Australian house prices and home building approvals have bounced back strongly in the past 18 months buoyed by improved affordability, robust buyer sentiment and tightening supply/demand fundamentals. The recent pick-up in home prices has reignited the debate as to whether Australia has, or is developing, a housing price bubble. We have assessed various valuation measures along with market demand and supply fundamentals and the broader economic outlook in order to address this question.
We conclude that despite increasingly difficult first home buyer deposit affordability, Australian house prices are not only sustainable (supported by improved loan affordability, solid economic fundamentals, a stable mortgage market, strong investor demand and a significant pent-up demand for homes) but are likely to continue to rise strongly in 2014 before moderating and growing broadly in line with average household incomes in the medium term
Recent market experience
Following an extended period of weak home sales, market activity surged in 2013, with elevated auction volumes and clearance rates, lower days on market and increasing housing finance reflecting renewed home buyer and vendor confidence. A growing recognition that market fundamentals have tightened and home prices and rents are increasing is once again attracting prospective purchasers into the market. Moreover, foreign demand for Australian property remains strong with purchasing power boosted by the decline in the AUD.
House prices are rising across most capital cities, with the strongest gains posted in Sydney, Melbourne and Perth. Despite speculation that recent price increases represent the early stages of a house price bubble, our analysis suggests price gains are largely explained by a degree of ‘catch-up’ as a result of improved affordability and the release of the substantial pent-up sales demand created over recent years.
Heightened economic uncertainty, elevated job security concerns, difficult affordability and a few years of flat to falling home prices saw many potential homebuyers delay purchase decisions. However, falling mortgage rates have significantly lowered the entry hurdle for buyers and renewed growth in home prices has re-established the incentive to buy sooner rather than later.
With interest rates likely to remain low for an extended period and the broader economy expected to strengthen, it is difficult to identify any factors that could arrest the momentum in house prices in the near-term. We expect national home prices will increase by around 7% in 2014. However, mortgage rates are expected to increase by around 200 bp over 2015 and 2016 as the RBA returns interest rates towards ‘neutral’. Consequently we expect house price growth to slow to 2.5% in 2015 as affordability begins to deteriorate. Worsening mortgage affordability will likely increasingly constrain further real house price growth. This, along with elevated unemployment, continued household and lender caution and soft economic growth in some states is likely to moderate house price gains before prices reach levels that could be reasonably seen as a ‘bubble’.
Greg McGuinness, Senior Relationship Manager – ANZ, 20th February 2014