Capital city home prices up, what happened to the downturn? Shane Oliver

Australian capital city average dwelling prices rose 0.7% in November according to CoreLogic.

Annual price growth slowed again to 2.4% though from a high of 9.7% in April.

Sydney dwelling prices rose by 0.4% after a 0.1% rise in October which followed a 2.9% fall between April and September. 

Melbourne prices rose a surprisingly strong 0.7%, following a 5.6% fall from their March high to their October low. The fall in Melbourne was the steepest across capital cities because of the bigger hit to its economy from its second round of lockdowns. The rebound has so far come on low volumes.

Prices in other cities were all up strongly with Brisbane up 0.6%, Adelaide up 1.3%, Perth up 1.1%, Hobart up 1.4%, Darwin up 1.9% and Canberra up 1.9%.

Regional dwelling prices rose 1.4% and are stronger reflecting lower levels of indebtedness and hence less vulnerability to the financial stresses caused by the pandemic driven economic downturn, less exposure to the slump in immigration and increased buyer interest as people seek to relocate from cities as part of a secular trend towards working from home and a greater focus on lifestyle.

Capital city house prices rose 0.9% whereas unit prices were flat (and down -0.7% in Sydney), likely reflecting an ongoing shift in lifestyle preferences towards houses as a result of more working from home and a lifestyle choice and as weak rental conditions made worse by the slump in immigration weigh on the unit market.

Since March capital city unit rents are down 5.4% (with much of the weakness in Melbourne and Sydney) whereas house rents are up 1.1%.

Source: CoreLogic, AMP Capital

Big hit to house prices averted

The property market has held up a lot better than I anticipated 6-9 months ago. Basically, the combination of reopening unleashing pent up demand, an avalanche of government incentives (including stamp duty concessions, various state support measures, HomeBuilder which has now been extended to March albeit at a reduced payment and an expansion of the First Home Loan Deposit Scheme), a further easing in lending standards on the way for early next year (with the removal of responsible lending obligations), record low mortgage rates, the desire to "escape from the city" helped along by ongoing bank payment holidays and Government income support measures have successfully averted a sharp fall in prices that would otherwise have followed from higher unemployment and underemployment, weak inner city rental markets and the hit to immigration. As a result property prices have turned up far earlier than I have been expecting and there appears to be a bit of FOMO (or the “fear of missing out”) creeping into some markets – particularly outside of Melbourne and Sydney.

At the current rate of increase average capital city dwelling prices will surpass their September 2017 record high by April next year, although this masks a wide divergence with: record highs already in Brisbane, Adelaide, Hobart and Canberra and in average regional home prices; Perth and Darwin remaining well down on their 2014 highs; and Sydney and Melbourne prices having been range bound since 2017.  

Outlook

While the combination of reopening, government incentives, easing lending standards and low rates are likely to push prices higher in the months ahead, the overall outlook into next year remains messy with a high risk that the negatives around weak rental markets and the collapse in immigration could reassert themselves particularly in inner city Melbourne and Sydney. The outlook is also widely divergent across cities, within cities and across units versus houses.

The negatives are: higher unemployment and underemployment and distressed sales as government income and bank support measures wind down although the risk on this front are rapidly diminishing; falling rents and high vacancy rates in inner city Melbourne and Sydney weighing on investors; a 100,000 per annum reduction in underlying dwelling demand flowing from the hit to immigration; and a pandemic/work from home driven “escape to the suburbs and regions” that is weighing on inner city/unit prices but pushing up outer suburban/house and regional prices.

It remains hard to see that the reversal in net immigration from around 240,000 people per annum to an expected net outflow of people this financial year (of -70,000) and next (of -20,000) won’t have a significant impact. The surge in population growth of around 150,000 people per annum taking it to around 375,000 people per annum due to higher immigration from the middle of the 2000s was the main factor explaining very expensive Australian housing over the last 15 years as the property market became chronically undersupplied. The collapse in population growth which is likely to result in a halving in underlying demand for housing this financial year and next at the same time that governments are intent on supporting housing construction via various initiatives including HomeBuilder is likely to weigh on prices at some point. Particularly with rate cuts and incentives pulling demand forward and mortgage rate reductions reaching the end of the road.

Source: ABS, AMP Capital

Inner city Melbourne and Sydney are the most vulnerable to the hit to immigration, but this may not become apparent till next year. Outer suburban areas and houses in these cities are likely to continue rising in value reflecting the “escape from the city” phenomenon against a backdrop of very low mortgage rates.

Other cities and regional areas are likely to perform well reflecting lower levels of debt and less exposure to immigration and as such as likely to see rising average prices with record low mortgage rates dominating. Adelaide and Brisbane are playing catch up after years of underperformance compared to Sydney and Melbourne, Canberra is benefitting from strength in public sector employment and Perth and Darwin are starting to recover after bear markets ever since 2014 helped by the recovery in mining investment in WA.

Outer suburban houses and dwellings in regional centres are likely to perform better than inner city units in most capital cities as a continuing trend to working from home and a greater focus on lifestyle dominates.