By Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP
Here are our thoughts on the latest home price data for June.
Australian home prices up again
Key points
- Cotality (formerly known as CoreLogic) data shows national average home prices rose again in June, their fifth monthly rise in a row, with the pace of increase accelerating further to 0.6%mom which is their fastest in a year.
- The upswing got underway in February when the RBA first started cutting interest rates with another cut in May, along with expectations of more cuts to come, providing further support.
- The trend in annual growth in rents continued to slow and at 3.4%yoy is the slowest since February 2021. Slowing student arrivals along with poor rental affordability leading to rising average household sizes have led to some slowing in demand for rental property.
- More RBA rate cuts along with the ongoing housing shortage and the anticipation of more support for first home buyers are expected to drive further gains in average prices this year. Poor affordability, slowing population growth and a dampening impact on economic growth from Trump’s trade war will act as constraints.
- Financial year home price growth was soft at 3.4%yoy but looks to have bottomed. We expect home prices to rise around 5 or 6% this year.
All capital cities except Hobart saw home prices rise in June
Cotality data shows that national average property prices rose again in June, with the May rate cut providing another boost to buyer confidence.
Australian dwelling price growth
All cities except Hobart saw price gains, with Sydney and Melbourne continuing to recover. The booming cities of the last two years, ie Brisbane, Adelaide and Perth, are continuing to see solid gains.
Source: Cotality, AMP
While annual growth over the financial year was just 3.4%yoy the acceleration in monthly prices over the last five months suggests that it has likely bottomed.
Source: Cotality, AMP
Rate cuts are expected to drive further increases
Further gains in home prices are likely as interest rates fall further, the shortage of property remains, and election policies boost first home buyer demand.
- Our base case is for 0.25% RBA rate cuts in each of July, August, November and February taking the cash rate to 2.85% by early next year. This is supported by the ongoing fall in inflation, with monthly headline and underlying inflation now in the bottom half of the RBA’s target range for inflation, softer than expected economic growth and the threat to growth from Trump’s trade war. Rate cuts are normally positive for home prices as they boost how much buyers can borrow and hence pay for a property, although sometimes this can show up after a lag following several cuts depending on economic conditions. Roughly speaking, each 0.25% cut in variable mortgage rates will add about $9000 to how much a buyer on average earnings can borrow. As can be seen in the next table, the start of rate cutting cycles since 1982 has been associated with higher average home prices over the subsequent 12 and 18 months in five of the last seven rate cutting cycles. The average gain over the subsequent 12 and 18 months is 3.9% and 8% respectively.
Australian average home prices after first RBA rate cut
Cotality. Australian recessions are highlighted in red. The GFC is in blue. Source: RBA, Cotality, AMP
- While falling population growth and improving housing completions are bringing the property market into better balance on annual basis, there is still an accumulated housing shortfall that has been built up over the last few years of under building. We estimate this to be around 200,000 to 300,000 dwellings. Unfortunately, with home building still running well below the Housing Accord objective for 240,000 homes a year, the shortfall is likely to remain for some time to come.
- Finally, the Government’s Help to Buy Scheme with 10,000 places a year which will see the Government take a 40% equity stake is starting up and anticipation of next year’s startup of its election promise to expand the low deposit guarantee allowing most FHBs to get in with a 5% deposit will likely provide some boost to housing demand from first home buyers looking to get in early.
The upswing in property prices in Sydney and Melbourne is consistent with auction clearance rates in both cities running above average levels for this time of year. Apart from the fall in interest rates, this has been helped by low levels of listings compared to a year ago as vendors hold back for higher prices and possibly as lower interest rates are relieving the pressure to sell for some distressed mortgage holders.
Source: Domain, AMP
However, there are some constraints which should prevent another boom (for now)
Just as the downswing in average home prices into early this year was mild the upswing may be constrained too because it’s starting from a point of still poor affordability, interest rates are likely to remain well above their 2021 record lows, and population growth is slowing.
- While interest rates are likely to fall further, the table above shows that while home prices tend to rise over the subsequent 12 to 18 months following the first rate cut in an RBA easing cycle the average response masks a wide array of outcomes ranging from falls in the recessions of the early 1980s and 1990s to big double digit gains and sometimes the gains only come through with a lag.
- Fortunately, recession is unlikely but near-term uncertainty and slightly lower economic growth and higher unemployment flowing from Trump’s trade war may be a bit of a dampener on buyer demand.
- What’s more in the absence of recession and much higher unemployment we only expect about 6 rate cuts in total in this cycle, taking the cash rate to a low of around 2.85% next year and mortgage rates to around 5%. This will be good news for mortgage holders but it will still leave mortgage rates well above their record lows seen in 2021 of around 2 to 3%. As such, the buying capacity of home buyers is expected to improve but remain below the levels seen in 2021-22. See the next chart. This will limit the upside in property prices.
Source: Cotality, AMP
- Housing affordability remains very poor without the usual improvement via lower prices that might have been expected to flow from the rate hikes seen in 2022 and 2023. This is evident in the ratio of home prices to wages & incomes being around record levels.
- Slower population growth, reflecting a crackdown on student visas and a return to the normal pattern of students leaving after they complete their degrees (after disruption from the pandemic), will likely lead to a further easing in the rental market which will help take some pressure off the home buyer market. Population growth has already slowed from a peak of 663,000 over the year to September 2023 to 446,000 over the year to December last year with the Government’s immigration forecasts implying a fall to around 365,000 in 2025-26.
Overall, we expect rate cuts and the housing shortage to dominate but with gains in national average home prices this year constrained to around 5 to 6%.
What to watch?
The key things to watch will be interest rates, the impact of Trump’s trade policies on Australian economic growth, unemployment and population growth. For example, a return to RBA rate hikes or less cuts than we are forecasting, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a resumption of property price falls. On the flipside a faster fall in rates and faster than expected population growth could drive a stronger upswing in property prices.
