Over 300 business leaders joined Macquarie Business Banking’s Sally O’Connell and CoreLogic’s Research Director Tim Lawless to discuss the residential housing market’s reversal during our third property update webinar for 2022.
“There’s been an obvious shift in the buyer-seller dynamic, with many agents telling us buyers are finally back in the driver's seat,” observed Sally. “FOMO has disappeared from the market – instead it seems to be FOOP, the Fear Of Over-Paying.”
When asked where that dynamic might sit on a clock, if a seller’s market is noon and a buyer’s market is six, Tim said, “we're not quite at peak buying conditions, so I’d suggest approaching 6 o’clock. That will probably happen late this year or early next year, and it will differ across markets.”
Much has changed in the past year, but the catalysts differ to other recent market cycle downturns. Importantly, this time it’s about more than just an upward shift in cash rates.
Under pressure from all sides
Housing price growth was slowing well before the Reserve Bank of Australia (RBA) started lifting interest rates in May.
“Back in March of 2021, we began to see housing affordability and cost of living pressures start to impact price growth,” observed Tim.
“Also around this time, most of the pandemic fiscal support had expired, and later in the year APRA tightened serviceability constraints by 50 basis points. More recently, high inflation set in – and once the cash rate moved higher from May 5, it amplified that downward trend.”
Housing affordability, cost of living pressures and tighter credit conditions were impacting values before 5 May 2022.
Seasonal trends still hold
The good news is, CoreLogic leading indicators do not suggest any sign of panic selling. “We’re seeing normal seasonal trends, and even though listings are trending lower, they are still about 8% up on last year’s levels as sellers try to get in before the spring uplift gives buyers more choice,” said Tim.
Listings typically rise by around 20% between winter and spring. As demand is likely to diminish in this cycle, clearance rates are likely to come down further and time-on-market will return to more normal benchmarks.
“Sydney and Melbourne listings are about 12% higher than last year, and clearance rates have come down to the low to mid-50% range, while time-on-market is back to 30 days after being as quick as 15 days,” Tim explained.
And while monthly sale volumes may be easing, they are still above the decade average.
Sales are still above the decade average in terms of volume
Tree change movement takes hold
The COVID-19 pandemic appears to have triggered permanent shifts in the way we live and work – including the growth of regional house prices, and remote working as the new normal.
“People moved into the regions during and post-lockdown periods, and now that we're back to living relatively normal lives those commutable areas are still seeing strong demand – like Geelong, the Gold Coast and Wollongong,” observed Sally.
CoreLogic’s Regionals Index value rose 42% from trough to peak during the pandemic, compared with 26% for the Combined Capital Cities Index. “Prices are trending lower in the regions now as well – they’re not immune to higher interest rates – but there was a lag,” said Tim.
He said he wouldn't be surprised if the underlying demand profile has changed with some degree of permanency for many regional markets. “On the downside, many areas on the coastal fringe no longer have the same affordability advantage.”
Construction pressures impact supply
While demand may soften, there will still be supply gaps as rising costs and construction delays put pressure on developers. One attendee said his residential developer clients were putting their projects on hold due to lack of viability.
“If there is a shortage of housing stock, an immigration rebound could trigger a quicker housing recovery than some economists predict,” suggested Sally.
“The whole supply-demand dynamic is a little bit up in the air, depending on how much of this approved stock actually goes through to a completion,” agreed Tim. “We've seen the home builders grants skew approvals and activity to the low-density sector. But the medium-to-high density sector in the inner city and middle ring could move into undersupply down the track, especially when you consider growth in rental markets from migration.”
House building activity has surged, but unit building is well below peak levels.
Outlier performers
While dwelling prices are generally trending downwards across all markets, there are some outliers: ultra-luxe trophy properties and land.
“Land values tend to be a little disconnected from the broader cycle, they are more influenced by scarcity and supply,” noted Tim. “I expect we will see underlying land values remaining firm if not growing, while the established market moves through a downturn.”
At the upper end of the market – the top 2% of houses – prices are impacted more by equity volatility and business confidence than interest rates.
Rents are also gathering pace, not slowing down. Vacancy rates are at record lows, and demand from new migrants will only exacerbate this. Tim said he’s seeing more tenancy demand flowing back into the medium-to-high density sector due to affordability. “Given the time frames to get new developments off the ground, and the increasing cost of construction, that pressure on the rental market is unlikely to ease soon.”
Tim expects these growing yields will provide another incentive for the investor market.
“Gross yields bottomed out across the capital cities at just under 3%, but now they’re starting to rise – especially in Sydney and Melbourne. Whether or not that's enough to completely offset higher mortgage costs remains to be seen – we may hit a rental affordability ceiling, but overseas migrant demand could offset that.”
Expect yields to rise again, especially in Sydney and Melbourne
A convergence of headwinds and tailwinds
Looking ahead, Sally and Tim agreed there are many contributing factors at play.
“As we move through this rising interest rate cycle, we also have a labour shortage with record low unemployment, which does create a safety net for the housing market” noted Sally. “We know that about 50% of people's wealth is tied to their property, and housing sentiments are closely correlated to rising interest rates. There will also be impacts on borrowing capacity, and banks are scrutinising debt to income ratios and loan-to-value ratios.”
Tim believes the RBA will go harder than they might normally to get inflation back into their target range.
“But there is a silver lining as well – as housing values fall, housing affordability will improve again – and first home buyers might become more active as the market shifts to favour buyers.”
In the short-term, vendors and agents will need to be realistic about market conditions, flexible on pricing expectations, and invest in strong marketing campaigns. For property buyers, investors and developers, now might be the right time to move on opportunities – before demand and supply levels recalibrate.
Because over the longer term, Australia’s economy is still well positioned to weather this storm through to a new growth phase.
To discuss any opportunities for your business, please speak with your Macquarie Bank Relationship Manager or request a call.
