Every man, woman and their pet dog are upbeat about house prices. Or so it seems.
'Get set for a house price boom' is a common refrain from those wanting to grab a headline.
Indeed, 2021 is kicking off with some strength in the housing market and it is reaching the point where economists are trying to out-do each other to see who can come up with the most upbeat price increase in 2021 and 2022.
Six per cent gains? How about 8 per cent? What about 16 per cent over the next two years!
To be sure, housing has found support in the last few months following the slump evident around the middle of 2020 when prices fell in most cities as the COVID-19 recession hit.
That context is very important when it comes to what might be termed a ‘mini-boom’ in the wake of the general opening up of state borders, low interest rates, easier credit and some pent up demand, especially from first home buyers.
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A little context: House prices are still weaker today than a year ago
House prices have risen strong in recent months.
Based on the excellent CoreLogic data base, in the last three months, prices are up around 2.5 per cent in Sydney and Melbourne, 3 to 3.5 per cent in Brisbane, Hobart, Canberra and Adelaide, nearly 4.5 per cent in Perth and over 6.5 per cent in Darwin. Prices in regional Australia are up over 4.5 per cent.
These look to be solid rises.
But note the following background from a blend of CoreLogic and Australian Bureau of Statistics data before getting too excited about the house price boom:
Sydney: Prices today are lower than in June 2017.
Melbourne: Prices today are lower than in December 2017.
Brisbane: In the 3 years since the end of 2017, house prices are up a total of 7 per cent, for an average annual increase of 2.25 per cent.
Adelaide: Since the end of 2018, prices are up around 6.5 per cent – so Adelaide is doing well over this short timeframe.
Perth: Prices today are substantially lower than in 2013 and 2014.
Darwin: Prices are hugely below 2012 to 2014 levels, even though it has been the strongest capital city for house price growth over recent months.
Canberra and Hobart: Prices continue to grind higher to be among the best performing housing markets in recent years.
Why the need for caution about the boom
The mini-boom right now follows a period of weakness. The normal ups and downs of the house price cycle. The current upswing is being driven by easier credit, low interest rates and confidence that the recession is over as COVID-19 is successfully tackled within Australia.
This is largely understandable, but it ignores some of the critical issues that are important in driving longer run house price changes.
Most important are supply and demand.
The latest building approvals data suggest that the number of dwellings in Australia will increase by around 150,000 in 2021.
This is good news for the building industry, but there is a real risk that many of these dwellings will remain empty given that population growth is so weak, with immigration stalled, there will be demand for just 25,000 to 30,000 additional dwellings.
Unless the international borders reopen and immigration inflows recover strongly, there will be a significant oversupply of residential property through 2021.
This is clearly a medium term structural downside risk to prices.
All up, the current mini-boom in prices and the relief COVID has been contained will move out of the house buying mind set soon. The house price pick up looks like it will peter out in the next few months.
While interest rates will remain low for some time and credit easily accessible, if there are too many properties on the market in the months ahead relative to demand, prices will ease.
It seems most likely that house prices will rise by 2 or 3 per cent in 2021, with some cities and regions doing better than others, as has always been the case.
But to expect strong double digit house price gains requires either an unexpected lift in population growth or a rapid slump in new construction which will limit the increase in new supply.
Neither of these look likely.