Housing boom to see 15% price gain in 2021 but a marked slowdown in 2022
Housing markets are positively fizzing right now.
Demand’s riding high, buyers battling it out over a shrinking pool of properties and driving some eye-catching price rises.
The March quarter saw a 5.6% jump across the major capital cities, the March month alone posting the biggest gain in 32 years.
Sydney dwelling prices rose a staggering 3.7% – putting on well over $1000 a day for the median-priced dwelling.
Daily measures are pointing to something similar, albeit not quite so strong, for the month of April.
These conditions have caused Westpac to amend the housing forecasts for 2021.
Westpac’s previous 10% forecast may well be achieved by mid-year.
They now expect a 15% gain in overall property values for the full year.
To be clear, this is a bring forward of their previous call that prices would rise a cumulative 20% over this year and next.
Property price growth will slow down
We all realise that property values just can’t keep growing at their current pace.
Recently Matthew Hassan, Senior Westpac economist gave four main reasons he forecasts slower housing price growth – in other words, values will grow more slowly – NOT retreat.
1. Sellers return
The first is that we will see some near-term rebalancing around supply and demand.
The surge in demand caught markets on the hop last year with many sellers, having decided to hold off listing new properties until the next year.
They are now coming back strongly and while new listings are still playing catch-up to rampant demand, the balance is shifting.
2. Affordability bites
More importantly, the sharp run-up in prices will start to discourage buyers – the air gets pretty thin at these levels, especially for would-be first-time buyers.
We are already seeing the early signs of a pullback with the ‘time to buy a dwelling’ index in our Consumer Sentiment survey down nearly 20% from its November high.
This index, which we know to be particularly sensitive to affordability, has correctly picked every twist and turn in Australia’s housing market since the early 1970s, usually with a lead of three to six months.
Note that there are some in-built mechanisms to affordability constraints as well.
Borrowing capacity and loan serviceability assessments become harder to meet as prices rise with both still largely determined by incomes and variable mortgage rates (rather than the lower fixed rates).
APRA’s moves from 2015 to 2017 to tighten up the way lenders conduct these assessments also means they should work more effectively as a constraint.
3. Macroprudential policy tightening
Reasons 1 and 2 will see some near-term slowing in the rampant price gains seen since the start of the year but are unlikely to bring an end to the boom.
That is only likely to happen some time down the track once other elements come into play: an expected lift in investor activity and a subsequent tightening in prudential policy.
So far investors have been subdued.
But they are unlikely to stay that way, particularly while prices are surging.
The segment will become increasingly prominent as affordability starts to curtail owner-occupier demand.
That in turn will make regulators increasingly uneasy.
APRA and the RBA may be comfortable with the way things sit now but their tolerance will be tested in a year’s time when prices have put on another 10%, credit growth is around the pace seen when they last intervened in 2015-2017, household leverage measures are high and rising, and investors are much more active.
With official rates still on an extended hold, authorities will need to revisit the macro-prudential policies deployed in 2015 and 2017.
The precise response will depend on exactly how things evolve but may include: caps on particular loan types viewed as riskier; limits on aggregate lending growth for investors; and even ‘micro-prudential’ changes to guidelines for individual loan assessments.
These measures will likely be more effective at taking the heat out of the market, although we expect authorities to favour light-handed approaches that see a ‘soft landing’ for housing rather than heavier moves that might risk a more disorderly correction.
4. Potential oversupply
The fourth reason for slowing is not part of our central view but is a factor that may come into play as we move through 2022, particularly if our external borders stay closed for some or all of next year.
Australia’s population growth slowed dramatically as migration stopped during last year’s COVID lockdown.
That in turn means new building, which is currently being boosted substantially by the HomeBuilder scheme, will run well ahead of population-driven requirements – we are likely to see over 180k dwelling completions this year while ‘underlying demand’ over 2020-22 tracking around 80k a year at best.
For now, this does not appear to be a major issue, partly because much of the nation is coming off an even longer period of under-building (Sydney and Melbourne’s high rise being notable exceptions).
However, the longer the combination of stalled population growth and strong building goes on the more susceptible we are to more widespread imbalances and oversupply problems. Some specific markets may also see issues emerge sooner – notably, Melbourne’s rental vacancy rate recently lifted to 6.5%, an all-time high.
The Bottom Line
We’re still in the very early stages of this new property cycle which has another 2 or 3 years of price growth ahead.
But it’s really hard to see the red-hot pace of the first few months of 2021 continuing.
Most previous property cycles have moderated in response to interest rate increases.
This will not be a factor this time, instead, it’s more likely this boom will run out of steam as affordability pressures impact later this year and prudential measures come into play in 2022.
Source Michael Yardney April 27, 2021