Property market set for ‘rough ride’ in 2024 as momentum slows: AMP

Average home prices reached a record high in December but are starting to show signs of slowing with gains now weakening, according to AMP chief economist Shane Oliver.

CoreLogic data indicated that national home prices rose 8.1 per cent during 2023, with Brisbane, Adelaide and Perth seeing the biggest gains.

However, Dr Oliver said the housing market is slowing again following the lagged impact of high interest rates.

Monthly growth slowed further to 0.4 per cent in December, down from the peak of 1.3 per cent in May.

Melbourne experienced a second monthly fall in prices, while Sydney saw a sharp slowdown in gains at just 0.2 per cent for the month of December.

“The slowdown appears to reflect high mortgage rates getting the upper hand again over the chronic housing supply shortfall, along with poor affordability, rising listings and depressed confidence,” said Dr Oliver.

The gains across the housing market have been diverse, with prices rising the most in Brisbane, Adelaide and Perth due to relatively better affordability and lower levels of new supply, particularly compared to Sydney and Melbourne.

“Regional centres and Hobart have also been constrained by a normalisation of migration to the regions post the pandemic,” the chief economist said.

“While Brisbane, Adelaide and Perth are still booming, it’s noteworthy that they often lag swings in Sydney.”

Dr Oliver said while there has been concern for some time that the rise in property prices in 2023 was running ahead of itself with a high risk of another leg down, this may now be starting to unfold with momentum slowing sharply.

“On the one hand the chronic housing undersupply in the face of record immigration numbers remains a strong force pushing home prices higher,” he said.

“However, against this, the impact of high and possibly still rising mortgage rates is still feeding through and unemployment is likely to rise significantly this year. This will make for a much rougher ride for the property market in 2024.”

Even if rates do remain unchanged, Dr Oliver said the huge hit to home buyer capacity to pay remains.

“We estimate 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 2022,” he stated.

“The rapid reversal in the capacity to pay since April 2022 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.”

The reduction in capacity to pay appears to have been masked in 2023 by buyers who were less interest-sensitive because they had already saved up big deposits or could rely on the bank of mum and dad.

“It’s likely that this pool of buyers is now running low,” said Dr Oliver.

He also noted that new listings have been trending up since winter and that there is a high risk of increased listings by distressed sellers.

“Based on the RBA’s own analysis, roughly one in seven home borrowers were cash flow negative in July, and this is likely now higher. The pressure on household budgets this implies is immense and means sharp spending cutbacks which runs the risk of significantly higher unemployment,” said Dr Oliver.

This may lead to a further increase in listings, he said.

“While the housing shortage will continue to worsen, it’s likely that we have now seen a peak in immigration levels with student arrivals likely to slow a bit after their reopening from COVID rebound and the government moving to tighten visa requirements,” he explained.

“Rents are also likely to hit an affordability limit as more turn to shared accommodation or young people choose to stay at home with their parents longer. This will result in some reversal of the pandemic-driven decline in average household size with a likely flow on effect to the home buyer market.”

The other sign that the strength in the property market is fading is the downward trend in auction clearance rates and home length growth dropping well below peak levels.

“The combination of slowing home price growth since May and slowing auction clearance rates from the low to mid 70 per cent range in May to below 60 per cent in December suggest that housing demand is struggling to keep up with rising listings in the face of high mortgage rates, poor affordability and cost-of-living pressures,” the chief economist said.

“The supply shortfall in the face of strong immigration had the upper hand in 2023, but high interest rates and their lagged impact along with poor affordability now appear to be starting to reassert themselves.”

Dr Oliver predicts there will likely be a fall of between 3 to 5 per cent in property prices this year.

“There is likely to be a big range around this with Sydney and Melbourne more at risk given higher debt levels and Adelaide, Brisbane and Perth likely to remain relatively stronger with lower listings, a benefit from interstate migration and lower debt levels,” he said.

“The ongoing housing shortage is likely to limit falls, but a deep recession that pushes unemployment up sharply causing a sharp increase in distressed mortgages could offset this pushing prices below their January low, which would imply an 8 per cent plus fall in average property prices. This is not our forecast but its a risk worth keeping an eye on.”