Yahoo Finance OPINION: The fall in house prices is coming to an end
With supply not meeting the demand for houses, prices can't go much lower.
House prices have almost stopped falling. Who would have thought it?
In the first three weeks of February, the Corelogic house price “five cities” series has fallen by just 0.1 per cent. If the momentum is sustained, prices are likely to be slightly down or even flat in March, which will be a clear signal the worst is over for house prices.
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A year ago, some bombastic forecasters were looking for house price falls of 25 or even 30 per cent. They got great media coverage but, alas, look to be wrong.
The key issue behind house prices getting close to bottoming out is strong demand, as population growth has boomed, while new housing supply is increasing only moderately.
Supply and demand
Anyone who has studied economics in high school, or perhaps beyond, knows that one of the most basic economic concepts is the relationship between supply, demand, and prices.
If, for example, there is a shortage of a particular good or service - relative to the demand for that good or service - the price will increase. If there is weakness in demand - relative to a given level of supply - prices will fall. It is one of the easiest economics concepts to digest.
We witness this effect on a daily basis in markets like oil. A supply disruption for oil or a change in usage because of a surge in economic activity in China, for example, sees the oil price rise. Or when the oil-producing companies say they will boost production, which will add to supply, prices fall.
You get the drift.
It is a similar issue for the Australian housing market.
While interest rates, credit availability, unemployment, household incomes and other issues have a cyclical impact on house prices, at the end of the day, and over the medium to long term, there is an interaction of supply - the construction of new dwellings - and demand - from population growth and household formation - that leads to price changes in houses.
You can throw in building costs as an issue – materials and labour costs are a long-run structural issue in prices too. No builder is going to build a house if the cost of construction is more than the sale price, and building costs right now are booming.
House prices are bottoming
According to the Corelogic house price data, so far in February, Sydney prices are up 0.1 per cent, Adelaide and Perth are down 0.1 per cent, and Melbourne and Brisbane down 0.4 and 0.3 per cent, respectively.
While this all may be a short-run data quirk, when account is taken of auction clearance rates, the extreme tightness in the rental market and a rise in household incomes, it is more likely to be a clear signal that the housing market is in for a period of relative stability after the falls in 2022.
Where to now for house prices?
Over the next year or two, high interest rates and a probable rise in the unemployment rate will work to dampen house prices. As they always do in a cyclical sense.
Offsetting this are the powerful effects of supply and demand and the surge in building costs, which will support prices. Relative to population growth, there are simply not enough new dwellings coming onto the market. There is a shortage.
After what looks like being a peak-to-trough fall in Australia-wide prices of around 9-10 per cent from April 2022, prices in the next few months are likely to experience a period of consolidation. That means a few small ups and downs, from city to city and region to region, but overall, not much change.
From the latter part of 2023 and into 2024, when the rampant surge in Australia’s population feeds extensively into demand for housing at a time when supply growth is moderate, prices are likely to be skewed higher. Price rises averaging around 0.5-1 per cent per quarter for the second half of 2023 are a reasonable expectation.
At this stage, it is difficult to forecast a surge in prices given the outlook for interest rates and unemployment but, if by early 2024 there is an interest-rate-cutting cycle in the offing, house prices could well kick up at a solid pace closer to 1-1.5 per cent per quarter, on average, in 2024.
As always for housing, there are many moving parts but, for now, it appears the low point in the house price cycle is near.
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