Home Prices – Page 61 – Digital Finance Analytics (DFA) Blog

Slowdown in house prices to continue: HSBC

Economists from HSBC have joined calls that Australia’s house market boom is reaching an end, predicting a moderation in house price growth to single digits in the coming quarters.

In the bank’s most recent Downunder Digest, Australian housing: Cooling Not Crashing, chief economist Paul Bloxham and economist David Smith write that slowdowns in the Sydney and Melbourne housing markets will continue to weigh in on national house price growth for the next few quarters.

“[We] retain our forecast that national housing pricing growth will slow from the double-digit rates of recent years to 3-6% in 2018,” the economists said.

They expect house price growth to be between 2-4% in Sydney and 7-9% in Melbourne for the upcoming year. In other cities, low single digit rates are expected.

Bloxham and Smith attribute cooler property markets in Sydney and Melbourne to increased housing supply through greater volumes of apartment construction, tighter prudential lending regulations, and a crackdown on foreign investors both locally and within China.

HSBC does not expect a sharp decline in house prices however, with a hard landing only caused by an unexpected shock from overseas or a steep rise in Australia’s unemployment rate.

Sudden changes from within the country are also off the table, the economists predicted.

“Although we see the RBA beginning to lift its policy rate in 2018, we expect only a slow pace of cash rate tightening and some relaxation of current tight prudential settings as the housing market cools.”

Overall, past upward trends of house price growth have been more boom than bubble, they wrote.

UK Property Investors Head For The Exit

The UK Property Investment Market could be a leading indicator of what is ahead for our market. But in the UK just 15% of all mortgages are for investment purposes (Buy-to-let), compared with ~35% in Australia. Yet, in a down turn, the Bank of England says investment property owners are four times more likely to default than owner occupied owners when prices slide and they are more likely to hold interest only loans. Sounds familiar?

According to a report in The Economist, “one in every 30 adults—and one in four MPs—is a landlord; rent from buy-to-let properties is estimated at up to £65bn ($87bn) a year. But yields on rental properties are falling and government policy has made life tougher for landlords. The age of the amateur landlord may be”.

Investing in the housing market has seemed like a one-way bet, with prices trending upwards in real terms for four decades, mainly because government after government has failed to loosen planning restrictions on building new houses. Now, however, there are signs that regulatory changes have begun to send the buy-to-let boom into reverse.

Yields on rental properties have fallen. House prices have risen faster than rents, in part because buy-to-letters have reduced the supply of housing available to prospective owner-occupiers while simultaneously increasing the supply of places to rent. Britain’s ratio of house prices to rents is now 50% above its long-run average. All this makes buy-to-let investment less lucrative. Data from the Bank of England suggest that yields in September were below 5%, their joint-lowest rate since records began in 2001, when they were above 7.5%.

One consequence of this could be a more stable financial system. Roughly 15% of mortgage debt is on buy-to-let properties. The Bank of England has warned that there are risks associated with this. One problem is that property investors buy when house prices are rising but sell when they are falling, making house prices more volatile. Buy-to-let landlords are also more likely to default than owner-occupiers. One reason is that doing so does not force them out of their home. Another is that buy-to-let mortgages are more likely to be interest-only (ie, where the principal is not repaid). That can be tax-efficient but it means that monthly repayments can jump sharply if interest rates rise. The Bank of England’s stress tests last month showed that the rate at which landlords’ loans turn sour could be four times greater than the rate for owner-occupiers’ loans. All things considered, the shrinking of the buy-to-let sector may come as a relief to regulators.

The future for buy-to-letters will not get much brighter. In January a tweak to the rules on capital-gains tax will increase the liabilities of landlords who register as businesses. Large institutional investors are moving on to buy-to-letters’ turf, hoping to benefit from their economies of scale to offer better-quality housing to tenants. It was good while it lasted, but the golden age for the amateur landlord may be over.

Housing Affordability Improves For Some

From The Real Estate Conversation.

Housing affordability has improved across all states and territories, allowing for a large increase in the number of loans to first-home buyers, according to the September quarter edition of the Adelaide Bank/REIA Housing Affordability Report.

The report shows the proportion of median family income required to meet average loan repayments decreased by 1.2 percentage points over the quarter to 30.3 per cent. The result was decrease of 0.6 percentage points compared with the same quarter in 2016.

