Westpac is out with a wet blanket for all those real estate agents wanting to upgrade their Porsches into Teslas this year, with some cooling messages over the out of control Australian property market.
Despite raising their previous 10% forecast to 15% for the full calendar year, they give four reasons why its likely to fall off from mid year onwards. To wit:
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 pull back 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.
3. Macro prudential 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 comes into play: an expected lift in investor activity and a subsequent tightening in prudential policy.
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.
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.
While the market micro-factors (points 1 and 2) may be turning, the macro (3 and 4) remains up in the air. Authorities (aka the entire property/monetary/political complex) will do everything they can to keep prices elevated, even if that means opening the floodgates to more COVID migration or keeping prudential policy in its current lettuce leaf rough mode.