The Property Price Surge Continues but the RBA are Watching
Property prices have started the year in the same fashion they ended 2019, but the RBA is starting to take note.
The latest data from CoreLogic has shown that over the January period, house prices in both Melbourne and Sydney have continued to push higher and there appear to be more increases in store for 2020.
In January, Sydney dwelling values rose by 1.1%, while Melbourne was even stronger at 1.2%.
Over the last three months values in Sydney and Melbourne have risen by 5.6% and 4.9% respectively and both are on track to regain their 2017 highs later this year. However, the rate of gains has slowed down from December, which we might expect during the holiday period.
Despite the fact that the real estate world takes an extended break over January, on the ground, we are hearing the same sort of stores we did at the end of 2019.
Buyers are keen to purchase properties, but there are still not enough to go around. The market at this stage appears to be dominated by first home buyers who are keen to secure a property before prices get out of reach.
At this time of year, we are often waiting for more property to come online as many agents are only now rolling out the first campaigns of the year. This will likely be the real test of just how strong the buying interest is at this stage.
This week, we also got the first look at how auction markets were feeling and once again clearance numbers were strong, albeit on weaker volumes.
Sydney is still sitting at a healthy 77.4% while Melbourne was a little lower at 67.7%. However, the results are still only an early indicator as there were only 359 auctions across both capital cities.
The RBA and Interest Rates
While the strong bounce back in property has been a boom for investors it is clearly starting to play on the mind of the RBA.
Last year the RBA cut interest rates three times and took the cash rate to a record low 0.75%. Over the Christmas break, the odds of a further cut at the February meeting ballooned to 60%, but a series of better than expected economic data, saw those odds drop to around 20% on decision day.
The main focus of the RBA has been to use the low interest rate environment to stoke job creation and reduce the unemployment rate. Recently we saw that rate tick down to 5.1%, which is still a little higher than the RBA might like but the trend is starting to head in the right direction.
At the same time, inflation is also starting to creep higher and pushed up to 1.7% on an annualized basis. Again it is under the RBA’s target band, but improving.
Based on the better than expected figures, it is likely the RBA could keep rates on hold for a while yet and wait for more information. However, as recently as this week, RBA Governor Lowe came out and made it known, he was keeping a close eye on asset prices, particularly in Sydney and Melbourne which are currently growing at 10% annually.
Lowe was concerned that the low interest rate environment could lead to ‘too much of a good thing.’
“The lower interest rates have assisted with both sides of the balance sheet. They have allowed people to pay down their liabilities more easily, and they have also boosted asset prices,” he said.
“We need to remember that it is possible to have too much of a good thing. We are aware of the risk of low interest rates encouraging too much borrowing and driving excessive asset valuations. So we will continue to watch borrowing, in particular, very carefully.”
The Acid Test
With the RBA clearly helping to prop up house prices, we can also assume that as Governor Lowe has suggested, we’ll be seeing an ‘extended period’ of low interest rates. So that won’t be changing dramatically in the short-term.
That means the real test will come in the next few months when we see if the strong growth in prices will in-fact lead more vendors in Sydney and Melbourne to list their properties.
Clearly this second house price surge is being driven by owner-occupiers trying to get a foothold in the market and there is no doubt a ‘fear-of-missing-out’ mentality across various segments. It also appears these buyers are focused on better quality locations, which is slightly different to the last time around which was investor driven and lead by some strong growth in the outer suburbs.
But even with that being the case, it is looking like another good opportunity for residential property investors in 2020. And of course, we must always remember that there is no single property market in Australia and good opportunities will always be present for savvy and prepared buyers.