver said some states may begin to wind back various homebuyer incentives like stamp duty concessions, but noted the federal government’s first home loan deposit schemes had been expanded.

The federal government’s HomeBuilder grants fuelled demand, particularly from first-home buyers. Picture: Getty

Mr Kusher said the new initiatives like the extended deposit schemes were unlikely to be as significant in terms of stimulus as HomeBuilder.

He said the volume of demand was another factor at play in the outlook for prices.

“While it remains heightened, it is not as strong as it was earlier this year and we’ve also seen a bit of a tapering of sales too, which suggests the volume of potential buyers is not as large as it was previously.”

4. Affordability concerns starting to bite

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Mr Kusher said the strong increase in prices has likely contributed to the slight weakening in demand recently.

“As prices rise and affordability worsens, particularly if mortgage rates start to head higher, then that is likely to also result in fewer buyers,” he said.

“For first-home buyers affordability is definitely becoming more of a challenge, however, this really relates to them being able to save a big enough deposit to enter the market and them competing with investors and pre-existing owner-occupiers.

“Prices are rising fast while wage growth is still fairly stagnant and the generous HomeBuilder scheme is no longer available. Furthermore, with interest rates at record lows, those saving for a deposit are getting virtually no returns on their savings.”

Affordability concerns are starting to weigh on first-home buyer demand. Picture:

Dr Oliver said poor affordability was likely already starting to weigh on first-home buyer demand.

While the latest ABS data showed new home loans hit a record high of $31 billion in April, the number of owner-occupier loans by first-home buyers fell for the third straight month.

“Affordability obviously has deteriorated, so it’s getting harder and harder for first-home buyers,” Dr Oliver said.

5. More properties for sale but demand outstrips supply

While the latest REA Insights Listings Report showed new listing volumes on fell 4.4% in May, they remained higher compared to the same month in recent years.

“While new stock levels have increased from recent lows, they have actually fallen over the past two months and total listings continue to trend lower,” Mr Kusher said.

“We’re still in a situation where demand is outstripping the supply of stock for sale, which is resulting in further price increases.”

Mr Kusher said spring will be the litmus test for the market.

“As new listings increase through spring that will be the real test of demand for housing, especially given we have already seen weakened demand over the past few months.”

Demand is still outstripping the supply of properties for sale. Picture:

6. Closed borders may lead to oversupply

Dr Oliver said the closure of international borders during the pandemic had hit immigration, cutting underlying demand for housing by about 100,000 dwellings – or by nearly 50% – this year.

He expected only a gradual recovery in immigration when international borders reopened, which combined with strong home building was likely to lead to an oversupply of property in the next few years.

“You’ve seen an ongoing increase in the supply of new property coming into the market but there’s been a collapse in underlying demand.

“At some point you would think it would start to have a dampening impact as we’re potentially going into an oversupply of total property.”

Mr Kusher said the closed international borders would have an impact on new housing in the longer term.

“A key source of demand for new homes is migrants purchasing their first home because in most instances, unless you have citizenship, you have to purchase a new home,” he explained.

“At this stage there are likely still many migrants who are purchasing first homes, however, with the borders closed the pipeline has been broken and at some point in the future that is likely to affect demand.”

7. COVID-led regional shift to impact prices

Dr Oliver said the continued shift from cities to regional areas during COVID-19 was another reason to expect a gradual slowing in the pace of capital city dwelling gains going forward.

“The ‘escape from the city’ phenomenon continues,” he said.

Dr Oliver said the regional shift, made possible by more flexible working from home arrangements, was likely to take some further pressure off capital city property prices.


The growth in regional property


“It does mean ongoing upwards pressure on regional prices,” he said.

“If it continues and more and more people realise they can potentially relocate to regional Australia and enjoy a higher quality of living without the city prices, then that acts as a bit of a drag on city prices longer term.”

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