2019 will go down as the year when new records were set.
For 2020, we’re likely to see markets in recovery mode as housing prices catch up and then overtake their previous record highs, however we expect the rapid rate of capital gains seen over the second half of 2019 to lose steam as stock levels rise and affordability deteriorates.
2019 – The housing market moved through the largest and longest correction on record, followed by a fast-paced rebound in values through the second half of the year.
Housing turnover fell to record lows in 2019, as did new advertised stock levels.
Interest rates reduced to levels previously unseen, while the concentration of investors in the market also plumbed new depths.
At a national level, housing values were trending lower through the first half of the year, continuing a downturn spiral that commenced in October 2017.
June 2019 saw CoreLogic’s national housing market index reach a floor after posting the longest and largest correction in housing values on record.
Between the market peak in October 2017, and the trough in June 2019, the national index fell by 8.4%.
The previous record decline in national housing values was an 8.1% drop through the early 1980’s as the economy moved through a recession and unemployment peaked slightly above 10%.
Larger peak-to-trough falls were recorded in Sydney (-14.9%) and Melbourne (-11.1%), where housing conditions had previously been the strongest.
Since reaching a floor in June, CoreLogic’s national index has rebounded by 4.7%, with the monthly growth rate in November the highest since 2003.
Despite the recent recovery trend, housing values nationally remain 4.1% below their 2017 peak.
A variety of factors contributed to the housing values recovery over the second half of the year.
Earlier in the year, a reduction in the rate of decline was supported by higher first home buyer activity and brought about by improvements in housing affordability and stamp duty exemptions in NSW and Victoria.
However, the main contributors to a rebound in housing conditions were:
- The positive effect of the federal government retaining power at the May federal election which removed the uncertainty around tax reform relating to negative gearing and capital gains discounts.
- Cuts to the cash rate in June, July and October
- And an easing in lending policy as APRA adjusted its rules around minimum interest rate serviceability tests; a move which acknowledged interest rates were likely to remain low for an extended period of time.
To deliver a fair assessment of the housing market trends over the coming year it’s important to reflect on the key factors driving market performance, and more recently, how these factors are likely to change over the coming twelve months.
Housing turnover hit record lows in 2019
Despite the rise in housing values and strong selling conditions, turnover in housing fell to record lows in 2019.
Nationally, only 4% of Australian dwellings changed hands through the spring period of 2019 compared with the decade average of 5.3%.
Factors contributing to low turnover include persistently low consumer sentiment, high transactional costs for those trading up or down, and overall low inventory levels which has kept sales activity low despite a lift in buyer demand.
Turnover was the lowest across the Northern Territory, at just 3.3%, closely followed by WA (3.4%), Victoria (3.9%) and NSW (4.0%).
Tasmania, where housing markets have generally been strong, showed the highest turnover rate at 5.1%.
Although turnover remained low through most of 2019, activity was trending higher through the second half of the year with CoreLogic estimates of monthly settled sales tracking above the decade average during spring.
With interest rates remaining low and advertised housing stock likely to rise, we expect the number of dwelling sales to increase further in 2020, however the volume of sales isn’t likely to exceed the highs of 2015 due to worsening affordability headwinds and tighter credit conditions relative to credit availability through the previous growth cycle.
A rise in housing sales should provide a positive multiplier effect on the broader economy, with housing transactions delivering a boost to industry and state government revenues as well as flowing through to retail items such as home furnishings, appliances and white goods.
Gradually, a rise in dwelling sales and values should also flow through to a turnaround in dwelling approvals, which have been trending lower through 2019, supporting an improvement in the residential construction sector.
Advertised stock levels remain low but likely to rise next year
Record-low advertised stock additions have kept a lid on housing activity and added a sense of urgency to the market as buyer demand rises.
New listings numbers were consistently tracking at record lows throughout 2019.
Even during the spring listing season, new stock additions remained seasonally low.
As buyer demand started to track higher around the middle of the year, active buyers were competing for a relatively small pool of available properties which has added some urgency to the market and supported upwards pressure on prices.
At the end of the first week of December, new listings remained 10% lower than a year ago nationally, with Sydney (+5.6%) the only city to see new listings trend higher relative to the same period one year ago.
Considering the strong selling conditions (as evidenced by consistently high auction clearance rates as well as a contraction in selling times and discounting rates) and pent-up demand from home owners looking to sell, we expect new listing numbers to increase early in 2020.
Higher stock levels will test the depth of buyer demand and likely help to ease some of the urgency felt by active buyers and dampen the pace of capital gains.
Interest rates likely to fall further in 2020
With the cash rate dropping to new record lows between June and October, mortgage rates fell to the lowest level since at least the 1950’s.
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The RBA slashed the cash rate by 75 basis points over three twenty-five basis point cuts, however a smaller 60 basis points (on average) flowed through to mortgage rates, with more for fixed rates but less for variable rates.
The sharp drop in rates, along with an easing in rules for interest rate serviceability tests from APRA, were the primary factors driving a rebound in housing values over the second half of 2019.
In all likelihood, the cash rate will drop by a further fifty basis points over the first half of 2020, taking official interest rates down to 0.25%.
