Below is the first in a new monthly routine of special reports that will be provided exclusively to MacroBusiness subscribers.
The Australian economy’s better than expected recovery, driven by unprecedented fiscal and monetary support, has delivered the biggest and broadest property price boom for generations.
All five major capital city markets have experienced astonishing rebounds from their pandemic lows, as illustrated clearly by the next chart:
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These rebounds are summarised below based on CoreLogic data.
Sydney dwelling values initially fell 2.1%, bottoming on 13 October 2020.
As at 30 June 2021, Sydney values had rebounded a whopping 17.0% to be 14.5% higher than the pre-COVID level on 15 March 2020.
Melbourne dwelling values initially fell very sharply, declining 5.9% to 18 October 2020.
As at 30 June 2021, values had rebounded 11.8% to be 5.2% higher than the pre-COVID level.
Brisbane only experienced a moderate 0.3% decline in dwelling values, bottoming on 16 August 2020.
As at 30 June 2021, values had surged 15.3% to be 14.9% above their pre-COVID level.
Perth values initially declined 2.0%, bottoming on 22 August 2020.
As at 30 June 2021, values had risen 10.8% from their low to be 8.6% above their pre-COVID level.
Adelaide dwelling values did not suffer any value decline during the initial stages of the COVID pandemic. As at 30 June 2021, values had risen 14.7% from their pre-COVID level on 15 March 2020.
What makes this housing rebound so remarkable is that it has been universal. As at 30 June 2021, all capital city markets in addition to every state region experienced strong price rebounds out of COVID, according to CoreLogic:
The remainder of this report delves into the drivers of the nation’s property price boom and follows-up with brief examinations of the prospects facing each major capital city market.
A perfect property price storm
Australia’s property price boom has been driven by a confluence of factors.
First and foremost, mortgage rates have been driven to record lows courtesy of cuts to the official cash rate to only 0.1%, alongside the introduction of the RBA’s Term Funding Facility (TFF).
The TFF provided low cost three-year funding for authorised deposit-taking institutions (ADIs) to support the supply of credit. And it has been highly successful in replacing relatively expensive wholesale funding with cheap funding from the RBA.
As noted recently by the RBA, “the availability of the TFF, along with the large increase in low-cost deposits, have combined to reduce banks’ cost of funds to historic lows”:
The end result is that mortgage rates have fallen sharply over the pandemic, as illustrated clearly in the next chart from CoreLogic:
New variable rate mortgages can now be readily obtained at interest rates below 2.5%, whereas variable investor mortgages can be obtained below 3.0%.
New fixed rate loans are even cheaper, available for owner-occupiers at rates of around 2% versus 2.4% to 3.0% for investors.
Because fixed mortgage rates have declined by more than variable rates since the start of the pandemic, there has also been a noticeable increase in the share of new mortgages at fixed rates from around 20% pre-pandemic to 30% of total new mortgages:
The collapse in mortgage rates has greatly reduced the cost of servicing mortgages. As illustrated in the next chart, mortgage interest payments as a share of household disposable income have fallen to a 21-year low, whereas household principal and debt repayments as a share of disposable income have fallen to a 17-year low:
The abundance of cheap credit on offer has driven Australian mortgage demand to its highest ever level, which has been the primary driver of Australia’s property price boom:
Household income boom
In response to the pandemic, the federal government showered the Australian economy with stimulus. A brief stock take suggests that around $180 billion of income support was delivered to the economy in the June and September quarters alone via the federal government, including:
- Initial welfare boost = $18 billion
- JobKeeper payments = $71 billion
- JobSeeker and other coronavirus supplements = $28 billion
- Business cashflow boost = $28 billion
- Early superannuation release = $35 billion
The flood of stimulus showered Australian households with disposable income, which experienced its strongest annual rise since 2008:
While the various stimulus measures have now ended, they have left households in a strong financial position going forward. At the same time as mortgage repayments have shrunk, aggregate household savings have experienced their biggest ever increase, rising to a whopping $200 billion in the year to March 2021:
This war chest of savings represents a massive pent up supply of unspent stimulus that is now available to be spent across the economy, included on housing.
The $12.5 billion of Stage 2 personal income tax cuts, which were brought forward to 1 July 2020, have also helped to support aggregate household disposable income.
Meanwhile, the sharp reduction in the nation’s labour underutilisation rate to an 8-year low of 12.5% shows the economy is transitioning from public support to market driven income:
This is also reflected by the sharp rebound in aggregate employee compensation (wages & salaries), which recovered to its pre-COVID trend in the March quarter of 2021 despite slower population growth:
Rental markets also soaring
Australia’s rental market is also experiencing strong growth, according to CoreLogic.
