Capital city home prices up however Coronavirus risk is low but growing: Shane Oliver
EXPERT OBSERVER
The Australian property market – particularly Melbourne and Sydney – has gone from boom and FOMO in 2017 to slump and FONGO into mid last year only to rebound again with a degree of FOMO returning! (FOMO = fear of missing out, FONGO = fear of not getting out.)
The boost from the election result, RBA rate cuts, the relaxation of the 7% mortgage rate serviceability test along with a greater willingness to lend by banks are continuing to drive home prices higher as demand that was pent up over the period of falling prices between September 2017 and June last year has been unleashed.
The strength in demand continues to be evident in strong auction clearance rates in Sydney and Melbourne.
While this initially came on very low volumes, listings have now picked up following the normal pattern that sees clearances lead volumes. As a result sales at auctions are now running around double depressed year ago levels.
The high level of auction clearance rates points to a continuing strength in home prices in Sydney and Melbourne in the months ahead and this is likely to be aided by further interest rate cuts and strong population growth.
However, the pace of growth is likely to slow with home price gains more constrained than what we saw through the 2012-17 property price boom because:
Household debt to income ratios are very high, bank lending standards are much tighter than in the last boom, APRA may move to tighten lending standards again if housing credit growth accelerates; there are still more units to hit the Sydney and Melbourne property markets and unemployment is likely to drift up as overall economic growth remains weak.
For 2020 as a whole average capital city property prices are expected to rise by around 10%, with continuing strong gains in the first quarter giving way to a more constrained pace from around April-June.
We also anticipate a broadening out of the property price gains beyond Sydney and Melbourne as Brisbane and Adelaide our relatively cheap and Perth looks to have bottomed and will be helped by a recovery in mining projects.
However, a big and rising risk to the property market outlook is now posed by the global coronavirus outbreak.
At this stage apart from the possible absence of some Chinese buyers I doubt coronavirus is having much impact on the property market.
However, if the situation badly worsens globally and the virus takes hold in Australia then it could become a big short term negative as the economy slows even further potentially into recession, the loss of share market wealth drags on property demand and if people put off buying property along with other activities for fear of catching the virus.
More RBA rate cuts could partially help in the other direction and help boost buying once the virus fear comes under control though, but in the interim it could drive renewed falls in property prices.
This is not our base case but given all the unknowns around Covid-19 it is worth monitoring as the risk is rising.
SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital
The Australian property market – particularly Melbourne and Sydney – has gone from boom and FOMO in 2017 to slump and FONGO into mid last year only to rebound again with a degree of FOMO returning! (FOMO = fear of missing out, FONGO = fear of not getting out.)
The boost from the election result, RBA rate cuts, the relaxation of the 7% mortgage rate serviceability test along with a greater willingness to lend by banks are continuing to drive home prices higher as demand that was pent up over the period of falling prices between September 2017 and June last year has been unleashed. The strength in demand continues to be evident in strong auction clearance rates in Sydney and Melbourne. See the next two charts.
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Source: Domain, CoreLogic, AMP Capital
While this initially came on very low volumes, listings have now picked up following the normal pattern that sees clearances lead volumes. As a result sales at auctions are now running around double depressed year ago levels.
Source: Domain, AMP Capital
The high level of auction clearance rates points to a continuing strength in home prices in Sydney and Melbourne in the months ahead and this is likely to be aided by further interest rate cuts and strong population growth. However, the pace of growth is likely to slow with home price gains more constrained than what we saw through the 2012-17 property price boom because: household debt to income ratios are very high, bank lending standards are much tighter than in the last boom, APRA may move to tighten lending standards again if housing credit growth accelerates; there are still more units to hit the Sydney and Melbourne property markets and unemployment is likely to drift up as overall economic growth remains weak. For 2020 as a whole average capital city property prices are expected to rise by around 10%, with continuing strong gains in the first quarter giving way to a more constrained pace from around April-June.
We also anticipate a broadening out of the property price gains beyond Sydney and Melbourne as Brisbane and Adelaide our relatively cheap and Perth looks to have bottomed and will be helped by a recovery in mining projects.
However, a big and rising risk to the property market outlook is now posed by the global coronavirus outbreak. At this stage apart from the possible absence of some Chinese buyers I doubt coronavirus is having much impact on the property market. However, if the situation badly worsens globally and the virus takes hold in Australia then it could become a big short term negative as the economy slows even further potentially into recession, the loss of share market wealth drags on property demand and if people put off buying property along with other activities for fear of catching the virus. More RBA rate cuts could partially help in the other direction and help boost buying once the virus fear comes under control though, but in the interim it could drive renewed falls in property prices. This is not our base case but given all the unknowns around Covid-19 it is worth monitoring as the risk is rising.
Please feel free to call if you wish to discuss.
Regards
Shane
Shane Oliver | Head of Investment Strategy and Chief Economist | AMP Capital
