State of the market property report for November 2023

Australia’s housing prices continued to recover in October, to potentially tap a new record high by the end of November.

Headwinds were anticipated following the Reserve Bank of Australia’s (RBA) decision to resume interest rate hikes at its November meeting, putting mortgage borrowers under greater duress. However, the prospect of rate rises was tempered by October’s inflation rate easing to 4.9%.

Stress on mortgage borrowers could in turn ease upward pressure on property prices, creating buying opportunities for developers and investors.

Australia’s property prices continue to rise

Figures from CoreLogic indicate that Australian home prices saw accelerated growth last month. CoreLogic’s national Home Value Index (HVI) posted a rise of 0.9 per cent in October, compared to an increase of 0.7 per cent in September.

Tim Lawless, CoreLogic’s research director, said the national HVI has risen 7.6 per cent since it tapped a bottom in January, and is now within striking distance of a new record high.

“At this rate of growth, we will see the national HVI reach a new record high midway through November, recovering from the 7.5 percentage drop in values recorded over the recent downturn between May 2022 and January 2023,” Lawless said.

All of Australia’s capital cities saw dwelling values rise in October with the exception of Darwin, which posted a 0.1 per cent decline. Perth led gains at 1.6 per cent, followed by Brisbane (1.4 per cent) and Adelaide (1.3 per cent).

Reserve Bank resumes rate hikes

After keeping interest rates on hold for four consecutive months, the Reserve Bank of Australia (RBA) has changed tack in November with the resumption of rate hikes.

At its November meeting held on Melbourne Cup Day, the RBA raised the cash rate target by 25 basis points to 4.35 per cent. The decision brings the cumulative increase to 4.25 percentage points since the current hiking cycle began in May 2022, when the RBA’s cash target rate stood at a record low of 0.1 per cent.

The latest hike was in line with consensus expectations, with all but four out of 39 economists surveyed by Reuters forecasting an increase.

Rob Flux, developer and educator at the Property Developer Network, says the move shows the RBA’s determination to contain inflation.

“They genuinely want us to slow down,” Flux said. “They’ve given us four rests in a row to see if we’ll work it out but we haven’t.

“This latest rate hike is a rap on the knuckles. Based on their rhetoric, there is still the chance of another rate rise.”

In RBA governor Michele Bullock’s post-meeting statement, she indicated that further hikes could be on the way, depending on how price levels respond in the near future.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” Bullock said.

However, today’s inflation data [29/11/23] shows Australia’s inflation rate eased in October with weaker consumer spending. This has reduced the likelihood of the Reserve Bank raising interest rates again this year.

As reported in the Guardian, ’ The RBA governor, Michele Bullock, has warned of “homegrown” inflation being more persistent than expected. At a gathering of central bankers in Hong Kong on Tuesday, she indicated the RBA may be prepared to hold off further rate hikes for now.

“We’re at a period where we have to be a little bit careful,” Bullock told the conference.

“We want to make sure we keep inflation under control and we bring it back down to our [2% to 3%] band,” she said. “But we also need to make sure we do that in a context of not imposing on the economy too much, and raising the unemployment rate so much.” ’

Housing supply remains a significant issue

CrowdProperty CEO David Ingram said housing supply remained tight with the seasonally adjusted estimate for the number of dwellings approved falling 4.6% in September, after an increase of 8.1% in August.

“At the same time,” Ingram said, “new arrivals are continuing to increase rental demand in the major cities and more employers are insisting people return to the office at least 50% of the working week which in turn affects demand for accommodation near working centres.

“We’re simply not building enough homes. But with the new housing policies due to come into effect in VIC and NSW, we might see planning restriction begin to change, enabling the construction of more medium density infill housing. This ‘missing middle’ is vital to helping ease the supply side of housing. Moreover, small-scale developers are ready to get on with building small infill projects immediately if they can get access to necessary debt finance.”

States continue to make announcements around housing policy changes. Queensland has announced a doubling of the first home owners grant (FHOG) to first home buyers on new builds of $30k (for off the plan and newly built homes).

The NSW Minns government is looking to fast-track buildings that have pre-approved designs for low and medium density buildings (up to six storeys). The NSW government plans to launch a competition for national and international architects to put forward high quality designs that will be chosen for a ‘pattern book’ of housing. The aim will be that developers who use the ‘pattern book’ will have an accelerated approval pathway. This is to help address the supply shortage in NSW in the current environment of low building approvals.

Western Australia is incentivising short stay accommodation property owners with $10,000 to convert to long term rental as a way of boosting the immediate need for more long term rental homes.

Mortgage borrowers come under heavier pressure

Further rate increases will exacerbate pressure on Australia’s mortgage borrowers, who have already come under heavy stress as a result of the current hiking cycle.

A study by Ben Phillips, principal research fellow at the ANU’s Centre for Social Research and Methods, found that Australian mortgage borrowers were under record levels of duress even before the latest rate hike.
“As a share of income, housing costs are at their highest rate since at least 1984,” Philips wrote in a paper published before the November hike.

“The key driver of this is mortgage interest rates and more significant debts compared to earlier decades.”

According to Philips’s research, by the end of the year around 48.5 per cent of Australia’s households paying off mortgages will be in a state of “financial stress”, which is defined as the allocation of at least 30 per cent of disposable income to mortgage repayments.

This compares to 26.7 per cent in 2019, prior to the onset of the Covid pandemic, and 43.8 per cent at the end of last year, following the RBA’s current rate hiking cycle to address breakneck inflation.

Rob Flux said increased pressure on mortgage borrowers could create buying opportunities for real estate developers and investors.

“I’m starting to hear advertising from the banks saying if you’re under mortgage distress, come chat with us,” Flux said.

“A large number of developers are also going into bankruptcy at the moment because they bought at previous high prices. There’s a lot of stock that’s coming onto the market right now that’s a good buying opportunity.”

“There’s going to be good opportunities over Christmas and New Year, while February and March is when the main action will take place.”

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