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House prices surge (… but there’s more than one market)

ABS data released today shows house prices jumped another 5.4% through the March quarter – the largest quarterly increase in over ten years – with annual prices rising 7.5%. And despite icy conditions across eastern Australia, house prices show no signs of cooling off. According to CoreLogic, they rose another 1.8% in April and 2.2% in May, placing current estimates of yearly growth at 10.6%. 

Since COVID took hold and Australia closed its border, there is expected to be a cumulative population growth hole of over 650,000 people by the time we re-open, and yet we are now building many more houses than we were pre-COVID. Such is the power of government support, via historically low interest rates and the federal HomeBuilder grant.

And when you add on unusually strong demand from high consumer confidence, extra household savings, and a fear of missing out on getting into the market, you get the perfect concoction for a hot housing market.

During the past year, every capital city has enjoyed a rise in house prices – in fact growth has been so strong that prices in six out of our eight capital cities sit at record highs.

But it’s the three smallest capitals that particularly stand out (chart below). In part, this is due to a mix of the different degrees of COVID lockdowns that dampened face-to-face activity in the property sector and the impact border closures and changing work preferences have had on capital city population flows. Additional state government support has also helped to bolster within state demand (the Tasmanian government, for example, topped up the HomeBuilder grant).

Chart: Annual and quarterly change in capital city house prices (May 2021)

Although the housing market is firing on all cylinders, challenges do lie ahead. Temporary policy measures and unusually high demand will begin to fade, and ongoing international border closures will keep Australia’s population growth lower for some time.

In fact, by mid-2025, Deloitte Access Economics forecasts there will be 670,000 fewer people living in Australia than we otherwise expected prior to the pandemic, taking roughly 260,000 houses/units out of the pipeline of demand. What remains to be seen is how much of the new construction is supply being brought forward from future years (making the most of the incentives) and how much will be additional stock. If the pendulum swings to the latter, we could see implications for prices in the coming years.

For now, the degree of demand varies considerably across the housing market. For many areas, vacancies are actually near the tightest they have ever been. But the story is very different for the larger inner-city markets, as an absence of international students and new migrants, and less premium being placed on living near a CBD office location, has left many dwellings vacant – Melbourne City, which has a vacancy rate of 8.6%, is particularly feeling the pinch.

The consequence of high vacancies can be seen in rents. On average, the median rent for a two-bedroom apartment in Melbourne Inner is now 25% cheaper than the year prior. In Sydney Inner, prices for an equivalent property were hit a little harder, and rents also declined (just not to the same extent as seen in Melbourne).

So, although the property market is hot, not all areas are reaping the spoils.