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Why Australia's house price recovery is about to flatline

The key drivers of house prices are starting to align to suggest a slowing over the next few months.

Heart rate monitor flatline over generic housing picture.
House prices have grown by roughly 7 per cent this year but are they about to flatline? (Source: Yahoo Finance)

At the start of 2023, there was an abundance of stories calling for a deep and protracted house price collapse.

Some people - keen to get a headline rather than focusing on quality analysis - were predicting house prices would fall 20, 25 or even 30 per cent. This scaremongering was saying that the dwelling you paid $800,000 for would be worth as little as $560,000 as the price crash unfolded.

Also by the Kouk:

Credible forecasters, conversely, were examining the facts with high-quality, sober analysis of the variables that drive house prices. They were expecting prices to fall around 7 per cent, for there to be a bottoming out in early 2023 and then a moderate house price rise through 2023 and into early 2024.


As it turned out, house prices - according to Corelogic data - did fall 7 per cent in the downturn and they started rising in early 2023. There was hot demand for housing from the reopening of international borders, in concert with a severe shortage of dwellings to buy or rent. The tight labour market and surging building costs also helped underpin the forecasts for prices to move higher.

The humiliation of the house-price pessimists was deep.

We know now that it was, as usual, the fact-based and sensible analysis that won out. The latest Corelogic results reveal that, Australia-wide, house prices are up around 7 per cent since the early 2023 low and are close to hitting new record highs.

It is no surprise that the house price gloomsters of 2022 and early 2023 have been quiet in recent times, hoping their headline-grabbing tosh of the time for record house price falls is forgotten.

For the sensible analysts, conversely, it is a good time to update the outlook based on recent trends in supply, demand, the labour market and other demographics.

House price growth to slow

The key drivers of house prices are starting to align to suggest a slowing in the rate of price increase over the next few months. This means nation-wide price growth is set to ease to 0-0.5 per cent a month rather than repeat the 0.5-1 per cent monthly increases that have been seen since early this year. This translates to house prices only rising by about 4 per cent in 2024 after a rise of close to 10 per cent in 2023.

There has been a clear lift in dwelling supply in recent months, with new listings for sale rising towards what are considered more normal levels. Buyers have a lot more choice than even a few months ago. At the same time, the frenzied demand that accompanied the reopening of the borders is starting to top out. To be sure, population growth is still solidly positive for house prices but the sudden, sharp shock of rampant population growth in 2022 and 2023 is set to taper off.

At the same time, the labour market is softening with the unemployment rate already edging higher - expectations are squarely pointing to a move to 4.5 per cent, or higher, in the next year or so from the 2022 low of 3.4 per cent.

The banks, who stress-test their mortgage portfolio on a regular basis, point to a weakening labour market as the main concern for the health of their balance sheets and any associated rise in bad and doubtful debts from housing. This makes any severe and unexpected weakness in the labour market a major downside risk to house prices.

But even a moderate softening in labour market conditions will take pressure off rising prices.

In line with the fall in inflation, building material costs are also easing, as is the shortage of construction workers – labour costs in other words. This should help property builders and developers to ramp up new construction, although this is a longer-run issue in any analysis of house price trends. In simple terms, the pass-through of higher costs will ease as the construction cycle heads towards an upswing in 2024 and 2025.

All of this points to a moderation in the house price cycle in the year ahead.

For 2024, nation-wide house prices are likely to have moderate annual growth of 4 per cent, with some cities vulnerable to small price falls.

The proverbial house price crash is unlikely unless of course the unemployment rate spikes above 5 per cent and immigration levels are unexpectedly slashed.

Stay tuned.

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