Housing Market Q4 Outlook: Price Remains Trending Up
With signs of “some increased risk taking” appearing in mortgage lending, APRA announced to change the way lender assess new borrower’s ability to service a mortgage, which lifted the loan serviceability buffer by 0.5 per cent (the borrower repayment test) to the mortgage rate plus 3 per cent.
This signal of tightening regulations reminds us that housing market values experienced a peak to trough decline of -8.4% off the back of macro-prudential changes in 2017 at the national level.
Will the up-rising trend change in Q4? From our point of view, it is not the time yet.
What happened this year in housing market?
According to Australian Bureau of Statistics, the house price index in Australia rose by 6.7% QoQ in Q2 2021, faster than a 5.4% growth in Q1 and above market consensus of 6%. This was the steepest pace of increase in residential property prices since the series began in Q3 2003, amid a record low of interest rates and as the most recent COVID-19 shutdown in Sydney did not have a noticeable impact. Through the year to the Q2 quarter, house prices jumped 16.8%.
All capital cities recorded higher prices, and Sydney saw one of the biggest gains. Sydney property prices has increase 23.8% over last year, exceeded its peak level in 2017.
What drives the upward trend?
No doubt that the record-low interest rate is one of the dominating factors. Since the beginning of 2019, the Reserve Bank of Australia has lowered its overnight cash rate target from 1.5 per cent to 0.1 per cent, leading to sharp falls in the average mortgage rates being offered by lenders.
The imbalance of supply and demand is another important factor. Since pandemic, many suburbs saw very tight housing inventory which was absorbed by the demand very quickly, which can be highlighted by the consistently strong auction clearance rates exhibited every weekend this year.
What can we expect in Q4?
1. APRA’s proposed change in loan serviceability buffer has limited impact
First comes to the concerns on the tightening moves from regulators.
But when we analyse the numbers, we can realize that this year’s growth has largely been driven by the ‘high-end’ of the market. This is reflected in CoreLogic tiered hedonic indices, which show the top 25% of Sydney values have increased 12.0% compared with a 5.4% rise at the ‘low’ end of the market. The higher wealth households are expected get limited impact since they often have multiple streams of income. Besides, major banks already have a required buffer of 2.5 percentage points in the serviceability assessment process, which was introduced in 2019. So APRA’s announcement regarding the extra 0.5% buffer may seem like it won’t have much impact on demand for credit.
2. Interest Rate is expected to be at the record-low level.
The other concern is the interest rate. Some experts predict mortgage rates will rise by the end of the year.
According to RBA’s own outlook, wages growth would need to jump from the current paltry 1.7 per cent per annual to more than 3 per cent for inflation to lift sustainably within the bank’s 2 per cent to 3 per cent target band before increasing rates. Economist from Deloitte estimated at no point before 2025-26 does the firm have the annual wage price index averaging above 2.7 per cent. “The interest rates were likely to remain low for years because any surge in inflation beyond short-term pandemic influences was still a long way off.”
3. Housing supply remains tight
NSW has lifted the restriction in October, the housing supply in terms of existing house may increase. But considering the owner now is more cautious and the Q4 is seasonal much quitter, the supply is still not enough to meet the extremely strong demand. For the new home, the approval for the new dwellings increased earlier this year, but new home construction takes time, and it is expected to take longer time due to previous lock down restriction and shortages and delays in construction materials. The new inventory won’t necessarily be ready for sales this quarter.
4. Housing price keeps trending up at a more sustainable rate.
Before housing price recorded historical high this year, housing market has experienced a number of years of minimal growth. It the sample period is from last peak, the annual growth rate is actually around 5%, which is not excessive or a bubble. Although the regulators’ guiding signal and uncertainty of the economy recovery would put a little pressure on the growth rate. The interest rate which remains low and the demand which remains high, should set the price trending up.
5. Affordability is further squeezed.
The proposed change in loan serviceability buffer would have more significant on the first home buyers, especially the young families, who do not have diversified source of income. Their borrowing capacities are squeezed while the housing price is keeping up, making the house dream more difficult, driving them out of the market.
6. Prime apartments would pick up sales.
With capital growth in houses outperforming apartments so far this year, the pricing gap between houses and apartments is around 50%, some investors have returned to the market, as well as the first home buyers who are being priced out of standalone houses market.
Well-located and family-friendly apartments are now picking up sales. Chateau Showground, the prime apartment project in Wharton’s investment priority pipeline, has achieved its sales target even in the restriction period.
The residents in NSW are celebrating the lockdown lift-up, they are confident in the reopening, so are they in the housing market. The housing market is still expected to perform well in Q4 and in 2022.
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Reference
https://www.bankrate.com/real-estate/housing-trends/
https://tradingeconomics.com/australia/housing-index
https://propertyupdate.com.au/property-investment-sydney/