House prices shine amid economic uncertainty

·4-min read
House prices are a shining light in the midst of bleak economic indicators. (Source: Getty)
House prices are a shining light in the midst of bleak economic indicators. (Source: Getty)

Amid the economic fall-out from the drought and bushfires and the unfolding problems associated with the coronavirus, the Australian housing market is seeing further strong price gains, a tight rental market and a turning point in new construction.

According to the Corelogic data, house prices have risen 9 per cent from the low point in July 2019, and are likely to hit fresh record highs by April, clearing out the earlier price falls.

The concerns for the economy that occurred with the destruction on household wealth between the middle of 2017 and the middle of 2019 as house prices dropped over 10 per cent, are unambiguously reversing.

With first home buyers stepping into the market, taking advantage of still decent affordability factors, house prices rises are likely to continue through the course of 2020. Strong investor demand is adding to the upward price pressures.

Three cheers for supply and demand

Fundamentally, the price increases are being driven by the Economics 101 creed of supply and demand.

New supply is faltering in reaction to the sharp fall in new building approvals in the last few years.

The total number of new dwelling approvals was 239,700 in 2015, 234,300 in 2016 and 225,000 in 2017. These were record high numbers of building approvals.

This construction boom was one reason why prices fell – a huge increase in supply that in some region saw a glut of property on the market.

The outlook

Fast forward to today and the housing market is being influence by what looks to be a sharp fall in new supply. In 2018, there were just 211,600 building approvals which dropped further in 2019 to 172,500 which was the lowest since 2012. Early signs suggest 2020 will see around 190,000 new dwelling approvals.

The pipeline of new dwellings is weak.

This is important because the source of demand for dwellings, Australia’s population growth, has been explosive, rising by an 405,100 per annum in 2016, 383,700 in 2017, 396,800 in 2018 and approximately 380,000 in 2019.

There is no sign of any material pull back in population growth which will fuel ongoing high demand for housing.

The interaction of demand and supply which was recently a negative for house prices (high supply), will be a positive for the next year.

A construction rebound?

The recent building approvals data show what looks to be a cyclical bottom in the number of new dwellings approved.

With credit a little easier to get, interest rates low and the recovery in house prices encouraging property developers to build, new dwelling supply is set to emerge during 2020.

If this pick up is strong, which is likely, once those new approvals are finished dwellings, become complete, the pace at which house prices increase is likely to tail off.

Whether this leads to actual price falls will be determined, as it usually is by trends in population growth, any regulatory changes on lending rules and interest rate changes.

Working on a reasonable and realistic scenario where neither side of politics trims immigration inflows, where credit will remain relatively easy to get and interest rates remain low, price falls are improbable.

But that is more likely to be an issue into 2021.

For this year, Australia-wide prices are likely to see increases of close to 10 per cent, with fresh record highs registered before mid-year.

The wealth effect of this on household finances is likely to be powerful enough to see reasonable growth in consumer spending and further improvements in household balance sheets.

The housing market remains fundamentally driven by supply and demand.

In 2020, it looks these dynamics will be strongly positive for house prices which is good news for banks, household wealth and the economy more generally.

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