The good news for potential home buyers, and not an April Fool’s Day joke, is that the latest rate hike is working in some housing markets to slow demand, namely in Sydney and Melbourne. Sydney and Melbourne recorded price declines in March of 0.1% and 0.2%, respectively, according to fresh Cotality data. Sydney prices have now fallen in three of the past four months and Melbourne has been declining since the end of November last year.
The bad news is that other housing markets did not see much let up. Affordability has clearly deteriorated further in these markets, especially across the mid-tier capital cities. Perth surged 2.5% in the month. We don’t affectionately call it the ‘Republic of WA’ for nothing. In fact, the mid-sized capital cities, as well as Darwin, all recorded robust gains of 1.2% or more last month. Brisbane, Darwin and Adelaide recorded strong rises of 1.8%, 1.6% and 1.2%, respectively. Meanwhile, Hobart prices rose 0.8% and Canberra 0.4%.
Nationally, dwelling prices rose 0.8% in March, after a similar rise in February. At a top level, and without the detail, one would be forgiven for thinking the housing market has largely brushed aside the February rate hike and rising cost of living pressures, including those stemming from the Middle-East conflict and higher fuel prices.
In year-on-year terms, national dwelling prices rose 7.3% in March, the fastest pace in two years. Houses and units both rose 0.7% over the month. Over the year, house prices increased 9.9% and unit prices rose 10.6%.
A continuing feature of the data is widening divergence across cities and price points. Regional markets outpaced capitals last month (1.1% vs 0.6%), and growth at the lower end of the market is running ahead of the upper end as buyers search for lower priced entry points. This pattern has been present for some time and remains in place.
The ugly news for mortgage holders and those seeking to enter the market is that further tightening from the Reserve Bank remains likely. Housing demand and housing price growth should moderate as mortgage servicing costs rise.
Auction clearance rates suggest Sydney and Melbourne may continue to soften as the recent rate rise works through the system and the prospect of further tightening remains a distinct possibility. Other housing markets should also see demand ease. Clearance rates have trended lower and advertised supply has picked up.
Demand still has some support even as it cools. Development is facing rising input costs as fuel prices lift, and population growth may be stronger than otherwise given fewer departures. These cost pressures were already building before hostilities in the Middle East. For builders operating under fixed-price contracts, margin pressures are likely to intensify, raising the risk that new construction is scaled back and housing delivery constrained.
Before the latest rate hike in March, new housing loans were growing at an annual pace of 7.1%, the fastest since 2002. That pace of borrowing is expected to slow. Markets are pricing two further rate rises later this year.
We see a strong chance of another rate hike before mid year and a possibility of one more in the September quarter. Swap markets also have two hikes fully priced in. The cash rate is already restrictive and is beginning to bear fruit, as evidenced by leading housing indicators. One to two further increases should do the job, although the outlook remains highly dependent on the depth and duration of the conflict. This is where the unpredictability lies.
Given further pressure on cost of living and interest rates, alongside softer confidence as conflict in the Middle East extends, housing demand is likely to ease over the coming months. This should support a moderation in housing price growth, including in the mid-sized capitals.
Nationally, we expect dwelling prices to rise 2% to 3% this calendar year, down from our prior forecast of 6%.
Disclaimer
This report has been prepared for general informational purposes only and does not constitute personal financial advice. It does not take into account your specific objectives, financial situation, or needs. Before acting on any information in this report, you should consider its appropriateness in light of your circumstances and seek independent financial advice. The author holds, or may hold, positions in some of the securities mentioned in this report. These holdings may represent a potential conflict of interest. No representation or warranty is made as to the accuracy, completeness, or reliability of the information contained herein. Past performance is not a reliable indicator of future performance.
