The Australian housing market has steadily reaccelerated since the middle of this year. House prices across most capital cities had been falling for 21 consecutive months, but finally bottomed out in around May and are now rising again.
Just last month, house prices rose at their fastest rate in more than four years and have already regained a third of the past two years’ losses.
There are three main contributing factors to the recent turnaround:
- First, the RBA has cut interest rates three times since May, lowering the cost of borrowing for households.
- Second, the coalition government’s success at the Federal election in May removed some of the perceived risks to the capital gains discount and negative gearing, locking in these favourable housing policies for investors.
- Finally, the Australian Prudential Regulation Authority reduced the interest rate serviceability measure that banks are required to use when assessing home loan applications. This has resulted in a relaxation of lending standards and an increase in successful applications.
Ultimately, these factors have all contributed to more buyers entering the national property market, however the number of new listings of properties for sale is still much lower than a year ago and this limited supply is compounding price increases.
Whilst overall the outlook is positive for property investors, it is important to note the turnaround is not consistent across the country. The two main capital cities that have seen the biggest impact are, somewhat predictably, Sydney and Melbourne. Around 40% of Australia’s population lives in these two cities and price rises here have been much higher than in the rest of Australia.
Residential property prices have increased by around 5% in Sydney since May, and in Melbourne by around 6%. That’s a significantly steep jump in just a few months. Gains in Brisbane have been much smaller (1.1% in the three months to October), while Adelaide’s movement is minimal (just 0.1% in the three months to October). On the west coast, Perth remains out of sync with the rest of the country and house prices are still falling, down more than 21% since their peak.
It’s not unusual that house prices in Sydney and Melbourne have bounced back more strongly. The population in both cities continues to grow (2.1% in Melbourne and 1.6% in Sydney), and despite healthy home construction rates over the last few years, there’s still an issue of undersupply in parts of both cities.
According to CoreLogic, we can expect to see prices accelerate even further next year, with Melbourne hitting a new peak as early as January, Sydney following suit in the first half of the year and even Brisbane on track to recover to previous highs – wiping out accumulated losses dating back to 2017. The smaller housing markets in Canberra and Hobart have already reached new record levels.
Fuelling this growth will be further rate cuts from the RBA, with two more expected over the next twelve months. If the RBA continues to cut the cash rate to record lows, and economic growth fails to improve, the central bank may consider deploying quantitative easing in 2020 – although economists are divided on whether the RBA will reassess policy options rather than continuing towards negative rates. Nevertheless, a further relaxation in monetary policy should continue to reduce the cost of borrowing and drive house price growth.
We anticipate that residential property prices will rise another 5% after this initial bounce has run its course, with Sydney and Melbourne continuing to lead this growth. Barring a major economic downturn there appears to be a higher upside to this prediction that downside, and prices could conceivably rise even higher.
Subscribe below to Market Watch to receive my latest articlesDiana Mousina, Senior Economist
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