Housing markets are positively fizzing right now.
Interest rates have never been lower and demand is riding high, buyers battling it out over a shrinking pool of properties and driving some eye-catching price rises. The March quarter saw a 5.6 per cent jump across the major capital cities, the March month alone posting the biggest gain in 32 years.
Sydney dwelling prices rose a staggering 3.7 per cent - putting on well over $1000 a day for the median priced dwelling.
Daily measures are pointing to something similar, albeit not quite so strong, for the month of April.
The surge has led us to mark up our price forecasts for 2021 – Westpac’s previous 10 per cent forecast may well be achieved by mid-year. We now expect a 15 per cent gain now expected for the full year.
But to be clear, this is a bring forward of our previous call that prices would rise a cumulative 20 per cent over this year and next.
A key take-out is that price growth is expected to slow from here and there are four main reasons: sellers will return, affordability will start to bite (particularly for first homebuyers), macro prudential policies will be introduced, and oversupply may become an issue.
Reasons one and two will see some near term slowing in the rampant price gains seen since the start of the year but are unlikely to bring an end to the boom. That is only likely to happen some time down the track once other elements comes into play: an expected lift in investor activity and a subsequent tightening in prudential policy by regulators.
So far, investors have been subdued. But they are unlikely to stay that way, particularly while prices are surging. The segment will become increasingly prominent as affordability starts to curtail owner occupier demand.
That in turn will make regulators increasingly uneasy. APRA and the RBA may be comfortable with the way things sit now but their tolerance will be tested in a year’s time when prices have put on another 10 per cent, credit growth is around the pace seen when they last intervened in 2015-2017, household leverage measures are high and rising, and investors are much more active.
With official rates still on an extended hold, authorities will need to revisit the macro-prudential policies deployed in 2015 and 2017, such as caps on particular loan types viewed as riskier, limits on aggregate lending growth for investors; and even ‘micro-prudential’ changes to guidelines for individual loan assessments.
In sum, while we remain bullish on Australia’s housing outlook, we do not expect the red-hot pace of the first few months of 2021 to continue. But unlike prior cycles, it won’t be interest rate increases that cause the slowdown, with affordability pressures and prudential measures to take the steam out of the market.
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