REIA president Malcolm Gunning said first-home buyers now make up 24.5 per cent of the total owner occupied housing market, excluding refinancing.

“This is the highest rate since September 2013,” he said, noting the rate had been dropping steadily for the last five years until this latest rise.

Gunning said the number of first home buyers increased by 22.8 per cent over the quarter and 32.6 per cent over the year.

Darren Kasehagen, Head of Business Development, Adelaide Bank said, “The increase in housing affordability across all states and territories is to be welcomed and is reflected by heightened activity in the number of first home buyers coming back into the market.

“Housing affordability is still a major issue in Sydney and Melbourne, but there are some bright spots in the latest report from the other capitals that are also worthy of note.

The largest increases in first-home buyers were New South Wales (up 57.7 per cent), Victoria (up 32.2 per cent), the Northern Territory (up 14.3 per cent) and the Australian Capital Territory (up 20.0 per cent).

“Nationally, the average loan size to first home buyers increased to $319,500, or by 0.6 per cent over the September quarter – but decreased by 0.1 per cent over the past twelve months,” said Kasehagen.

For all borrowers, the average loan size decreased to $380,900 with the total number of loans increasing by 4.2 per cent for the quarter or 12.5 per cent year on year.

Rental market affordability

The report shows varied affordability across rental markets.

“Over the quarter, the proportion of median family income required to meet rent payments increased by 0.3 percentage points to 24.6 per cent,” said Gunning.

Rental affordability improved in Queensland, South Australia, Western Australia and the Northern Territory, he said, and remained steady in Victoria but declined in New South Wales, Tasmania and the Australian Capital Territory.

Western Australia recorded a “standout” result, said Kasehagen.

Western Australia knocked the ACT from their position of being the state or territory with the lowest proportion of family income devoted to meeting median rents. Western Australians only contribute 17.4 per cent of their family income to rent, according to the report. The figure for Canberra was 18.1 per cent.

“This bides well for future first home buyers in the West seeking to build a deposit and take the step toward eventual home ownership,” said Kasehagen.

In Canberra, 18.5 per cent of family income in Canberra was devoted to meeting average loan repayments – the lowest percentage in the country. The gap between renting and buying in Canberra is now only 0.4 per cent, said Kasehagen.

“An equation that may see more people now renting in the ACT deciding to take the step towards home ownership,” he said.

Adelaide Bank/REIA Housing Affordability Report: State by State

New South Wales

Over the September quarter, housing affordability in New South Wales improved with the proportion of income required to meet loan repayments decreasing to 36.1 per cent, a fall of 1.9 percentage points over the quarter and a decrease of 1.0 percentage points compared with the corresponding quarter 2016. With the proportion of income required to meet loan repayments 5.8 percentage points higher than the nation’s average, New South Wales remained the least affordable state or territory in which to buy a home.

In New South Wales, the number of loans to first home buyers increased to 6,775, an increase of 57.7 per cent over the quarter and a rise of 70.9 per cent compared to the September quarter 2016. Of the total number of first home buyers that purchased during the September quarter, 23.4 per cent were from New South Wales while first home buyers make up 19.0 per cent of the State’s owner-occupier market. The average loan to first home buyers decreased to $361,333, a decrease of 1.2 per cent over the quarter and a decrease of 1.0 per cent compared to the same quarter last year.

Rental affordability, declined in New South Wales over the September quarter with the proportion of income required to meet median rent payments increasing to 29.8 per cent, an increase of 1.2 percentage points over the September quarter and an increase of 1.7 percentage points compared to the same quarter last year.

Victoria

Over the September quarter, housing affordability improved in Victoria with the proportion of income required to meet loan repayments decreasing to 32.2 per cent, a decrease of 1.2 percentage points over the quarter and a decrease of 0.2 percentage points compared to the same quarter of the previous year.

The number of loans to first home buyers in Victoria increased to 8,786, an increase of 32.2 per cent over the quarter and an increase of 33.0 per cent compared to the September quarter 2016. Of the total number of first home buyers that purchased during the September quarter, 30.4 per cent were from Victoria while first home buyers make up 26.2 per cent of the State’s owner-occupier market.

Rental affordability in Victoria has remained steady over the quarter with the proportion of income required to meet median rent remaining at 23.1 per cent. Compared to the September quarter 2016, rental affordability has declined with the proportion of income required to median rent increasing by 0.2 percentage points.

