Back in February, we called a 20 per cent increase in dwelling prices over 2021 and 2022.
By the end of June, prices were already up 12.2 per cent this year, an extraordinary 25.6 per cent pace in annualised terms. Sydney had already hit our forecasts of a 16 per cent gain such has been the strength of the boom in Australia’s biggest city.
Therefore, despite recent COVID lockdowns and signs Sydney will face extended restrictions, we’ve revised our outlook, seeing a stronger total gain over 2021 and 2022 of 23 per cent, with 18 per cent coming in 2021.
By 2023, the market is likely to turn as stretched affordability in most markets combines with the Reserve Bank’s first rate hike cycle since 2009 to send national prices down 5 per cent.
However, to be clear, our general view on the dynamics in the housing market over the period remain the same: surging prices through to the first half of 2022, a flattening in the second half in response to “macro prudential” tightening and a mild correction in 2023.
What about COVID disruptions in the near term?
Momentum already appears to have slowed and price growth may stall altogether, particularly in Sydney. However, any slowing is very likely to be transitory with easing restrictions and a national economic rebound driving a subsequent re-acceleration in the December quarter. Prices don't tend to respond to transitory disruptions, and we entered the lockdown with strong momentum. Notably, Victoria's second wave lockdown last year had only a marginal impact on prices.
Once we get the other side of the restrictions and head into 2022, the economy should resume above trend and the interplay between affordability and policy will be the key for prices.
Looking back historically, there’s very few examples of affordability constraints alone slowing price growth or causing a correction. It's almost always or the combination of stretched affordability and policy changes, normally interest rate rises. But as we saw in 2015 in 2017, macro prudential (restrictions on bank lending) tightening can do the trick too.
But several factors limit the risk of a harder landing when the cycle inevitably turns.
Firstly, regulators – which are obviously trying to support the economic recovery – are unlikely to take a heavy-handed approach to macro prudential tightening.
Secondly, unlike in the 2017-19 housing market correction, we do not expect to see additional damage from other developments, ie fears about potential changes to housing-related tax policy and the Banking Royal Commission.
Finally, the rate hike cycle will be quite benign with a peak cash rate of 1.25 per cent being reached in the second half of 2024.
For the time being, the quite extraordinary housing market boom has further to run and is likely to remain a little bit detached, or unsynchronised, from a wider economy facing notable COVID-induced challenges and uncertainty.
As we’ve seen time and again, Australians aren’t adverse to looking through shocks when it comes to property.
The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.