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In an update on the housing market provided by NAB’s Group Economics, CoreLogic founder and research director Tim Lawless reflected on the state of the housing market through the pandemic.
Since the onset of COVID in March 2020, Australian housing values have surged by 24.6 per cent, adding around $144,000 to value of an average dwelling.
There are many factors that led to the capital gain rise including record-low interest rates, higher levels of housing sentiment, a surge in savings during lockdowns, an imbalance between demand and supply and government policies that supported housing activity, Mr Lawless explained.
“But each of these factors are losing their potency to drive housing values higher,” he said.
Housing sentiment is slipping, Mr Lawless reported, as wages growth has lagged significantly behind house prices – rising only by around 3.3 per cent between March 2020 and December 2021.
“Not only does worsening affordability restrict access to the housing market, especially first home buyers, it also erodes housing sentiment,” he said.
“Measures of housing sentiment have been reducing since November 2020, reflecting a mix of affordability challenges and rising mortgage rates.”
Additional uncertainty has potential to drag sentiment further.
“More broadly, consumer sentiment could be further negatively impacted by Russia’s invasion of Ukraine, triggering a new wave of global uncertainty,” Mr Lawless said.
“Consumer sentiment and housing market activity have historically shown a strong correlation, so if sentiment does trend lower we could see that denting housing demand.”
He also referred to prospects for higher inflation resulting from the Ukraine war.
As explained by the Reserve Bank of Australia, the invasion of Ukraine and subsequent sanctions against Russia have created a supply shock, jacking up the prices of commodities such as gas and oil, as well as disrupting supply chains.
The Reserve Bank of Australia (RBA) wants annual underlying inflation to be “sustainably” within a target range of 2 to 3 per cent, before it raises rate. But annual wages growth will also need to inch up to 3 per cent, for the RBA to be convinced that inflation can be sustained in the target range.
But, the Ukraine war has provided a major source of uncertainty for the central bank in its rate deliberations.
Mr Lawless noted that the invasion could result in “higher inflation and wages growth, potentially forcing interest rates higher”.
While a cash rate rise is broadly anticipated for later this year, there are concerns around how hard some households will be hit.
“While mortgage rates are expected to remain well below average for an extended period of time, households are likely to be more sensitive to a higher cost of debt, considering housing debt ratios are at record levels,” Mr Lawless commented.
Other downside risks to the property market include rising supply, particularly in Melbourne and Sydney, where total listings are close to or above-average levels, as well as the roll-out of vaccines and eased restrictions – encouraging more household spending and a slowdown in savings.
However, reopened borders, improving economic conditions and higher wages growth should “keep a floor under housing demand and distressed property sales to a minimum”, Mr Lawless said.
He also recounted that fixed-term mortgage rates had trended higher since early 2021.
CoreLogic’s Home Value Index posted a 0.6 per cent gain over February, taking Australia into its 17th consecutive month of rising house prices.
However, the pace of growth had continued to ease, as it had since April last year.
February’s rate of growth was the lowest in a month since October 2020 and was down from a cyclical peak of 2.8 per cent in March last year.
Sydney and Melbourne copped the sharpest slowdowns, with Sydney posting its first decline in prices since September 2020, while the Victorian capital was relatively flat on December and January.
“Every capital city and broad ‘rest of state’ region is now recording a slowing trend in value growth, albeit with significant diversity,” Mr Lawless said.
[Related: Annual property growth rockets to record high]
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