Queensland

Housing affordability in Queensland improved over the September quarter with the proportion of income required to meet home loan repayments decreasing to 26.8 per cent, a decrease of 0.5 percentage points over the quarter and a decrease of 1.0 percentage points compared to the same quarter last year.

Over the September quarter, the number of loans to first home buyers in Queensland increased to 6,271, an increase of 4.5 per cent over the quarter and an increase of 18.5 per cent compared to the same quarter of 2016. Of all Australian first home buyers over the quarter, 21.7 per cent were from Queensland while the proportion of first home buyers of the State’s owner-occupier market was 26.1 per cent.

Rental affordability in Queensland improved over the quarter with the proportion of the median family income required to meet the median rent decreasing to 22.8 per cent, a decrease of 0.2 percentage points over the quarter and a decrease of 0.6 percentage points compared to the same quarter 2016.

South Australia

Over the September quarter, housing affordability in South Australia improved with the proportion of income required to meet monthly loan repayments decreasing to 25.3 per cent, a decrease of 1.5 percentage points over the quarter and a decrease 1.1 percentage points compared to the September quarter 2016.

Over the September quarter, the number of loans to first home buyers in South Australia increased to 1,385, an increase of 2.0 per cent over the quarter and an increase of 12.6 per cent compared to the September quarter 2016. Of all Australian first home buyers over the quarter, 4.8 per cent were from South Australia while the proportion of first home buyers in the state’s owner-occupier market was 19.2 per cent.

Rental affordability in South Australia also improved over the quarter with the proportion of income required to meet rent payments decreasing to 21.7 per cent, a decrease of 0.2 percentage points over the quarter and a decrease of 0.7 percentage points compared to the September quarter 2016.

Western Australia

Over the September quarter, housing affordability in Western Australia improved with the proportion of income required to meet loan repayments decreasing to 22.4 per cent, a decrease of 1.2 percentage points over the quarter and a decrease of 1.4 percentage points compared to the September quarter 2016.

The number of first home buyers in Western Australia increased to 4,432 in the September quarter, an increase of 7.4 per cent over the quarter and an increase of 17.9 per cent compared to the same time last year. Of all Australian first home buyers over the quarter, 15.3 per cent were from Western Australia while the proportion of first home buyers in the state’s owner-occupier market was 36.2 per cent.

Rental affordability in Western Australia also improved during the September quarter with the proportion of family income required to meet the median rent decreasing to 17.4 per cent, a decrease of 0.7 percentage points over the quarter and a decrease of 1.8 percentage points compared to the year before.

Tasmania

Housing affordability in Tasmania improved over the September quarter with the proportion of income required to meet home loan repayments decreasing to 23.3 per cent, a decrease of 0.6 percentage points over the quarter and a decrease of 0.5 percentage points from the September quarter 2016.

The number of first home buyers in Tasmania increased to 386, an increase of 1.6 per cent over the quarter but a decrease of 3.3 per cent compared to the same quarter of the previous year. Of all Australian first home buyers over the quarter, 1.3 per cent were from Tasmania while the proportion of first home buyers in the state’s owner-occupier market was 17.5 per cent.

Rental affordability in Tasmania, however, declined over the quarter with the proportion of income required to meet median rents increasing to 26.3 per cent, an increase of 0.5 percentage points over the quarter and an increase of 2.3 percentage from the same quarter 2016.

Northern Territory

Housing affordability in the Northern Territory improved with the proportion of income required to meet loan repayments decreasing to 19.4 per cent in the September quarter, a decrease of 0.9 percentage points over the quarter and a decrease of 1.1 percentage points when compared to the September quarter 2016.

The number of loans to first home buyers in the Northern Territory increased to 200, an increase of 14.3 per cent over the September quarter and an increase of 37.9 per cent compared to the September quarter 2016. Of all Australian first home buyers over the quarter, 0.7 per cent were from the Northern Territory while the proportion of first home buyers in the Territory’s owner-occupier market was 28.8 per cent.

Rental affordability in the Northern Territory also improved over the quarter with the proportion of income required to meet the median rent decreasing to 22.7 per cent, a decrease of 0.4 percentage points over the quarter and a decrease of 2.0 percentage points compared to the September quarter 2016.

