Despite Australia’s property market growing at a pace not seen for three decades, a leading economist suggests there are warning signs that the property boom could be short-lived.
Australia’s booming property market is set to slow down in 2022, following growth of 15 per cent over the next 12 months, with affordability issues, higher fixed rates and tightening restrictions tipped to act as a handbrake.
CoreLogic’s national home value index recorded a 2.8 per cent rise in March, the fastest rate of appreciation since October 1988 (3.2 per cent).
These exceptionally strong growth conditions remain broad-based, with values rising by at least 1.4 per cent across each of the capital cities and rest-of-state areas over the month.
Sydney led the pack for capital gains in March, with values surging 3.7 per cent over the month and 6.7 per cent higher over the first quarter of the year.
According to AMP’s chief economist, Dr Shane Oliver, there are good reasons to believe that the long-term boom in Australian property prices may be coming to an end.
“The long-term decline in interest rates that began in the early 1980s with bond yields and then spread to Australian mortgage rates interest rates in the 1990s looks like it might be at or close to the bottom,” Dr Oliver explained.
“If inflation is bottoming, then so will interest rates, and the super cycle of each new economic slowdown leading to even lower mortgage rates and ever higher debt levels driving ever higher house prices relative to wages will come to an end.”
Moreover, the leading economist opined that the chronic undersupply of property may be starting to fade, thanks to the unit building boom since 2015, the hit to immigration and home building incentives, which are likely to keep house building high for the next 12 months at least.
“The collapse in population growth has likely now seen this move back to balance, and if population growth remains as weak as the government is projecting over the next two years, and construction stays up, we will move into a clear oversupply. This will be healthy in terms of improving housing affordability for new buyers and renters,” Dr Oliver noted.
Finally, AMP’s chief economist pointed to changing work dynamics with employees willing to live further away from the office.
“The work from home (WFH) phenomenon is likely to remain, albeit not five days a week for all. This means less need to live close to work and a greater focus on lifestyle, meaning greater demand for houses in outer suburbs, smaller cities and regional areas which are generally more affordable,” Dr Oliver said.
Despite highlighting the reasons as to why housing price growth could slow, he explains Australia’s housing market has surprised on the upside over the last two decades.
“There could be one last low in interest rates; population growth may bounce back faster than expected once borders reopen, and once the pandemic is over, Australians could forget lifestyle and return to the rat race.”
“That said, there are good reasons to expect that the forces that have driven average Australian capital city property prices well above trend and well above price-to-income ratios seen in other comparable countries over the last two decades may be at or close to having finally run their course,” Dr Oliver concluded.
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Article by Cameron Micallef on 22 April 2021 – nestegg.com.au