Australian housing is well into an upswing although at this stage, price growth is not uniform across capital cities and regional areas. The pattern of recovery widened in the second half of last year from Sydney and Perth initially to include Melbourne, with Brisbane lagging behind so far this cycle.
In 2014, price growth is expected to broaden further to include Brisbane, locations within two hours’ drive from major capital city markets and the upper-end, although median price growth in the early-mover Sydney and Melbourne markets is unlikely to match the exceptional growth achieved last year.
Residential cycles from here will be shorter than the 1980s, 1990s and 2000s. Central bank monetary policy has shifted relatively swiftly in the last couple of cycles and now with structurally lower rates, smaller changes in rates will have a more sizeable influence on affordability and the timing of residential market turning points.
Upswing drivers are similar to previous cycles
The drivers of this upswing are similar to those in previous cycles and reflect the lagged impact of progressively lower mortgage rates on housing affordability.
Medium-term drivers – in the form of high population growth from robust immigration and low rates – will help sustain the upswing cycle and further price growth this year and into next. Increased supply will become more apparent over the next couple of years which will have the impact of moderating, though not completely offsetting, the extent of excess demand in the overall housing market.
Forecasting models point to further price growth ahead
With the major drivers being mortgage rates, relative affordability, migration, household incomes and policy changes, our house price models point to an ongoing trend for robust growth ahead across different capital cities, with modest price falls later in the cycle in line with those seen during previous cycles.
Rates hold the key.
Aggressive or earlier-than-expected rate hikes would bring the moderation cycle forward. Conversely, a dovish, staggered rate tightening cycle would draw out the current house price inflation cycle.
2014 outlook by major capital city market
Sydney is expected to continue to outperform this year given the earlier stage of the cycle relative to Melbourne, strong housing demand and previously low construction. Cyclically high auction clearance rates reinforce the strong near-term outlook. We expect price growth to approach 10% in 2014, then slow to single digit growth in 2015 with moderate falls expected 2016 as rates increase. Upper-end demand should lift this year assuming sustained solid growth in share market prices.
Melbourne price growth was above expectations last year due to the rate cuts; the rate of growth in 2014 is expected to moderate to single digit levels in 2014 and 2015, held up by overseas migration and foreign investor demand. A rush of CBD apartment supply will dampen investment returns in that market sector.
Brisbane has been one of the laggards so far this cycle, though forward indictors are recovering. Interstate migration is a major driver and with the affordability gap with Sydney having widened, the population shift from southern states should start to improve – along with housing demand and price growth.
Perth prices improved early although slowing mining investment will have a progressively smaller impact on demand and price growth from here. WA inward migration is starting to slow from record highs, a trend that might soften further. With affordability still reasonable relative to recent history, mid-single-digit house price growth is expected this year.