Resurgent house prices are being driven by a combination of an acute supply crunch and a population surge. Peter Rae
Australian house prices are poised for an annual rebound during a policy tightening campaign for the first time since at least the early 1990s, when the Reserve Bank of Australia began inflation targeting and entered the modern era.
National property prices will climb 7.7 per cent this year, a survey of 13 economists shows, recovering from a 4.8 per cent decline in 2022. The median estimate was for the housing market to rise a further 4.5 per cent in 2024.
The recovery is unprecedented as it comes amid the RBA’s most aggressive tightening cycle in more than 30 years, having raised interest rates by 4 percentage points in 14 months. In the previous five episodes when house prices rebounded from a fall, based on figures dating back to 1994, the central bank had already begun reducing borrowing costs, as set out in the chart below.
“The Australian housing market has proved much more resilient to higher interest rates,” said Andrew Boak, chief economist for Australia at Goldman Sachs.
“We view the risks to our already above consensus growth forecasts for 2023 and 2024 as skewed slightly to the upside,” Mr Boak said.
The RBA has been caught off-guard by the strength of the property market. Minutes of the bank’s October 3 meeting released on Tuesday showed policymakers were concerned about the implications of households feeling wealthier, as they’re more likely to spend and add to already elevated inflation pressures.
That has the bank again considering whether it needs to do more: “The rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed,” the minutes showed.
The vigilance on inflation is reinforced by higher oil prices that threaten to spill over into people’s expectations for prices. Economists see one more hike to 4.35 per cent, though money market pricing suggests the campaign is all-but done.
The RBA’s 12 rate increases since May 2022 lifted the cash rate to 4.1 per cent – an 11-year high – as policymakers try to regain control of inflation that remains well above the central bank’s 2 per cent – 3 per cent target range.
Resurgent house prices are being driven by a combination of an acute supply crunch and a population surge as the immigration gates were reopened post-pandemic.
An additional factor behind economists’ bullishness on housing is an update to the methodology of CoreLogic, which runs the monthly house-price index used by most groups to calculate market movements.
The upward revisions to the back-series increased the pandemic-era gain in home prices to 26.6 per cent from 23.1 per cent between February 2020 and April 2022. In addition, the peak to trough decline for the eight capital city index was lowered to 8.1 per cent from 9.7 per cent.
The revisions led three of the 13 respondents in the poll, including Commonwealth Bank of Australia, to upgrade forecasts for this year, while two revised their predictions for 2024. Westpac said it was reviewing its estimates.
“The ratio of house prices to incomes is highest in New Zealand and Australia,” said Nerida Conisbee, Ray White’s chief economist. “For housing policy, it simply means that we won’t fix affordability until we fix housing supply.”
A robust economy with the jobless rate hovering in a range of 3.4 per cent -3.7 per cent – levels last seen in the 1970s – also underpins demand for housing. Given that backdrop, there are few signs that a property downturn is around the corner.
“It stands to reason at the moment that housing values would continue to rise in the near term,” said CoreLogic Economist Eliza Owen.
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