Australian Capital Territory

Housing affordability in the Australian Capital Territory improved over the September quarter with the proportion of income required to meet home loan repayments decreasing to 18.5 per cent, a decrease of 1.3 percentage points over the quarter and a decrease of 1.5 percentage points compared to the same quarter last year.

The number of loans to first home buyers in the Australian Capital Territory increased to 684, an increase of 20.0 per cent over the quarter and an increase of 64.4 per cent compared to the September quarter 2016. Of all Australian first home buyers over the quarter, 2.4 per cent were from the Australian Capital Territory while the proportion of first home buyers in the Territory’s owner-occupier market was 26.8 per cent.

Rental affordability in the Australian Capital Territory, however, declined over the September quarter with the proportion of income required to meet the median rent increasing to 18.1 per cent, an increase 0.2 percentage points over the quarter and an increase of 0.8 percentage points compared to the September quarter 2016.

ABC Radio Does Housing

I had the chance to discuss at some length the latest dynamics of the housing and property markets with ABC’s Jules Schiller on ABC Radio last night.

You can listen to the discussion.

We discussed the concept of affordability to first-time house buyers and the latest Bankwest study which shows how budget-friendly the Australian housing market is today. North says that the country has an existing dilemma to repair in able for younger people to buy houses easily.

North says that giving incentives to first-time buyers will only lessen the interest of the house they are set to buy, adding that it might not help those people. He believes that reforms in the housing sector are needed to solve this issue of unaffordable housing among new buyers. He talks about the different housing prices in the East coast where Sydney resides and the West Coast where Perth is located. He gives advice to first-time buyers when is the right time to buy houses in capital cities in Australia.

He believes that there are several uncertainties concerning the current set-up of the housing market. He says that a Housing Royal Commission is more needed than a Banking one, though this inquiry can affect the housing industry but he is not sure whether first-time buyers will feel the effect once the inquiry is finished. He says that the inquiry should look into how banks are dealing with mortgage payments and other transactions.

He cannot say whether foreign ownership of some houses and lands in the country are largely affecting the first-time buyers but it is a factor. He says that there are many markets where first-time buyers can invest like Adelaide, Hobart and Brisbane.

Home Prices Wobble In Sydney; Melbourne Higher

From CoreLogic.

National dwelling values held steady in November, with a 0.1% fall in capital city dwelling values offsetting a 0.2% rise in values across the combined regional markets of Australia, according to CoreLogic’s November Hedonic Home Value Index results.

According to CoreLogic head of research Tim Lawless, a significant contributor to the downwards movement over the month came from the Sydney housing market, which recorded a 0.7% fall in dwelling values, while a fall in values was also recorded across Darwin and regional Northern Territory which were both down 0.4% over the month. For the remaining broad regions of Australia, dwelling values were relatively steady, or experienced a subtle rise, over the month.

Index results as at November 30, 2017

National dwelling values tracked 0.2% higher over the past three months and have increased 5.2% over the twelve months ending November. The national annual growth rate has now halved since reaching a recent peak in May 2017, when dwelling values rose 10.4%.

Conditions remain diverse across the regions

Mr Lawless said, “The diversity in capital city housing market conditions is highlighted by the rolling quarterly change in dwelling values, which range from a 3.3% rise in Hobart, to a 2.7% decline in Darwin. However, considering that together these two cities account for less than 1.5% of total housing stock in Australia, they have had little effect on the overall headline figures.”

He said, “On the other hand, softer housing market conditions across Sydney, which comprises roughly one fifth of national dwelling stock (and approximately one third by value), has a material influence over the headline growth trends.”

The Sydney housing market moved through a recent peak in July 2017 and dwelling values have been trending lower each month since that time. Dwelling values were down 0.7% in November to be 1.3% lower relative to the market peak. Sydney’s 1.3% fall over the past three months is the greatest decline over a three month period since March 2016. While the rate of value decline in Sydney has gathered some momentum, it remains extremely modest.

Mr Lawless believes there is mounting evidence that the Perth housing market may finally have bottomed out. Dwelling values across Perth have edged higher over each of the past three months to record the first rolling quarterly capital gain since late 2014. The three months to November saw Perth dwelling values rise by 0.3%. In addition to values moving off their low base, settled sales are rising (+3.8% year on year), homes are selling faster (59 days compared with 68 days a year ago) and advertised stock levels have reduced substantially (-12.7% compared with last year). He said, “If this is indeed the start of a recovery phase in the Perth housing market, it comes after dwelling values have fallen 10.8% since peaking in mid-2014.”

