Continuing from last month's trend, the housing market in Australia continues to see an upswing in activity and dwelling values. Melbourne and Sydney lead the housing rebound, which continues to grow at a robust rate, attributed largely to interest rates being slashed to 0.25%.
Already, the September quarter has recorded a 4.1% increase in Melbourne house prices, with buyers surging to the property market as the housing downturn approached its end. Nationally, median prices have increased by more than A$20,000 over the past three months. September results also recorded an increase of 5.7% in new home sales, taking figures back to mid-2018 levels.
October saw national dwelling values record its largest month-on-month gain (1.2%) since May 2015. In Melbourne, a 2.3% rise has placed dwelling values at 6% above its floor in May earlier this year. The increase in Melbourne prices also pushes its recovery ahead of Sydney's, which are up 5.3% since May. Currently, Melbourne is on track for the earliest recovery among the capital cities, projected to recover by January 2020.
According to Moody's economist Katrina Ell, Melbourne is expected to see a 7% increase in housing values over 2020 and 7.8% over 2021; for apartment values, Moody's predicts a 4.8% increase in 2020 and 0.8% in 2021.
Recovery is expected to be especially strong in Melbourne's inner east suburbs, though values in the western and south-eastern suburbs are also expected to see growth, albeit at a slower pace. SQM forecasts a more dramatic increase in dwelling values, predicting a rise of 11-15% for Melbourne house prices over 2020. It is, however, based on the assumption that there will be no further changes to the interest rate nor regulatory intervention to influence the market.
If this assumption holds and the rate of improvement remains stable, this could see national dwelling values reach a new record high in six months. This outcome would have conflicting effects, as while the recovery of the housing market could provide support for the Australian economy, high housing price would place pressure on Australia's housing affordability levels, which have just begun to see improvement.
Affordability over the Quarter
In the September quarter, the HIA Affordability Index observed the 'most affordable' housing values since 2014. Moody's vice president Alena Chan attributes this to an average fall in housing prices by 1.6% over the year while mortgage interest rate declined an average of 0.4%.
This improvement is a welcome relief in a housing market that remains plagued with criticisms of lack of affordability and sky-high prices. Yet the forecasted 2020 turnaround would see these improvements eroded. HIA chief economist Tim Reardon notes that thus far, it has been primarily RBA interest rate cuts that have prompted a recovery in housing affordability as homeowners see their ability to service mortgage loans increase. Reardon cautions, however, that this is at best a temporary boost—a more sustained improvement must come from wage growth, which despite the RBA's targeted efforts remains stagnant.
Indeed, a flat wage growth has spurred the RBA to make plans for 'more assured progress toward both full employment and the inflation target', though there appears to be limited flexibility for the RBA to do so through another adjustment of the cash rate, which currently sits at 0.25%.
Housing Supply Shortfall—Demand Climbs as Supply Tigthens
Though October marked the 15th consecutive month of decline in residential building construction, its slowing pace of decline keeps hopes buoyant that the fall in construction is nearing its floor. The apartment sector, however, remains weak, despite a 16.1% upward spike in September; October saw approvals continuing their downward trend and entering its 19th consecutive month of decline.
Melbourne's inner-city apartments pipeline has plummeted over the month, prompted by both weak market conditions and a drop of confidence in high-rise residential buildings as the impacts of the construction crisis continue to be felt throughout the industry. Indeed, with building approvals down 40% from their peak in 2017, concerns are rising within the RBA of a housing supply shortfall. The RBA forecasts a 'further 7% decline in housing investment over the next year.
RBA deputy governor Guy Debelle expresses concern that falling investment could have a direct impact on the economy; housing construction currently sits at 6% of Australia's GDP—a fall in investment could shrink economic growth by 1%. The fall in construction indicates that upward pressure on prices can be expected as supply tightens and demand booms due to improving credit availability, stamp duty exemptions for first home buyers and access to the lowest mortgage rates since the 1950s. (ET)