The Australian Housing Market Is a Double Dip Downturn Looming?

The Australian housing market has been a topic of much speculation and concern in recent months. As house prices continue to rise across most capital cities, there is growing apprehension about the sustainability of this upward trend. Many experts are now warning that the market is overvalued and vulnerable to a potential downturn. In this article, we will explore the current state of the Australian housing market and the factors that could contribute to a double dip downturn.

The Overvaluation of House Prices

According to Tim Lawless, the research director at CoreLogic, house prices in Australia are already “hideously overvalued” when compared to underlying fundamentals. He believes that the market is currently 20 to 25 per cent overvalued and is at risk of a significant correction. Lawless points to the potential impact of rising interest rates and a slowing economy as key factors that could trigger a market struggle and a potential fall of 8 to 10 per cent, similar to what was witnessed in 2022.

The Slowdown in Growth

Lawless also highlights the clear slowdown in the quarterly pace of growth in housing values. He notes that since June, there has been a loss of momentum in the market. As advertised stock levels rise and buyer demand weakens due to low sentiment and stretched affordability, the outlook for housing markets is becoming less positive. Lawless states that the rate of growth has turned, and the market has lost momentum in recent months.

The Likelihood of a Double Dip Downturn

Shane Oliver, the chief economist at AMP, believes that the risk of another leg down in prices is still high. The recovery in the housing market is fragile, and the full impact of higher interest rates is yet to be seen. Oliver acknowledges that the market has shown resilience so far but warns that a further increase in interest rates, coupled with a slowdown in the economy, could trigger another downturn in property prices. He emphasizes the importance of monitoring listings and the unemployment rate to gauge the potential impact on the market.

Affordability and Borrowing Capacity

One of the key factors contributing to the vulnerability of the Australian housing market is affordability. As interest rates rise, affordability worsens, and borrowing capacity decreases. Oliver explains that the capacity to pay for property for a buyer on average full-time earnings with a 20 per cent deposit has declined by 29 per cent since interest rates started to rise. Historically, this has led to weaker property prices. If interest rates continue to rise and the economy slows, demand may be further constrained, leading to a potential downturn in prices.

Economic Conditions and Vendor Activity

Lawless highlights the influence of economic conditions, vendor activity, and the trajectory of the cash rate on the momentum of the housing market recovery. If economic conditions weaken due to higher interest rates, more households may face mortgage serviceability issues, prompting them to sell. This increase in supply, combined with limited buyer demand, could put downward pressure on housing values. Additionally, a further rise in interest rates could dampen consumer sentiment, leading to lower housing market activity. The correlation between housing, purchasing activity, and consumer sentiment is significant.

The Resilience of the Housing Market

Despite the concerns surrounding the Australian housing market, it has shown remarkable resilience in recent years. House prices have defied gloomy predictions and continued to rise, even in the face of rising interest rates. Phil O’Donaghoe, the chief economist at Deutsche Bank, attributes this resilience to the strong labor market. The unemployment rate has been more resilient than expected, and this has supported the housing market. Additionally, households have responded to cost-of-living pressures by increasing their supply of labor, resulting in a more dynamic household sector.

The Role of Interest Rates and Economic Shocks

The impact of interest rates on house prices is a subject of much debate. While rising interest rates may not directly cause house price declines, they can contribute to reduced affordability and borrowing capacity, which could lower demand and prices. Paul Bloxham, the chief economist at HSBC, believes that for prices to fall, there would need to be a larger negative economic shock to the overall economy. Such a shock could come in the form of significantly higher interest rates, a sharper weakening in the labor market, or a negative global event. However, these scenarios are not currently the central case for most economists.

The Future of the Australian Housing Market

The future trajectory of the Australian housing market remains uncertain. Carlos Cacho, the chief economist at Jarden, expects a gradual rise in prices to continue over the next 12 to 18 months. While there has been an increase in listings, the supply of well-located family homes remains low, which has driven up prices. However, Cacho expresses concern about the current trend of wealthier buyers dominating the market, as it excludes many average buyers and contributes to a lack of affordability. He believes that this situation is unsustainable in the long term.

In conclusion, while the Australian housing market has experienced a strong recovery in recent years, there are growing concerns about its sustainability. The overvaluation of house prices, the slowdown in growth, and the potential impact of rising interest rates and a slowing economy all pose risks to the market. However, the resilience of the housing market and the strong labor market have thus far supported prices. The future of the Australian housing market will likely depend on a variety of factors, including economic conditions, interest rates, borrowing capacity, and affordability.