By Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP.
Australian home prices up again in August
Key points:
- Cotality (formerly known as CoreLogic) data shows national average home prices rose again in August, their seventh monthly rise in a row, with the pace of increase accelerating slightly to 0.7%mom which is the fastest since May last year. Capital city price growth rose to 0.8%mom.
- The upswing got underway in February when the RBA first started cutting interest rates, with subsequent cuts in May and August and expectations of more cuts to come providing further support along improving real wages and consumer sentiment and the ongoing property shortage.
- Rental growth is showing signs of picking up again too with average monthly growth rising to 0.5%mom and the annual change accelerating to 4.1%yoy.
- Some more gradual RBA rate cuts, real wages growth, the ongoing housing shortage and more support for first home buyers from October are expected to drive further gains in average prices this year. Poor affordability, rates remaining relatively high compared to the 2021 low and slowing population growth will act as constraints though.
We now expect home prices to rise around 7% this year, but likely picking up to around 8-10% next year as rate cuts and ramped up support for first home buyers impact.
All capital cities except Hobart saw home prices rise in August
Cotality data shows that national average property prices rose again in August, with the August rate cut providing a further boost to buyer confidence.
All cities, except Hobart, saw price gains, with Brisbane, Perth and Adelaide continuing to accelerate and Melbourne remaining a laggard.
Source: Cotality, AMP
The acceleration in monthly price gains points to a continuing acceleration in annual price growth which is starting to hook up.
Source: Cotality, AMP
Expect further price gains
Further gains in home prices are likely as interest rates fall further, real wages continue to rise, consumer sentiment has picked up, the property shortage remains and Government support for first home buyers ramps up again.
- Our base case is for further 0.25% RBA rate cuts in each of November, February and May taking the cash rate to 2.85%. This is supported by our expectation that underlying inflation is likely to stabilise around the midpoint of the RBA’s target range, the cash rate still being relatively restrictive at current levels, still subdued consumer spending and business investment and the uncertainty around the growth outlook flowing from Trump’s tariffs. Rate cuts boost how much buyers can borrow and hence pay for a property. Roughly speaking, each 0.25% cut in variable mortgage rates adds around $11,000 to how much a buyer on average earnings can borrow.
- 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, Government support for first home buyers is ramping up again which will likely bring forward demand and so add to near term upwards pressure on prices. The Government’s election commitment to expand the low deposit guarantee allowing most FHBs to get in with a 5% deposit has now been brought forward to start from 1st October and the Government’s Help to Buy Scheme with 10,000 places a year which will see the Government take a 30 to 40% equity stake is also expected to start taking applications from late this year. Combined these will add to demand and make housing affordability worse in the near term.
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. This is also being helped by low levels of listings compared to a year ago as vendors hold back for higher prices and as lower interest rates are relieving the pressure to sell for some distressed mortgage holders. Its likely to be a solid spring selling season.
Source: Domain, AMP
However, poor affordability is likely to act as a constraint
However, the upswing is likely to be constrained because of poor affordability, interest rates likely to remain well above their 2021 record lows and slowing population growth.
- We only expect three more rate cuts in this cycle, taking the cash rate to a low of around 2.85% next year and mortgage rates to around 5%. The risks to this are judged to be on the upside – ie that we see maybe only one more rate cut as recent economic activity data, and the July CPI indicator were a bit stronger than expected. Either way this 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. 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), may 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 annual gains in national average home prices constrained to around 7% this year. We have revised this up from 6% reflecting the recent acceleration in monthly price gains. More rate cuts and a surge in first home buyer demand on the back of the bring forward of the broader low deposit scheme and the start-up of the Help to Buy scheme are likely to see the pace of gains pick up to around 8-10% next year.
What to watch?
The key things to watch will be interest rates, unemployment and population growth. For example, 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.
Ends