Many Households Think Property Values SHOULD Fall

According to ME Bank, in a study of 1500 Australian adults, 43% of respondents said they were reliant on future house prices to achieve future life / financial goals, with 10% completely reliant.

But it’s a tug-of-war as to which way we want prices to go: 38% want prices to increase while 37% want them to fall.

Where you sit largely comes down to your property ownership status: 39% of those who own the home they live in and 47% who own an investment property indicated they are ‘reliant’ on future prices, presumably increasing, while 48% of those who don’t own a property also say they are reliant, presumably wanting prices to fall.

Younger respondents indicated they are more reliant on future house prices than older: 51% of Millennials (25 to 39 year olds) said they are reliant compared to 30% of Baby Boomers (55-74 year olds).

Most tellingly, the survey indicates more Australians would benefit from property prices falling than rising, with only 28% indicating they’d benefit by selling if prices continued to rise compared to 47% who said they’d benefit by buying in if property prices fell.

A quarter of home owners happy to see house prices to fall

ME home loan expert, Patrick Nolan, said he was surprised to find 37% of respondents want property prices to fall, including 24% of those who own a home and even 20% of those with an investment property, compared to 38% of who want prices to continue rising 38%.

“Traditionally Australians fall into two camps when it comes to property prices: owners, who want them to rise, and non-owners, who want them to fall.

“But with high prices disrupting the dream of home ownership and the benefits that brings, views are changing.”

“That property owners were willing to see asset values fall is a sure sign house prices had reached heights many think are unfair,” Nolan said.

When asked why they want prices to fall, the overwhelming reason given was to help address the housing affordability issue (57%), a sentiment expressed by 97% of those with property.

The bulk of those wanting house prices to continue rising are property owners: 49% of home owners and 55% of investors.

Chinese Homebuilder Outlook Stable, but Market to Cool

China’s housing market is likely to continue to cool in 2018, with sales growth set to slow across most of the country and house prices likely to stay relatively flat, says Fitch Ratings.

However, the authorities have considerable policy flexibility to support housing demand, which limits the risk of a market downturn. We therefore maintain a stable sector outlook for Chinese homebuilders.

The Chinese government has imposed tougher rules on home purchases and minimum loan deposits in higher-tier cities since October 2016 to dampen speculation. We do not expect further tightening in 2018, except perhaps in some lower-tier cities in strong economic regions that could see price increases. Most of the existing restrictions are likely to remain in place, but policies could be adjusted to encourage homeownership for first-time homebuyers or to attract skilled labour migration in some cities where house prices have stabilised.

The curbs have had a clear impact on the market, reining in house price inflation, tempering home sales growth and encouraging destocking. We expect them to limit any gains in house prices in 2018. Contracted sales growth is likely to slow for most homebuilders, and we forecast that overall housing sales will decelerate to 5%, from 10.9% yoy on a trailing 12-months contracted sales at end-October 2017. The destocking cycle could, however, begin to reverse, as some companies now only have land bank reserves for two to three years of development.

A major house price correction is unlikely, given that the authorities directly control many aspects of the housing and mortgage markets. Moreover, the restrictions in higher-tier cities, which have seen the strongest price gains in recent years, have led to considerable pent-up demand that could be released if policy is relaxed.

Homebuilders’ EBITDA margins could begin to narrow in 2018 and 2019 as homebuilders start to work through their higher-cost inventory in a market where prices are under pressure from government controls. Leverage is likely to remain relatively stable over the next two years, with net debt/adjusted inventory averaging 40%-43% among Fitch-rated homebuilders. Cash flow generation is also likely to remain strong.

We maintain a stable sector outlook on commercial property. Mall traffic in higher-tier cities is suffering from strong saturation and competition from e-commerce, with only mature malls in prime locations performing well. We believe these first-tier city malls will achieve low single-digit yoy rental growth in 2018, similar to 2017. However, malls of established operators in less-saturated lower-tier cities are seeing strong traffic growth.

