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HOME OPEN: Affordability tension

07:21pm February 28 2020

Westpac senior economist Matt Hassan discusses affordability constraints in the Sydney and Melbourne housing markets. (Josh Wall)

As any house hunter would know, the market is well and truly back. 

The market rebound that began in mid–2019 strengthened and broadened into year end with momentum carrying into 2020.

Remarkably, annual price growth is now running at an annual pace of over 7 per cent nationally – the strongest pace since September 2017 – with turnover in the final three months of last year up over 30 per cent on a year ago.

While conditions continue to vary by state, most are now showing a clear lift. 

Queensland is showing a more promising pick-up, the WA market may be stabilising at last, Tasmania’s tight supply is driving renewed price gains and South Australia’s muted recovery – albeit fading – is keeping the market in positive territory. 

However as laid out in our latest Housing Pulse, in the biggest markets of Sydney and Melbourne strong annual price growth of more than 10 per cent is however starting to inject a familiar tension into the markets: affordability constraints.

As previously discussed, we thought a key theme for Australia’s housing markets in 2020 would be that price growth in Sydney and Melbourne would moderate as these affordability constraints re-emerged. Yes, interest rate cuts (we’ve pencilled in two more moves by the RBA this year) would support momentum overall, but the price pulse in these markets should slow from the very rapid rebound seen over the second half of 2019. 

But when? 

Our affordability measure, which incorporates both deposit requirements and mortgage repayments, suggests these markets are more sensitive to variations in interest rates and dwelling prices. Importantly, it also allows us to run scenarios that give some indication of when affordability pressures may start to bite. 

In the previous property boom from 2012 to 2017, affordability became a major issue from mid-2017. In this cycle, assuming no interest rate changes, the current 10 per cent pace of price gains would see a return to 2017-style affordability issues by mid-year in Melbourne and by year end in Sydney. Even though prices would be 8–10 per cent above their 2017 peaks, that reflects the fact mortgage rates are lower now and thus prices can be higher before affordability bites. 

But buyer perceptions may already be being ‘whipsawed’ by sharp changes in price and interest rate expectations, which we track in our monthly consumer sentiment survey. And while hard to show, it is plausible that affordability dynamics may be playing out via expectations rather than actual changes. That in turn may mean some slowdown effects could come through more quickly. 

This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.

Matthew is a senior economist with Westpac. His specific areas of expertise are housing markets and the Australian consumer sector. Matthew’s research has been instrumental in shaping Westpac’s views on the Australian economy, including recent calls on official interest rates. His research has provided important insights into housing market developments and the behaviours of the Australian consumer. He is the author of Westpac’s monthly Red Book report, regards as essential reading on the consumer sector. Before joining the Westpac team in 2007, Matthew held senior positions with leading economic consultancies in Australia and New Zealand.

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