‘Double dip’ on the horizon for property prices, says economist
While a dwelling supply shortfall has had the upper hand this year, high interest rates and their lagged impact are now coming to the forefront, according to a lead economist.
National average home price growth has slowed to 0.6 per cent in November following a 0.8 per cent rise in October, and a peak of 1.2 per cent in May, according to CoreLogic data.
While the national 8.3 per cent rise from a low in January has been fuelled by supply shortages from surging immigration levels and less interest rate sensitive buyers seeking to take advantage of last year’s price falls, AMP’s chief economist Shane Oliver noted that housing prices are showing clear signs of slowing again as the prospect of future rate hikes shakes up the market.
This is particularly evident with prices dropping in Melbourne, Hobart and Darwin last month, with falls of 0.1 per cent, 0.1 per cent and 0.3 per cent respectively. Sydney prices have also begun to fall in the last week or so.
Meanwhile, Perth leads the charge with 1.9 per cent growth in November, while Brisbane and Adelaide see dwelling prices swell by 1.3 per cent and 1.2 per cent, respectively.
However, Mr Oliver noted that the three states often lag swings in Sydney.
Bracing for a property market ‘double dip’
With high interest rates getting the upper hand again, AMP now expects national average prices to fall around 5 per cent next year, revised from a 5 per cent gain, with Sydney and Melbourne to lead the trend.
“While we had been looking for a further rise in property prices next year, we have been concerned for some time that the rise in property prices has run ahead of itself with a high risk of another leg down,” Mr Oliver said.
“With momentum slowing sharply, this now appears to be starting to unfold and as such we have revised down our home price forecasts.”
While housing undersupply in the face of record immigration remains a strong force pushing home prices higher, this is expected to be offset by the impact of high and potentially still rising mortgage rates, alongside an expected rise in unemployment over the course of next year.
Even if rates have peaked, Mr Oliver warned, the hit to home buyer “capacity to pay” remains in place. He estimated that the capacity to pay for a home for a borrower with a 20 per cent deposit on full time average earnings is around 30 per cent lower than it was in April last year.
“The rapid reversal in the capacity to pay since May last year due to the surge in mortgage rates threatens a downwards adjustment in home prices at some point unless incomes rise dramatically or mortgage rates fall dramatically – both of which look unlikely,” he added.
Based on the Reserve Bank of Australia’s own analysis, roughly one in seven home borrowers were cash flow negative as at July, with Mr Oliver projecting that this has continued to worsen since.
The added pressure on household budgets and the risk of significantly higher unemployment due to sharp spending cutbacks means that an increase in listings by distressed sellers seems impending.
“Related to this, consumer sentiment remains very depressed with sentiment towards buying a dwelling is very weak and pointing to home price weakness, in contrast to this year’s strength,” Mr Oliver said.
He added that the fading strength in the property market was confirmed by a downtrend in auction clearance rates and home lending growth coming in at well below peak levels in November, suggesting that the rebound in home prices has come on low volumes with a softening in the upper end of the market in Sydney and Melbourne, where downturns often commence.