Migration flows to narrow house-unit price gap

BIS Oxford Economics chief economist Sarah Hunter said that the return of temporary workers and students to Australia once international borders reopen could reignite rental demand, particularly for apartments in city centres like Sydney and Melbourne.

This, in turn, could encourage investors to return to the market and purchase properties at a higher level than they currently are, particularly in Sydney and Melbourne, and to a lesser extent, Brisbane, she said.

“That overseas migration piece is critical, not because the migrants themselves are necessarily buying the apartment, but because they’re the source of demand if you own an investment property and you’re looking for rental income from it,” Ms Hunter told Mortgage Business.

Investor lending has already been increasing, with the Australian Bureau of Statistics (ABS) data for July 2021 showing that investor lending commitments almost doubled in value from $4.7 billion a year ago to $9.35 billion in July.

As such, Ms Hunter said she expects the gap between the median prices of detached houses and units to close, with stronger growth in unit prices moving forward.

Her comments have followed the release of The Australian Housing Outlook Report 2021-2024 – which has been produced by BIS Oxford Economics for QBE Lenders’ Mortgage Insurance.

Figures in the report revealed that unit prices could post double-digit growth across the capital cities between now and 2024 and almost touch the $1 million mark in Sydney.

For example, median unit prices have been forecast to surge by 19.1 per cent in Sydney between now and 2024 to $997.3 million. This would follow a 7.8 per cent rise in 2021 to $837,600.

Melbourne median unit prices have been predicted to rise by 16.1 per cent to $732,000, while prices in Canberra have been predicted to grow by 26.4 per cent to $714,000, and Perth by 21.3 per cent to $517,000.

Ms Hunter said that the narrowing of this price gap could exacerbate affordability pressures for first home buyers (FHB) even further.

She said: “Typically what you can see is that when investor demand picks up, that acts as a spurt to prices, which can squeeze affordability.

“Affordability was already being squeezed for first home buyers because of the price moves we’ve already seen. This will reinforce that trend so we would expect that first home buyers will decline further as a proportion of total market activity. It’s already falling now based on what’s happened to prices so far.”

Indeed, ABS figures showed that FHB loan commitments fell by 6.8 per cent in July 2021, following a 7.8 per cent drop in June. Commitments have dropped by 20.0 per cent since January 2021.

While this was partly attributed to the unwinding of the strength in construction lending post-HomeBuilder, the ABS said that the decline appears to be more widespread.

Housing markets to diverge post-COVID

Ms Hunter also observed that there has been a synchronisation in housing trends in the past 15 months across the country amid the coronavirus pandemic, especially in terms of the price gaps between detached houses and units.

She said that housing markets have responded similarly across the states and territories (although the rate of house price increases and affordability levels has varied across the country).

However, this would not likely be the case in the next 15 to 18 months, she said.

“The cities will start to look quite different again and it’s normal for them to look different,” Ms Hunter said.

“It’s unusual for them to all look the same in terms of what’s happening to prices, and that difference between houses and units.

It’ll be interesting to see how they start to diverge once again as we get into a different phase of the pandemic and beyond as well.”

Figures in the report have demonstrated that this divergence has already been at play in Sydney and Perth.

Median house prices in Sydney could rise by 8.3 per cent to over $1.54 million in 2022 (they increased by 26.0 per cent to $1.4 million in 2021).

However, looking ahead, affordability constraints are expected to dampen price momentum, with house prices expected to rise by 0.3 per cent in both 2023 and 2024.

On the other hand, Perth prices are expected to grow by 8.7 per cent in 2022, and further 5.4 per cent and 3.6 per cent in 2023 and 2024 respectively.

The price growth would be driven by more favourable housing affordability levels, a positive outlook for the resources sector (although simmering trade tensions pose some downside risk), and the resumption of migration flows.

Macro intervention to have larger impact on Sydney

Responding to questions about growing speculation that the introduction of new macroprudential measures to curb lending to mortgage borrowers is around the corner, Ms Hunter said that it would slow momentum in the housing market.

Federal Treasurer Josh Frydenberg recently confirmed that he had met with regulators to discuss the housing market and whether policy intervention would be required.

While mainstream media reports have suggested that regulators could intervene by imposing new debt-to-income ratio limits, there has been no confirmation on which route they could take.

As such, Ms Hunter said that while it is difficult to assess the impact on particular segments at this point in time, she suggested that imposing new debt-to-income ratio limits could pose more challenges for FHBs than other owner-occupiers.

She said: “While it’s really hard to be precise on the impact at this stage without knowing exactly what regulators would consider doing, we know from previous experience that these kinds of moves absolutely [dampen] momentum across the market.

“How it dampens momentum depends on what exactly they do.”

In particular, Sydney would be more exposed to the impacts of any regulatory intervention than the other markets where housing affordability is more “stretched” and debt levels are higher relative to income, she said.

Mr Frydenberg said this week at a doorstop interview that “the investors or the first home buyers or others who may be affected by this will be a very small proportion of the overall market”.

[Related: Building more homes could cut prices by 20%: Grattan Institute]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.