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Dangerous housing trend costs Aussies tens of thousands as 'forced sells' loom

The record property prices seen across Australia could finally be able to relax.

Stephen Koukoulas next to an overhead shot of Sydney's Double Bay with a large red graph going down
Stephen Koukoulas said the writing is on the wall for property prices to finally ease. (Source: X/Getty)

Forecasts for a crash in Australian house prices are a dime a dozen. For the past 15 or 20 years, barely a week has gone by without someone trotting out what is inevitably a poorly framed piece of "research" that concludes that house prices are about to crash, collapse or some such emotive description.

It is telling that these forecasts have been universally wrong. Never once have they been correct with each mini-pull-back in dwelling prices followed by a major increase with prices hitting unrelenting record highs.

Such forecasts of gloom are dangerous as they may encourage potential home buyers to postpone their decision to buy, in the hope that the whacky forecasts for 20 or 30 per cent price falls are correct and they will as a result save on their purchase price at these lower levels.

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Instead, with prices trending up year in and year out, the decision to postpone buying is inevitably costly. The cost is usually in the order of many tens of thousands of dollars.

According to CoreLogic data, nationwide house prices have hit record highs every month for the past year and, according to its high-frequency daily house price data, a further rise is almost certain for July.

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Before getting into the key issue at hand, it is important to note that house prices are very unlikely to "crash" over the next few years even though there are a series of issues that are starting to emerge that point to a period, perhaps lasting a few years, where dwelling prices are flat to slightly down, with divergences between cities and regional areas.

Decades of information about the issues that determine how the housing market works and what drives house prices presents a clear picture on the drivers of prices. These are starting to point to weaker house prices over the next couple of years – maybe longer.

It is clear that house prices are driven by demand via population growth and household formation, supply via the level of new dwelling construction, the health of the labour market and especially the level of unemployment, and building costs, including for materials and labour.

In the last few years, house prices rose strongly, underpinned by a few obvious and simple issues:

  • Buoyant demand from strong population growth.

  • Limited supply from weak construction and the move of many potential rental properties to Airbnb status.

  • A healthy labour market with the unemployment rate hovering near its lowest level in five decades and wages growth picking up. This fuelled strong lending.

  • Surging building costs including for material, labour and interest rates. The surge in the cost of building feeds directly into the sale price.

These are all changing and if the trend in these variables is sustained for any reasonable timeframe, house prices growth will stall and prices should stabilise or even ease.

One important issue to note is the recent ‘topping out’ in net immigration flows. The post-pandemic surge in population has ended and immigration is reverting to normal. This means that underlying demand for housing is cooling.

At the same time, new housing supply is no longer low, although there is still a shortage of dwelling in some cities and regions.

New listings of houses for sale are on the rise and while it is still early days, the government is starting to get traction with its plan for 1.2 million new dwellings to be built over the next five years.

This will be a ‘slow burn’ issue, but building approvals are starting a gentle trend higher.

Unemployment is rising. This is the most important issue lenders assess when writing a mortgage. No job, no loan. It is as simple as that.

If, as is likely, the unemployment rate heads to 5 per cent from the low of 3.5 per cent in 2023, not only will a large part of the population be unable to borrow, but there is a risk of a lift in forced selling as the newly unemployed struggle with mortgage payments.

The surge in building costs and labour shortages is also easing, meaning developers will be able to ramp up new construction in a cost-effective and profitable manner.

Altogether, these influences point to a period where house price growth will stall even if there is an interest rate-cutting cycle in the next few months.

How long this sluggishness in house prices lasts will be determined by trends in the factors that drive prices.

That said, it is distinctly possible that if there is a construction surge in 2025 and beyond, with a further cooling in population growth and the unemployment rate stays nearer 5 per cent than 4 per cent, dwelling prices could be weak for several years.

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