While the entirety of any rate cuts won’t be passed on in full by lenders, due to already squeezed net interest margins and to ensure depositors remain incentivised, mortgage rates are likely to reduce even further from their current record lows.
Lower mortgage rates are likely to support a modest rise in buyer demand, however, there is a chance cutting rates to such low levels could have the opposite effect; denting confidence and spooking households into a more conservative approach of savings and deleveraging.
Investors reached a record low proportion of participation in the housing market during 2019, however the concentration of investors is likely to rise in 2020
Investors made up the smallest proportion of market activity on record in 2019, comprising of only 24.8% of mortgage demand.
The reduction in investor activity prior to the federal election was understandable, considering the uncertainty associated with tax reform under a change of government.
Post-election, the value of investor loan commitments has increased, however, owner occupier lending increased even more which has pushed the proportion of investor lending lower.
Both the level and proportion of investor activity is likely to rise in 2020.
Investors are likely to be motivated by prospects for capital gain, as well as the fact that gross rental yields, although generally low, are likely to be higher than the cost of debt.
Opportunities for positively geared properties should be more abundant as mortgage rates move lower.
If investor activity trends materially beyond the long-term average (investors averaged approximately one third of mortgage demand over the past decade), this could be a trigger for another round of macro-prudential intervention from APRA aimed at curbing speculative activity in the housing market.
The previous round of credit tightening specific to investors occurred when investors comprised more than 40% of mortgage demand, triggering a macro-prudential response from APRA which limited banks from growing their investment loan books by less than 10% per annum.
First home buyers took advantage of improved housing affordability, stamp duty exemptions in some states and less competition with investors to step up their presence in the market in 2019
First home buyers comprised almost 30% of owner occupier mortgage demand in September, up from
just 20% four years ago.
First home buyers are typically price sensitive, therefore, the housing downturn has been good news for this sector of the market.
Stamp duty exemptions for properties under specific price points in New South Wales and Victoria, record low interest rates and less competition with investors are other factors encouraging a larger presence of first time buyers into the market.
Although interest rates are likely to move lower next year, worsening housing affordability and increased competition with investors is likely to have a negative impact on first home buyer activity in the market.
Approved housing supply trended lower through 2019, falling to levels well below the decade average
Nationally, dwelling approvals were down 44% from their 2017 peak through to the end of October 2019, reflecting a combination of concerns around a previous oversupply and weak developer confidence as market conditions deteriorated, compounded by tighter credit conditions.
Anecdotally, consumer confidence has been dented in the high-rise sector following high profile construction faults and remediation costs associated with combustible cladding.
Based on the data to the end of October, there has been no sign of a pick-up in new dwelling approvals despite the improved housing market conditions.
With buyer numbers and housing values expected to rise further next year, it is highly likely that approved housing supply will start to trend higher, however, considering the lag between approvals rising and construction work completing, 2020 is likely to see the new housing sector undersupplied relative to the rate of population growth.
Housing demand looks to remain strong, with overseas migration the primary driver of national population growth
Unfortunately demographic updates from the Australian Bureau of Statistics (ABS) are lagged by around six months, however the trend in population growth into early 2019 remained strong.
Australia’s population increased by almost 390,000 over the year to March 19, which was 21% above the twenty year average.
With population growth set to remain high through 2020 and housing supply additions remaining low, there is likely to be a gradual imbalance towards an undersupply of housing relative to demand.
So… what does this mean for housing markets?
Housing prices are likely to trend higher through the year.
At a broad level, we expect dwelling values to trend higher in 2020, however at a reduced pace of growth relative to the second half of 2019.
Factors that will propel values higher include the stimulatory effect of lower interest rates, a lift in investment activity and an undersupply of new housing.
The headwinds will be seen in worsening housing affordability, higher advertised supply levels and potentially a worsening in consumer sentiment as households look to deleverage as they become more concerned around the economic outlook.
A slowdown in growth will most likely emanate from Sydney and Melbourne where the current pace of growth has been rapid, while smaller cities such as Brisbane and Perth, where demographic trends are improving and housing is much more affordable could see an acceleration in value growth over the next year.
Outside of the capital cities we are likely to see diverse conditions.
The satellite cities adjacent to the largest capitals, such as Newcastle, Wollongong and Geelong are likely to benefit from an overflow of demand as buyer seek out affordable housing options in areas with a diverse economy as well as commuting options into the major cities.
Lifestyle markets along the eastern seaboard and hinterland locations, especially areas adjacent to the major capitals, are likely to continue to experience strong demand from a variety of market segments.
Post the recent housing boom, cashed up buyers from Sydney and Melbourne have utilised their improved wealth position to purchase investment properties and holiday homes, while baby boomers approaching retirement are also positioning themselves in these lifestyle markets.
Anecdotally, professionals are also taking advantage of high-speed internet services, a greater acceptance of remote working by employers and tolerable commuting times to base themselves in a regional location adjacent to the major capital cities.
Mining regions have started what is likely to be a drawn out recovery, following a dramatic decline in values post-mining/infrastructure boom, however agricultural regions that are drought-affected are likely to continue to see weaker conditions until climatic conditions improve.