Property prices back on the rise as households see RBA finish line

Editor's Note

It doesn’t take much for Australians to jump back on the property bandwagon, but hints that we may be nearing the end of the tightening cycle is driving buyers back into the market.

^{Property prices have turned positive in March, Corelogic data shows. Picture: Getty}

The Reserve Bank of Australia this month raised the cash rate for a 10th consecutive time to 3.6%, shaving another 2.5% or so off the average person’s borrowing capacity and driving repayments higher for existing borrowers.

And while inflation is still too high, unemployment is hovering near a half-century low, and business conditions remain strong, the events of the past week have complicated the outlook for interest rates.

The collapse of Silicon Valley Bank – and the ensuing global banking rout – has highlighted financial stability risks among institutions that haven’t adequately prepared for rising interest rates.

You can read more on what’s happened, and why it matters here.

Before the fallout the US Federal Reserve was expected to raise interest rates by another 50 basis points at its next meeting. Now it’s anyone’s guess. A pause is equally as likely at this stage, and markets are expecting cuts in the second half of the year.

Australian lenders are largely insulated from the fallout, but the turmoil has split economists on whether the RBA also hits pause in April. Financial markets have sharply retreated since the news broke – last week, the RBA was expected to raise the cash rate two more times to reach a terminal rate of 4.1%.

At the time of writing, the cash rate futures market is no longer pricing in any more rate rises, and now expects cuts in the second half of the year.

But even before the SVB news broke, Corelogic data shows a property resurgence was emerging through the first half of March.

Property prices back on the rise

The property price downturn flatlined in February, and has since turned positive according to Corelogic, with its Daily Home Value Index up 0.3% during the first half of March.

Corelogic research director Tim Lawless says Sydney led the charge – up 0.5% – followed by Melbourne and Perth (+0.2%).

CoreLogic Daily Home Value Index

The reasons? There are many, but Lawless says a lack of new supply and a return of overseas migration are two key drivers.

“CoreLogic reports capital city listings over the past four weeks were 19.9% below the previous five-year average for this time of the year,” Lawless says.

“At the same time, we have also seen a rise in auction clearance rates back to around the decade average.”

International migrants typically rent when they first move to Australia, but with vacancy rates so tight, Lawless says more may be choosing to buy instead.

That tight rental market may also be driving more existing renters to buy, according to data from REA Group’s data arm, PropTrack.

It shows rental vacancy rates across Australia have halved since the start of the Covid pandemic, to sit at the lowest level since 2018.

“It’s now tougher to find a home to rent in the capital cities than in regional areas, which is a reversal of trends seen since before Covid,” PropTrack senior economist Paul Ryan says.

“With demand for rentals expected to remain strong, we see no reprieve in the coming months. These market conditions mean [rent] prices will continue to grow strongly throughout the year.”

PropTrack Rental Vacancy Rates - February 2023

Does that mean house prices have again defied expectations? Maybe, says AMP’s chief economist Shane Oliver.

“There are a bunch of positives for the property market,” he says, listing the return of immigrants and foreign students, a very tight rental market, lower house prices that may be luring in bargain hunters, very low levels of listings…

“…and maybe signs that the RBA is close to the top on rates,” he says.

But that doesn’t mean prices have bottomed. He says these factors are working against rising interest rates – which are still yet to fully flow through to mortgages – as well as the ‘fixed rate mortgage cliff’ which will see some borrowers revert to an interest rate almost triple what they’re on now.

Then there’s the hit to borrowing power…

Housing less affordable despite falls

Putting on my mortgage broking hat – as a general rule of thumb, a typical buyer’s borrowing capacity drops by roughly 5% each time the RBA increases the cash rate by 50 basis points – assuming a lender passes on the hike in full.

To put that into perspective, an average wage earner who could borrow $684,000 in May 2022 can now only borrow around $513,000.

That outpaces the recent price falls – over the same period, property prices have only fallen around 9%. Ultimately, housing has become less affordable for those trying to break into the market, unless they’ve seen a substantial jump in their salary.

But first-home buyers make up a small slice of the property market, and one key piece of the property puzzle is existing homeowners, those who have built up vast equity across Australia’s $9.3 trillion residential housing market.

According to Corelogic, national housing values remain 14.8% higher than where they were in March 2020, before the pandemic hit.

National housing values

The majority of homeowners are sitting on a tidy sum of equity. It means they have choice – if they can’t get a price they want, they simply won’t sell. If interest rates become too high, they’ll still sell at a profit.

So while we may not be at the bottom yet, we may not have far to go.