‘Increasingly entrenched’ property rebound a ‘headache’ for RBA

CoreLogic’s latest Hedonic Home Value Index reported a 1.2 per cent increase in national dwelling values in May — the sharpest monthly gain since November 2021 and the third consecutive increase since prices bottomed in February.

Combined capital city values rose 1.4 per cent, spurred by sharp gains in Sydney (1.8 per cent), Brisbane (1.4 per cent), Perth (1.3 per cent), Melbourne (0.9 per cent), and Adelaide (0.9 per cent).

Hobart (0.5 per cent), Darwin (0.4 per cent), and Canberra (0.4 per cent) also recorded gains, albeit less pronounced.

According to CoreLogic’s research director Tim Lawless the latest monthly improvement suggests markets have “moved past a short but sharp downturn”, during which capital city values fell 9.7 per cent over the course of 10 months.

Mr Lawless acknowledged headwinds threatening to buck the trend but said the recent rebound in prices is “looking increasingly entrenched”.

The Reserve Bank of Australia’s (RBA) resumption of monetary policy tightening earlier this month failed to deter home buyer sentiment, REA Group senior economist Eleanor Creagh observed.

“The decision by the Reserve Bank to lift the cash rate in May did not deter the current home price rebound and the rise in prices seen so far this year gathered pace in May, broadening and accelerating across markets,” she said.

“Although the reduction in affordability implies larger price falls than have been seen to date, the downward pressure on prices from the substantial tightening already delivered is being counterbalanced.”

Ms Creagh said supply constraints have offset price pressures associated with aggressive monetary policy tightening.

“Stronger housing demand is being bolstered by the rebound in net overseas migration, tight rental markets amid shortages in rental supply, and ongoing labour market tightness with slowly increasing wages growth,” she continued.

“And although supply constraints have eased slightly with respect to total stock on market, the flow of new listings remains soft, keeping a floor under prices with sellers benefiting from less competition with other vendors.

“Fewer properties are hitting the market compared to the same time last year, creating a more competitive buying environment and buoying home values as there remains excess buyer demand keeping prices resilient to the falls the calculated shift in borrowing capacities would imply.”

‘Lag down’ risks

But according to AMP Capital chief economist Shane Oliver, the risk of another downturn in the residential property market “remains high”.

“The RBA is threatening to raise rates further particularly as wages growth risks accelerating, fixed-rate mortgages are now resetting to much higher interest rates and on the RBA’s estimates, more than 15 per cent of variable rate borrowers will have negative cash flow by year end, all of which, combined with higher unemployment, could lead to an increase in listings by distressed sellers,” Mr Oliver said.

The AMP economist also pointed to the RBA’s recent monetary policy statements, in which it has noted concern over the inflationary impact of higher home values.

“The rebound in home prices could itself spur the RBA to raise interest rates more than it otherwise would have done because rising home prices could drive a positive wealth effect offsetting its efforts to try and slow consumer spending down,” Mr Oliver said.

“… So, while our base case is that home prices have bottomed with stronger increases likely next year, the risk of another leg down as the full lagged impact of interest rate hikes on the property market and on unemployment materialises is high.”

But according to Commonwealth Bank chief economist Craig James, sustained housing price growth amid macro-economic uncertainty could derail the RBA’s goal of achieving a “soft landing” from inflationary heights.

“Limited housing supply, strong population growth, soaring rental costs, and the rising cost to purchase homes combined are a headache for the Reserve Bank in its efforts to combat price pressures,” he said.

CBA’s base case is for property price growth of 3 per cent in 2023 and 5 per cent in 2024, supported by expected monetary policy easing early next year, aimed at reviving a floundering economy.

[Related: Hot Property: The biggest property headlines from week 29 May to 2 June]