Six factors affecting property market growth

In March, the Australian housing market hit its fastest national growth rate in capital gains since 1988. Record low interest rates, heightened consumer confidence due to overperforming economic recovery, and Government stimulus measures such as the First Home Loan Deposit Scheme have spurred demand.

But there are also factors that indicate that this growth is at its peak. A continued boom is unsustainable, and markets are inherently cyclical. According to property market research firm CoreLogic there is unlikely to be a dramatic decrease in the housing market, but that its growth will slowly taper in the next few months – a change that is indicated by the following factors.

Six Factors Affecting Property Market Growth

1. Slowing rate of capital gain

CoreLogic’s Home Value Index shows a daily update measuring the movements in the value of Australia’s housing markets. Since late March, the index has already shown that the rate of housing value growth has slowed, indicating that its peak has been reached.

2. Lower auction clearance rates

Auction clearance rates refer to the percentage of properties sold at auction over a particular period. According to Core Logic the weighted average clearance rate moved through a recent high in the last week of March at 83.1%, and has since declined.

“The weighted average clearance rate moved through a recent high in the last week of March at 83.1%, and has since drifted lower to reach 78.6% over the week ending April 18th. Historically there has been a strong positive correlation between auction clearance rates and the pace of appreciation in housing values.”

— Tim Lawless

3. Population decline

For the first time since 1916 Australia’s population is declining, as closed borders have all but stopped overseas migration. The immediate and greater impact has been on rental markets, particularly in the inner cities. Most migrants arrive on a temporary basis, and those who intend to stay permanently typically rent before buying. However, in the coming years, the negative population growth is likely to gradually dampen demand to buy properties.

4. Fewer incentives

The impact of COVID-19 on the economy urged the Government to put stimulus measures in place, including income support and housing measures such as stamp duty concessions and the HomeBuilder grant. As these Government incentives expire, with extended lower migration and declining affordability, it is expected that the demand in the housing market will decrease.

5. Rising vendor activity and new housing supply

As vendors move to take advantage of the rise in capital gains, more new listings are coming to market. The four weeks leading up to April 18th saw the largest number of new listings for this time of year – 26, 740 properties – 17% above the five year average. While the total number of advertised properties remains low, the increase in new listings suggests a rebalancing between demand and supply is on its way.

Alongside this rise in supply is the increase in dwelling construction. Over the December quarter, dwelling commencements hit 5.5% above the decade average. Approvals for new housing construction are at record highs. With a large remaining surplus of apartments new building activity is biased towards the construction of new houses.

“The unprecedented pipeline of new housing supply will take some time to work through to completions, however it is occurring at a time when demand from population growth has recently turned negative which could progressively create an imbalance between demand and supply.”

— Tim Lawless

6. Declining Affordability

Affordability is a key concern for first home buyers, as property prices have risen at a significantly higher rate than wages. Whilst loan repayments have declined for existing property owners, the barrier to entry for new buyers is more closely linked to their capacity to save a deposit. The recent lift in property prices means that it is taking nearly 12 years for the typical couple in Sydney to save a 20% deposit.

What Does The Future Hold?

With these factors in mind, it is likely that the growth rate of capital gains has reached its peak. However, there are also factors that will continue to contribute to rising housing values. Most notably, mortgage interest rates remain at a record lows. International borders will eventually re-open and the resulting immigration will see a recovery in the rental market following through to a higher purchasing demand in the housing market.

While the housing market may have reached its peak in growth, housing values are nonetheless expected to rise in the near future – if consumer sentiment remains high as we emerge from the economic impact of COVID-19.

References

Lawless, T. (2021) Seven signs the housing market is moving through a peak rate of growth. CoreLogic.

Murray, C & Ryan-Collins, J. (2020) When houses earn more than jobs: how we lost control of Australian house prices and how to get it back. The Conversation.