The pace of capital gains across Australian housing markets has been close to record breaking, with the national growth rate in March the fastest since 1988.
Such exuberant conditions have been driven by a multitude of factors including record low mortgage rates, a stunning surge in consumer confidence as the economic recovery beats expectations, a range of additional stimulus measures which have incentivised home buying and building, and persistently low advertised inventory levels which has created a renewed sense of FOMO amongst buyers.
But there are some early signs the exuberance in the housing market may be peaking. This isn't to say housing values are about reverse; a more likely scenario is the housing market is moving through a peak rate of growth and the pace of capital gains will gradually taper over coming months.
CoreLogic's home value index is already indicating a slowdown in the pace of capital gain
The first clear sign of a slowing in the pace of growth comes from CoreLogic's daily reading of home values. The daily update of CoreLogic's benchmark measure of housing values, the hedonic Home Value Index, is showing a clear and broad based slowdown in the rate of housing value growth; a trend that has been evident since late March.
Lower clearance rates
Clearance rates have also edged lower, with the Easter period marking a subtle softening in auction results. The weighted average clearance rate moved through a recent high in the last week of March at 83.1%, and has since drifted lower to reach 78.6% over the week ending April 18th. Historically there has been a strong positive correlation between auction clearance rates and the pace of appreciation in housing values.
A rise in vendor activity
Recently there has also been a marked lift in new listings coming to the market relative to prior years as more vendors take advantage of the strong selling conditions. The four weeks ending April 18th saw 26,470 newly advertised capital city properties added to the market which was the largest number of new listings for this time of the year since 2016 and 17% above the five year average. Total advertised stock levels (ie new listings plus re-listings) remain low, tracking -17.5% below the five year average, which implies buyers are still likely to feel some urgency, but the lift in stock additions should gradually support a rebalancing between buyers and sellers, especially if buyer activity slows as new supply levels lift.
A lift in new housing supply
Along with more new advertised stock coming on the market, there has also been a significant lift in housing construction activity that will gradually add to overall supply levels. Approvals for new dwelling construction are at record highs, and dwelling commencements over the December quarter were almost 20% higher than a year earlier and 5.5% above the decade average. The surge in new building activity is skewed towards houses rather than units, however the larger cities are still showing a unit supply overhang, with 46,166 units under construction across NSW over the December quarter last year and 43,032 under construction in Victoria. The unprecedented pipeline of new housing supply will take some time to work through to completions, however it is occurring at a time when demand from population growth has recently turned negative which could progressively create an imbalance between demand and supply.
Negative population growth
The lift in new home building will gradually add to overall housing supply levels at a time when population growth, which is an important component of housing demand, has turned negative for the first time since 1916 due to closed borders and stalled overseas migration. The timing of a return to higher housing demand via population growth remains uncertain until international travel and migration resumes. Stalled migration has had a more direct and immediate impact on rental markets, due to the fact that around 70% of Australia's overseas migrants arrive on a temporary basis. Of the roughly 30% of migrants that arrive in Australia with permanent intentions, most would rent before buying, so the impact on buying demand is more gradual.
Further to the demand side, Australia is moving into a new phase of the economic recovery where there is substantially less fiscal support which could result in a reduction of housing market activity. Arguably, housing demand has been brought forward by incentives such as the HomeBuilder grant and income support as well as state based initiatives such as stamp duty concessions. As these stimulus measures expire, along with less migration and rising affordability constraints, it's reasonable to expect housing demand could be negatively impacted.
Higher barriers to entry
Another barrier to a further acceleration in rising housing prices is affordability. For those that already own a home, servicing the debt is generally straight forward thanks to record low mortgage rates. However, for those looking to enter the market, growth in housing values is substantially outpacing incomes, which means a growing deposit hurdle for first home buyers. Based on data to September 2020 (which would have worsened by now considering the 8.2% lift in national housing values since then) it would take the typical Australian household 8.6 years to save a 20% deposit (assuming a household can save 15% of their gross annual income), with households in the most expensive capitals, Sydney and Melbourne, taking a longer 11.4 and 9.8 years to save a deposit.
Although it's likely the pace of capital gains has peaked, there remains a variety of factors that are likely to keep upwards pressure on housing values.
Record low interest rates will be here for an extended period of time, with the RBA reiterating their view that the cash rate won't lift "until 2024 at the earliest".
Additionally, the rapid economic recovery trend and low interest rates are likely to keep consumer spirits high for a prolonged period of time. The correlation between sentiment and housing activity is high; as long as consumers remain in a buoyant mindset we should continue to see housing activity holding up.
Eventually, international borders will re-open, helping to support housing demand as overseas migration recovers. As mentioned earlier, open borders are likely to have a more direct and immediate positive effect on rental demand, which should gradually flow through to purchasing demand from permanent migrants.
Overall, we are expecting housing values to continue to rise throughout 2021 and most likely throughout 2022, just not at the unsustainable pace of growth that has been evident over recent months.
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