High demand, low supply ‘dominates housing trend’

Property values have risen for a second consecutive month, providing further evidence that the downturn in the property market may be over, according to the CoreLogic Home Value Index.

After falling 9.1 per cent between May 2022 and February 2023, property values increased half a per cent in April following a 0.6 per cent lift in March.

Sydney saw the most significant gains with a 1.3 per cent rise in April and a 3 per cent increase since January.

Many economists interpreted the rise in values in March as a brief bounce, predicting that prices would resume their downward trend as interest rates continued to impact buyers.

“It’s looking increasingly likely that prices have bottomed as a deteriorating demand and supply imbalance dominates,” said AMP chief economist Shane Oliver.

“Solid auction clearance rates, signs of a turn up in housing finance and a pickup in upper end property prices provide confirmation of the upswing.”

The surge in immigration is one of the factors driving driving the worsening demand and supply imbalance.

“Immigration has returned far quicker than expected and is now likely to be around 400,000 this financial year, which is well up from 5940 in lockdown impacted 2021 and well above the 235,000 forecast in last October’s Budget,” said Mr Oliver.

“The rapid rebound in immigration over the last 18 months roughly equates to demand for an extra 200,000 dwellings.

“At the same time the supply of new dwellings has slowed with labour shortages, cost increases and falling building approvals.”

The lack of housing supply is reflected in capital city rental vacancy rates which are at a record low of around one per cent.

“This is leading to a surge in rents. This in turn is likely driving some to seek to buy a property as its harder to find rental property,” said Mr Oliver.

There’s also a growing expectation that the RBA cash rate is at or close to peaking.

With supply and demand continuing to worsen, the government is looking at a range of initiatives to try and address the challenges with housing.

In recent days it announced it would expand the criteria under the Home Guarantee Scheme to enable more people to participate in a range of different guarantee schemes.

The eligibility criteria for the First Home Guarantee, the Regional First Home Buyer Scheme and the Family Home Guarantee will be expanded. Some of the changes include incorporating permanent residents into the guarantee schemes, broadening eligibility criteria for joint applications, an expansion to allow more single guardians use the Family Guarantee, and a change that enables those who have previously owned properties to join the scheme.

This follows other previously announced measures including an increase in the depreciation rate from 2.5 per cent to 4 per cent per year for eligible new build-to-rent projects where construction commences after 9 May 2023.

The government also plans to reduce the withholding tax rate for eligible fund payments from managed investment trusts to foreign residents on income from newly constructed residential build-to-rent properties after 1 July 2024 from 30 to 15 per cent, subject to further consultation on eligibility criteria.

The headwinds facing the property market remain significant despite the recent increase in values, with further pain yet to come from higher interest rates.

“Household debt servicing payments as a share of income have already risen to their highest in more than a decade and a rise in the cash rate to 4.1 per cent would see them pushed to record levels,” said Mr Oliver.

Recent research from Roy Morgan has estimated that there would be 171,000 more mortgagors at risk of mortgage stress if the RBA raises the cash rate by 25 basis points today.

The RBA has estimated that 40 per cent of home borrowers have less than three months of prepayment buffers, 15 per cent of variable rate borrowers will have negative cash flow by year end if the cash rate rises to 3.75 per cent.

In addition, close to 900,000 fixed rate mortgages are due to reset to interest rates that are more than double their initial level, with much of this due to occur this quarter and the next.

"At the same time unemployment is likely to rise and household size may rise due to the surge in rents. This all runs the risk of another hit to buyer demand & more distressed sales,” said Mr Oliver.

“The conflicting forces of higher rates and a slowing economy, but a chronic demand and supply imbalance make the property market very hard to read with greater than normal uncertainty. Interest rates, unemployment and auction clearance rates are key indicators to watch.”