With so much discussion about the state of the housing market across Australia I thought this an ideal time to update our clients!
Australian housing values increased a further 1.6% in July, according to CoreLogic’s national home value index. The latest rise takes housing values 14.1% higher over the first seven months of the year and 16.1% higher over the past twelve months.
A 16.1% lift in national housing values over the past year is the fastest pace of annual growth since February 2004.
The question we are most often asked is why? Why are we in such a strong market while there is a global pandemic? Simply demand is being stocked by record low mortgage rates and the prospect that interest rates will remain low for an extended period. Couple this with FOMO (Fear of Missing Out) and generally low stock levels it is the perfect storm for the best growth in prices since 2004.
Property sales continue to surge across Australia against low listings levels. Active listings across the country remain about -26% below the five-year average. The mismatch between demand and advertised supply remains a key factor placing upwards pressure on housing prices.
The ‘sales to new listings ratio’ is abnormally high nationally, at 1.4 over the three months to July. The sales to new listings ratio are calculated by dividing the number of sales that have taken place over a given period by the number of new listings added to the market over the same time. For the past decade, the ratio has averaged 0.9, suggesting for each listing added to market, there was just under one transaction that took place.
When the ratio is 1, it implies buyer demand and advertised supply is balanced. A sale to new listings ratio of 1.4 suggests strong selling conditions, as there is more than one transaction taking place for every new unit of supply in the same period. The sales to new listings ratio has averaged above 1 since June 2020.
Each of the capital city markets currently has a sale to new listings ratio of greater than 1, ranging from 2.0 in Adelaide, to 1.1 across Darwin. Capital cities with imposed lockdown restrictions through July saw a particularly strong uplift in the ratio, which may be a result of a disproportionate number of vendors postponing the start of a selling campaign amid lockdowns.
Multiple factors can explain the surge in sales relative to low listings levels from mid-2020. On the demand side, these factors include the following:
Low mortgage rates
Increased buyer demand has stemmed from continuously falling mortgage rates. Despite concerns of an earlier-than-foreshadowed lift in mortgage rates, RBA data shows average new home loan rates for owner occupiers fell 12 basis points through the first half of 2021, and 18 basis points for investors. Mortgage rates are one of the most important determinants of housing demand, and in the current climate, where GDP is once again expected to decline, the RBA will likely facilitate a low-rate environment for longer.
A savings windfall
As social consumption declined through lockdowns, and household financial support was increased, household savings peaked at 22.0% of household income in the June quarter of 2020, which was above the then-decade average of 7.0%. Combined with a range of incentives for home purchases introduced through 2020, increased savings levels may have bolstered borrower deposit levels, triggering additional sales since the onset of COVID-19. Savings rates remained elevated at 11.6% through the March quarter of 2021, which have supported sales volumes through the first half of this year.
Incentives for first home buyers
2020 saw the introduction of multiple first home buyer incentives, from the first home loan deposit scheme before the pandemic, to various state-based grants and concessions, along with incentives for the purchase/construction of new or off the plan property. First home buyer purchases would go a long way in explaining the current supply and demand dynamic. This is because owner occupier purchasers who already own property would presumably list their existing home around the time they are purchasing a new one. First home buyer activity on the other hand creates additional housing demand without adding new advertised stock to the market.
On the supply side, new listings stock was persistently low through 2020, as a lack of mobility and extended lockdowns across Victoria saw fewer Australians list their home for sale. Through 2021, new stock added to the market has hit levels that are on par with previous years. In the four weeks ending 4th of July, CoreLogic counted around 38,000 new listings added to the market nationally, which is higher than the five-year average level. However, recent lockdown conditions have seen new listing counts slip back below the historic average, with Sydney in particular recording a -17.3% drop in new advertised stock over the past four weeks.
Rental markets remain tight, with the annual pace of growth in national rents lifting to 7.7%, the fastest rental appreciation since 2008.
Rental conditions across Darwin and Perth are the tightest amongst the capitals reflecting low vacancy rates and high rental demand. At the other end of the spectrum are the apartment sectors of Melbourne and Sydney, where rental conditions have been substantially looser attributable to stalled overseas migration and a preference shift away from high density living during the pandemic.
The Adelaide vacancy rate sits at .7% (July 2021) – SQM Research – Property – Residential Vacancy Rates – Adelaide
Will the market slow? Perhaps a potential headwind is the tightening of credit policies and an earlier than expected lift in interest rates.
Tighter credit policies, should they be introduced, would likely have an immediate dampening effect on housing markets, however the trigger for another round of macroprudential intervention isn’t yet apparent. An intervention would be similar to what we saw after the Banking Royal Commission. APRA, the RBA and the broader Council of Financial Regulators are watching for any signs of a material slip in lending standards, as well as a more substantial lift in household debt or speculative activity. While each of these metrics is on the rise, the level is likely to be insufficient to trigger a response from APRA.
Similarly, a lift in the cash rate is likely to be at least 18 months away, but, depending on the trend in labour markets and inflation, we could see rates potentially rise earlier than the RBA’s 2024 forecast. The recent spate of lockdowns is likely to see Australia’s economy once again contract through the September quarter, a factor that is likely to keep rates on hold for a while longer, providing ongoing support for housing demand.
Changes @ DB Philpott – David and Benjamin would like to take this opportunity to welcome Chelsea Ramm to the team. Chelsea is an enthusiastic and welcome addition to the team coming form an IT customer service background. Chelsea will be working with David. This is a new position that became available as Emily Gretgrix has taken on a new role in our accounts & admin team working with Danielle.
Thank you for your ongoing support!
Regards David, Benjamin & the Team at DB Philpott Real Estate