Supply and Demand, Not Interest Rates Driving Property Prices
The turnaround in sentiment across the Australian property market is continuing to grow, with all the latest data pointing to the worst being behind us for now.
According to CoreLogic data, property prices across the five largest capital city markets are up 1 per cent over the past month, led by Sydney which is 1.5 per cent higher, while Brisbane was up 0.9 per cent.
At the same time, there is more evidence of strong demand on the ground. Numbers at open homes are increasing, particularly in Sydney. Auction clearance rates have also stabilised and are now holding steady above 70 per cent. This time last year, clearance rates were at only 60 per cent.
This change of mood comes at a time when the Reserve Bank of Australia (RBA), surprisingly lifted interest rates at its May meeting, and made it even more difficult for many people to borrow money.
If rates are still moving higher, then what is behind the turnaround? There has been some speculation recently that many mortgage holders have been actively seeking out lower introductory rates, while new borrowers might have also been able to borrow more due to bank discounting which has been putting pressure on home prices again. We have recently seen that refinancing activity has reached record-high levels according to the Australian Bureau of Statistics (ABS) as borrowers seek out lower rates.
This is something I think is only happening in a fragmented manner and certainly, it’s not going to make a big enough difference to see a substantial rise in property prices. In reality, borrowers still need to qualify for a home loan and to do that they are needing to meet serviceability rates which are now up around nearly 10 per cent.
The reality of the situation is that even though interest rates are now a lot higher than what they were, demand is still strong. It has been well documented that Australia should have around 700,000 new arrivals over the next two years, at a time when there is already an existing rental crisis in most major property markets. The huge amount of demand that we have for housing is clearly now starting to again translate into higher prices.
At the same time, supply is incredibly constrained. For most homeowners who do not have to sell and see prices are decreasing, then they will simply sit on their hands and not sell. This is reducing the supply of properties on the market and puts a cushion under house prices to some extent.
While there are still factors that might impact homeowners and cause them to sell, such as borrowers who are rolling off ultra-low fixed-rate loans and having to manage repayments that suddenly have doubled or more. The data shows that this again does not seem to be translating into a significant increase in distressed sales as low unemployment and a robust labour market participation rate continue to support mortgage holders. With the current high level of demand and very tight supply, it is unlikely that this “mortgage cliff” is going to shift the balance one way or another.
We are seeing extremely tight levels of stock in most major property markets around Australia with Sydney being the standout, especially in the mid-to-upper end of the market. Good quality properties seem to be selling incredibly well when they do come to market and have done so for some months now. Our research shows that people who are actively seeking to buy into this market are finding it extremely frustrating and difficult.
As the current interest rate cycle eventually reaches its peak, we are only likely to see more activity from this point onwards and potentially more upward pressure on prices. The biggest headwind to this scenario is if the RBA continues to increase interest rates as the current OCR is already in restrictive territory in my opinion. The latest unemployment print showed a rise to 3.7% in April and should give RBA a further indication that their monetary policy is already achieving some of their stated goals and softening economic conditions. The Australian Bureau of Statistics stated that circa 4300 people lost work in April, in a report that countered economists’ expectations for employment gains of 25,000 and should mitigate the chance of a further rate hike in June.
It is worth remembering that the majority of Australians do not actually have a mortgage. A 2021 census revealed that over a third of Australia’s 10 million homes are owned with a mortgage, while just under a third are owned outright and a third are rented. The reserve bank will be mindful of the fact that raising rates will act to weaken demand from mortgage holders but also act in reverse for the cohort which has cash on deposit with banks and is enjoying an ever-increasing income stream, whilst potentially also stimulating services inflation by forcing landlords to increase rents to try to cover their increased interest costs.
I will be covering many of these issues in more detail in our upcoming online Quarterly Review on 31st May, 2023.