Australian Housing Market A Closer Look at the Contradictory Forces

Introduction

The Australian housing market has been experiencing some puzzling trends lately, leaving economists and experts confused about its future trajectory. While some indicators point to a potential boom in prices, others suggest a possible downturn. In this article, we delve into the conflicting factors affecting the Australian housing market and explore different perspectives on what lies ahead.

Rising Listings: A Sign of Early Spring Selling Season or Confidence in Peaked Interest Rates?

New listings in certain cities have surged by 20 percent in August, indicating an early start to the traditional spring selling season. However, Nicola Powell, chief of research and economics at Domain, offers a different interpretation. According to her, the increase in housing stock is more likely a reflection of buyers and sellers growing more confident that interest rates have reached their peak.

Powell argues that a combination of lingering FOMO (fear of missing out) in the market and strong population growth can continue to drive prices upward. However, she cautions that the significant rise in properties for sale may dampen the rapid price increases witnessed in the June quarter. Sydney, for instance, saw prices surge by 5.3 percent, double the expected rate for a normal upward cycle, a trend that is unlikely to be sustained.

Confusion in the Market: Shane Oliver’s Perspective

Shane Oliver, head of investment strategy and chief economist at AMP, admits to being bewildered by the current state of the housing market. He points out that last year’s price decline happened much earlier than expected, considering the lagged effect of interest rates on the economy. On the other hand, the sharp increase in prices this year, driven by low stock levels, also defies logic since the anticipated lagged effects of rate changes have yet to materialize.

Oliver identifies two contradictory forces at play. Firstly, historical supply shortages are exacerbated by booming immigration. AMP estimates that the demand requires the construction of 220,000 to 240,000 homes this year, but housing starts are projected to be around 170,000. Secondly, Oliver refuses to believe that the laws of economics have suddenly ceased to function. He argues that the fall in mortgage rates from 17 percent in the late 1980s to as low as 2 percent during the pandemic contributed to price increases. Therefore, the rise in mortgage rates to 6 percent should have an opposite effect.

“This is the thing that makes me really nervous. Anyone who knows anything about asset prices knows that interest rates do matter,” says Oliver.

He further highlights that higher rates have reduced the buying capacity of an average borrower on an average wage with a 20 percent deposit by 30 percent. This reduction in borrowing power continues to loom over the market, impacting affordability.

The Potential for a Second Leg Down: Factors to Consider

Despite the conflicting trends, Oliver believes that the potential for a second leg down in property prices remains alive, particularly in the event of a spike in unemployment and a sharper economic slowdown than anticipated. The housing market is currently treading in uncertain territory as it awaits the full impact of rate changes.

Consensus on Supply: A Positive Focus for the Future

While there may be skepticism about the government’s ability to achieve its ambitious target of 240,000 housing starts this year, industry experts such as Bouris, Oliver, and Powell agree that a focus on supply, as advocated by the Labor party, can only be beneficial for the Australian housing market.

In conclusion, the Australian housing market is experiencing contradictory forces that are leaving economists perplexed. The surge in new listings may suggest an early spring selling season, but it could also be a result of increased confidence in peaking interest rates. The sharp rise in prices, fueled by low stock levels, defies expectations given the lagged effects of rate changes. Shane Oliver remains nervous about the market, emphasizing the impact of interest rates on asset prices. The potential for a second leg down in property prices is still present, particularly if unemployment spikes and the economy slows further. Despite the uncertainty, focusing on supply is seen as a positive step for the future of the Australian housing market.