National property rents rose by 6.6% in the year to June 2021, which was the strongest annual increase since February 2009:
Rental growth has been broad-based, with nearly all markets other than Melbourne and Sydney apartments reporting solid-to-strong growth, as illustrated clearly below:
The surge in rental growth across Australia is explained by the boom in household disposable income (explained above), alongside the tightening of rental vacancy rates, which have hit decade lows across most markets outside of Melbourne and Sydney:
Melbourne’s and Sydney’s apartment markets are the outliers having been hit hard by the collapse in immigration (especially international students), with net overseas migration (NOM) falling to zero in the 2020 calendar year:
The softer rental growth across Melbourne and Sydney amid the strong growth in dwelling values has forced gross rental yields to record lows in those two cities, whereas every other market is still enjoying gross rental yields around 4% or above:
With mortgage rates at record lows, the rental yields on offer outside of Sydney and Melbourne has provided buyers in those markets with the opportunity to secure a property at a holding cost that is near or below the cost of renting.
Property boom to continue, but risks building:
Current momentum suggests that Australian property prices should continue to rise strongly throughout the remainder of 2021; albeit at a slower rate than was experienced over the first half.
First, growth in new mortgage commitments remains turbo charged, which typically correlates strongly with dwelling value growth.
As illustrated in the next chart, the quarterly growth in new mortgage commitments has slowed from recent highs but remains at a strong rate overall. In a similar vein, capital city dwelling value growth has also slowed from a quarterly peak of 7.1% in May to 6.1% in June:
The same can be said for the nation’s auction clearance rate, which is arguably the best short-term indicator for national capital city dwelling values. The auction clearance rate has also moved past its March peak, but remains at a high level historically. This too points to slower (but still strong) dwelling value growth in the months ahead compared with the first half of 2021:
Second, Australia’s housing market continues to suffer from a chronic shortage of homes for sale, which should place upward pressure on values.
CoreLogic’s June property market report revealed that total for sale listings were tracking 25% below the five-year average:
At the same time, annual property sales hit their highest level since February 2004, with every mainland capital city and region recording double digit growth in annual sales volumes.
Therefore, the current state of the property market is one where many buyers are confronting an urgent sense of FOMO, leading them to pay high prices for the limited available stock.
Third, the Australian economy is likely to remain well supported into 2022 on the back of the Australian consumer and the hangover from stimulus.
As shown above, Australian households have amassed an ginormous $200 billion savings war chest, the contents of which is available to be spent across the economy, be it on retail, travel or housing. Australia’s labour market is also incredibly tight with the number of job vacancies per unemployed and underemployed Australians currently tracking at a record low:
This means that households should soon enjoy stronger wage growth, which will support consumer confidence and the ability of households to service their mega mortgages.
Clouds building on the horizon
The biggest risk to property market headed into 2022 is the increasingly likelihood that Australia’s financial regulators will impose macro-prudential curbs on mortgages to cool the market, such as loan-to-value ratio (LVR) restrictions, debt-to-income (DTI) restrictions, increased mortgage buffers, or restrictions on interest-only lending.
Financial regulators would have been concerned by the latest surge in investor mortgage lending, which shot up 116% year-on-year in May:
While owner-occupiers continue to drive the property market overall, investor participation is now only a whisker below its 2015 peak with further strong rises likely in the pipeline:
In mid-June, RBA Governor Phil Lowe stated that the Council of Financial Regulators (CFR) – i.e. RBA, Treasury, APRA and ASIC – are actively examining macroprudential tools to curb the mortgage/property market in the event that credit accelerates, and that these tools would come into effect before the RBA considers lifting interest rates.
In this month’s Monetary Policy Decision, Phil Lowe also stated that the cash rate will not be lifted “until inflation is sustainably within the 2 to 3 per cent range”. Lowe elaborated that “it is not enough for inflation to be forecast in this range”, rather “we want to see results before we change interest rates”.
Our prediction is that Phil Lowe will use his position as chair of the CFR to implement some form of macroprudential restrictions before the end of the year, the impact of which will dampen mortgage/property price growth heading into 2022.
While it is highly unlikely that the official cash rate will rise over the next 12 months, fixed mortgage rates should rise moderately owing to the closing of the RBA’s TFF to new drawdowns on 30 June 2021. This means that average mortgage rates will likely rise – albeit will remain near historical lows – which should further dampen mortgage and property price growth into 2022.
The other longer-term headwind for the Australian property market is the rising supply of homes under construction amid plunging population growth.
