What better way to end the year than with an article on house prices?
This time last year, I stuck my neck out and forecast that house prices would drop by around 7 per cent from peak to trough in 2022. This was in large part due to the RBA hiking interest rates but also on the back of lingering oversupply issues linked to the prospects of only a moderate lift in immigration as uncertainty remained about the recovery from the COVID pandemic.
The consensus at that time was for house prices in Sydney and Melbourne to rise by around 6 to 7 per cent, with many forecasters looking for double-digit increases.
Also by the Kouk:
According to the two main estimates of house price data, Corelogic and PropTrack, house prices are down by between 4 and 8 per cent from the peak, with falls continuing to unfold.
All told, it was a solid forecast a year ago even though it is now certain the total fall will be a little more than the 7 per cent I was looking for.
It is somewhat surprising that house prices are continuing to fall. Sure, interest rates have risen, but a number of the other key drivers of house prices are positive for prices, not negative.
At this point, it must be noted that there is not a single Australian housing market. From state to state, city to city, the regions, and even by suburb, price swings vary widely. Prices in some areas are still rising despite the interest rate hikes.
Just on that point, according to Corelogic data, since the first rate hike in May 2022, Adelaide prices are more than 2.5 per cent higher, while Perth prices are up 0.5 per cent. Price falls have been seen in Sydney - which is down nearly 12 per cent - and Melbourne and Brisbane - both down around 8 per cent.
Quite clearly, as should be obvious to anyone analysing house prices, there are factors in addition to interest rates that are impacting prices.
Where to now?
With my price target now reached, and a year’s worth of fresh and important economic, health and policy news to incorporate into a new forecast for housing, it appears the low for house prices is near.
Prices are likely to have one final down-leg through to the first quarter of 2023 as a tightening in credit bites and the cyclical effect of the past couple of rate hikes impact. Prices could well edge down another 3 or 4 per cent.
But, as the economy moves towards the middle of 2023, the conditions supporting prices should assert themselves.
The peak in the interest rate hiking cycle will be in. Borrowers will be less fearful of taking out loans as a result.
A lift in housing demand from a resurgence in population growth will be evident during 2023, which will be at a time when fresh housing supply is expanding at only a moderate pace. The supply – demand imbalance is already impacting the rental market where vacancy rates are hovering near record lows and asking rents are rising by around 15 per cent.
Another vital factor is the ongoing strength in the labour market. While unemployment is likely to rise a little as the economy slows, it will remain very low on a historical basis and wages growth is set to further increase. A healthy labour market is a key factor in assessing house price trends, and the news remains positive.
One under-appreciated aspect of trends in house prices is the cost of building. Clearly, if building costs are rising at a pace relative to house prices, it is quickly unprofitable for developers to build. As a result, they will not add to supply. With the cost of materials and labour - mainly tradespeople - rising rapidly at the moment, and with house prices generally tilting lower, new dwelling construction is set to fall away – markedly. As this occurs supply will falter at the time demand is surging.
In other words, the mix of factors suggests the time for a bottoming in house prices is near.
Do your own research
Of course, any decision to buy is very much an individual one, based on personal circumstances, especially finances. Indeed, this article is not investment advice – do your own research and seek professional input before deciding to buy a property. It is a big decision with many factors impacting your ability and willingness to buy.
But, based on many decades of information and data, one of the key issues for long-run financial security is buying a house to live in. From a financial perspective, it is a good thing to do.
Downward blips in house prices and upward moves in interest rates can - and do - cause some anxiety for new buyers. They happen every few years, along with changes in the business cycle but, over time, prices do grind higher and interest rates go down and up, and down and up again.
Over a 15-year period where house prices rise by, say 4 per cent per annum - which is actually below the long-run average in Australia - the cumulative rise will be around 80 per cent. That $1 million house today would be worth $1.8 million in those circumstances. And, by the way, your household’s income over 15 years is likely to have increased by close to 100 per cent, making the size of any loan taken today almost trivial.
All of which means buying about now, even if it is not the low point in the cycle, will be all but irrelevant to anyone with an appropriate long-run time frame for their purchase.
Clearly, getting a bargain soon as house prices fall will make that long-term investment even more attractive.