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House prices go boom, but is a bust around the corner?

·5-min read
What next for Australia's property market? REUTERS/Mick Tsikas
What next for Australia's property market? REUTERS/Mick Tsikas

Right around Australia, house prices are rising strongly.

To be sure, some of the current rebound follows a period of weakness during the Covid-19 lockdowns in 2020, but the force of the price increases in early 2021 is reaching record levels.

Auction clearance rates also remain high and the daily house price data from Corelogic confirm strong gains over the past few months.

The current cyclical price surge is linked to a few basic issues – low interest rates, the easy availability of credit, government incentives and a surge in first home buyers tapping the market, satisfying at least part of the pent up demand that had been building over recent years.

There are some issues ahead which cast doubt on the sustainability of these price gains.

Most of the issues supporting house price growth are unlikely to still be in place at the end of 2021 and into 2022. In particular, the rise in government bond yields is a precursor to higher mortgage interest rates, at least for some fixed term loans. Further, there is growing pressure for APRA to impose tighter lending rules which is likely to make it harder for some borrowers to gain access to credit.

Furthermore, some of the government incentives have or will be coming to an end which could damped the growth in first home buyer activity.

Supply and demand are a big threat

There are bigger issues emerging for house prices as I write.

These involve the interplay of supply and demand. Supply coming from the construction of new dwellings; demand being driven by broad population growth and more specifically, net immigration flows.

History shows that the strong rise in house prices over many years was driven by population growth with demand outpacing the ability of builders to construct more dwellings.

The economics of this is simple.

This also shows up in the State and Territory data on population and capital city house price growth over the past decade.

The following presents a short examination of the supply and demand pressures in each State and Territory and the capital cities. The findings are based on the three simple facts: Population growth (demand), the change in the number of new dwellings (supply) and the change in house prices.

The changes are from 2011, based on the latest Australian Bureau of Statistics data.

Sydney

Strong house prices:

Since 2011:

  • 15.6 per cent increase in the number dwellings in NSW.

  • 12.8 per cent increase in population.

A slight dwelling shortage.

Sydney house prices up 67.8 per cent.

Melbourne

Strong house prices:

Since 2011:

  • 21.8 per cent increase in the number dwellings in VIC.

  • 20.1 per cent increase in population.

A slight dwelling shortage.

Melbourne house prices up 47.7 per cent.

Brisbane

Moderate house prices:

Since 2011:

  • 19.0 per cent increase in the number dwellings in QLD.

  • 15.3 per cent increase in population.

A moderate oversupply of dwellings.

Brisbane house prices up 25.7 per cent.

Adelaide

Moderate house prices:

Since 2011:

  • 10.2 per cent increase in the number dwellings in SA.

  • 7.7 per cent increase in population.

A moderate dwelling shortage.

Adelaide house prices up 22.7 per cent.

Perth

Very weak house prices:

Since 2011:

  • 19.4 per cent increase in the number dwellings in WA.

  • 12.2 per cent increase in population.

A significant oversupply in dwellings.

Perth house prices up 1.8 per cent.

Hobart

Strong house prices:

Since 2011:

  • 8.3 per cent increase in the number dwellings in TAS.

  • 5.7 per cent increase in population.

A slight dwelling shortage.

Hobart house prices up 56.8 per cent.

Darwin

Very weak house prices:

Since 2011:

  • 16.9 per cent increase in the number dwellings in the NT.

  • 5.9 per cent increase in population.

A significant oversupply in dwellings.

Darwin house prices down 9.6 per cent.

Canberra

Moderate house prices:

Since 2011:

  • 24.8 per cent increase in the number dwellings in the ACT.

  • 16.6 per cent increase in population.

A significant oversupply in dwellings.

Canberra house prices up 32.0 per cent.

The results

Darwin and Perth are the two cities where the increase in the number of new dwellings has significantly out-paced population growth and they have had the weakest markets in terms of house prices.

Cities with a dwelling shortage, Sydney, Melbourne and Hobart, saw strong gains in house prices.

Looking ahead

Australia’s population growth has stalled. There is a small increase in natural population growth (more births than deaths) but immigration is actually going backwards as the border closures associated with Covid-19 continue and people leave Australia.

There will be no immigration in Australia until the Covid-19 issue is dealt with when there are mass vaccinations. And even then, it is likely that the immigration inflows will be well below pre-Covid-19 levels.

At the same time, there is strong pipeline in new dwelling construction which will add significantly to supply through 2021 and into 2022.

Boiled down, there will be a significant oversupply of dwellings emerging over the next couple of years and given the history of supply and demand pressures, house price growth is likely to be weak, regardless of interest rates, regardless of government incentives.

It is a curious house price mini-boom at the moment brought on by a few positive influences and a relief that the Covid-19 pandemic didn’t hit us harder.

It looks unlikely to be sustained for much longer and when it is clear there are too many properties for the current population, the supply and demand dynamics should see prices weaken.

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