As illustrated in the next chart, the Morrison Government’s HomeBuilder subsidy has successfully pulled forward demand and engineered an enormous dwelling construction boom at the same time as immigration and population growth has collapsed:
While structural supply-demand dynamics play second fiddle to other factors like the availability of credit / mortgage rates and the market supply of homes listed for sale, the budding oversupply of homes under construction should provide some headwinds to property prices and rents from 2022 as these homes start to hit the market.
Overall, our best guess is that Australian dwelling values will increase by around 8% over the second half of 2022 (versus 12% over the first half), with growth decelerating further over 2022 as the mortgage market tightens, affordability constraints bite, and the supply of homes increases.
The next section of this report briefly examines each of the five major capital city markets. Each of these markets will be covered in detail in future subscriber reports.
Sydney’s property market has been the star performer over the pandemic, rising an extraordinary 17% from its October low.
The immediate outlook is for Sydney dwelling values to experience strong growth, albeit at a slower pace than the break-neck speed experienced over the first half when values grew by a whopping 15.4%. This view is based upon the slowing of new mortgage commitments, which have historically led dwelling value growth:
Sydney’s auction clearance rate has also softened (even prior to the current lockdown), which points to slower dwelling value growth over the second half:
Our guess is that Sydney dwelling values will rise another 8% to 10% over the second half which, if achieved, would mean that Sydney dwelling values would rise by 23% to 25% in calendar year 2021. That would be the strongest price growth since 1989.
We do not anticipate that Sydney’s lockdown will have an enduring impact on the city’s property market. Transaction volumes will likely fall initially followed by a period of catch-up growth.
Melbourne has recorded slower dwelling value growth than Sydney, rising 11.8% from its October 2020 COVID low.
Like Sydney, the immediate outlook for Melbourne is for slower price growth over the second based on softening of new finance commitments:
As well as softer auction clearance rates:
After rising by 9.7% over the first half of 2021, we are tipping that Melbourne dwelling values will grow by another 5% to 7% over the second half to be up 15% to 17% over calendar year 2021.
Brisbane’s housing market has been the second strongest performer growing by 15.3% from its August 2020 low.
The immediate outlook is also for softer growth over the second half of 2021 based on the quarterly fall in new mortgage commitments:
Auctions are rare in Brisbane, so they are not a useful indicator of price growth, unlike Sydney and Melbourne.
After rising by 11.7% over the first half, we are tipping that Brisbane dwelling values will grow by another 6% to 8% over the second half to record total growth of around 18% to 20% in calendar year 2021.
Perth has experienced the slowest price growth of the major capitals with prices rising 10.8% from their August low and momentum slowing over recent months:
Perth is also the only major capital city market yet to rise above its pre-COVID peak.
Like the other major capitals, Perth’s mortgage market is also pointing to slower price growth over the second half of 2021:
Auctions are rare in Perth, so they are not a useful indicator of price growth.
After rising by 7.2% over the first half of 2021, we are tipping that Perth dwelling values will rise by between 3% and 5% over the second half, meaning Perth dwelling values would rise by around 10% to 12% in calendar year 2021.
Adelaide is the quiet achiever with dwelling values not recording any decline over the initial months of the pandemic and values rising 8.9% over the first half of 2021:
The immediate outlook is for Adelaide dwelling values to continue growing strongly based on the rebound in new mortgage commitments after a brief fall:
Based on the above, we are tipping that Adelaide will record price growth of between 6% to 8% over the second half which, if achieved, would deliver a rise in values of around 15% to 17% in calendar year 2021.
Avoid high-rise apartments
Despite the strong price growth forecast over the immediate horizon, readers should continue to avoid the high rise apartment segment. High-rise apartments are generally lower quality, heavily dependent on migrant flows (especially international students), oversupplied, and are experiencing softer rental growth.
For example, while the Brisbane property market as a whole is very attractive (due to strong growth prospects and juicy yields), high rise apartments in Brisbane are not. As the saying goes, “land appreciates, buildings depreciate”.
Signs are pointing to ongoing strong growth for Australian property prices over the second half of 2021.
The economy continues to rebound, households are awash with savings, and the labour market is tightening, which points to stronger wage growth.
Monetary policy remains supportive, which should keep mortgage rates near historical lows; although fixed rates should rise modestly given the expiry of the TFF.
The biggest risk to the outlook is the likelihood that financial regulators will respond to the surge in investor lending with macroprudential curbs, which we tip will arrive near the end of the year.
These macroprudential curbs are likely to knock the froth off the market and result in slowing dwelling value growth over 2022.
The collapse in immigration, which has coincided with a surge in dwelling construction, also presents a longer-term headwind that should temper growth in rents and prices from 2022 as the newly constructed homes begin to hit the market.
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