Grade A office space in most first-tier cities is likely to remain broadly stable, and we expect the vacancy rate to stay below 15%. However, office assets in Guangzhou and Shenzen, as well as in lower-tier cities, have higher vacancy rates and could be affected by an increase in supply in 2018.

Poorer Australians Bearing the Brunt of Rising Housing Costs

From The Conversation.

Rising housing costs are hurting low-income Australians the most. Those at the bottom end of the income spectrum are much less likely to own their own home than in the past, are often spending more of their income on rent, and are more likely to be living a long way from where most jobs are being created.

Low-income households have always had lower home ownership rates than wealthier households, but the gap has widened in the past decade. The dream of owning a home is fast slipping away for most younger, poorer Australians.

As you can see in the following chart, in 1981 home ownership rates were pretty similar among 25-34 year olds no matter what their income. Since then, home ownership rates for the poorest 20% have fallen from 63% to 23%.

Home ownership rates also declined more for poorer households among older age groups. Home ownership now depends on income much more than in the past.

Lower home ownership rates mean more low-income households are renting, and for longer. But renting is relatively unattractive for many families. It is generally much less secure and many tenants are restrained from making their house into a home.

For poorer Australians who do manage to purchase a home, many will buy on the edges of the major cities where housing is cheaper. But because jobs are becoming more concentrated in our city centres, people living on the fringe have access to fewer jobs and face longer commutes, damaging their family and social life.

Prices for low-cost housing have increased the fastest

The next chart shows that the price for cheaper homes has grown much faster than for more expensive homes over the past decade. This has made it much harder for low-income earners to buy a home.

If we group the housing market into ten categories (deciles), we can see the price of a home in the lowest (first and second) deciles more than doubled between 2003-04 and 2015-16. By contrast, the price of a home in the fifth, sixth and seventh deciles only increased by about 70%.

Tax incentives for investors may explain why the price of low-value homes increased faster. Negative gearing remains a popular investment strategy; about 1.3 million landlords reported collective losses of A$11 billion in 2014-15.

Many investors prefer low-value properties because they pay less land tax as a proportion of the investment. For example, an investor who buys a Sydney property on land worth A$550,000 pays no land tax, whereas the same investor would pay about A$9,000 each year on a property on land worth A$1.1 million.

Rising housing costs also hurt low-income renters

As this last chart shows, more low-income households (the bottom 40% of income earners) are spending more than 30% of their income on rent (often referred to as “rental stress”), particularly in our capital cities. In comparison, only about 20% of middle-income households who rent are spending more than 30% of their income on rent.

Why are more low-income renters under rental stress?

First, Commonwealth Rent Assistance, which provides financial support to low-income renters, is indexed to the consumer price index and so it fell behind private market rents which rose roughly in line with wages.

Secondly, rents for cheaper dwellings have grown slightly faster than rents for more expensive dwellings. Finally, the stock of social housing – currently around 400,000 dwellings – has barely grown in 20 years, while the population has increased by 33%.

As a result, many low-income earners who would once have been in social housing are now in the private rental market.

What can be done about it?

Increasing the social housing stock would improve affordability for low-income earners. But the public subsidies required to make a real difference would be very large – roughly A$12 billion a year – to return the affordable housing stock to its historical share of all housing.

In addition, the existing social housing stock is not well managed. Homes are often not allocated to people who most need them, and quality of housing is often poor. Increased financial assistance by boosting Commonwealth Rent Assistance may be a better way to help low-income renters meet their housing costs

Boosting Rent Assistance for aged pensioners by A$500 a year, and A$500 a year for working-age welfare recipients would cost A$250 million and A$450 million a year respectively.

Commonwealth and state governments should also act to improve housing affordability more generally. This will require policies affecting both demand and supply.

Reducing demand – such as by cutting the capital gains tax discount and abolishing negative gearing – would reduce prices a little. But in the long term, boosting the supply of housing will have the biggest impact on affordability. To achieve this, state governments need to change planning rules to allow more housing to be built in inner and middle-ring suburbs.

Unless governments tackle the housing affordability crisis, the poorest Australians will fall further behind.

Authors: John Daley, Chief Executive Officer, Grattan Institute;
Brendan Coates, Fellow, Grattan Institute; Trent Wiltshire, Associate, Grattan Institute

78% of Australians say prices won’t fall

From Mortgage Professional Australia.

Nearly four out of five Australians don’t see house prices falling in their state over the next two years, according to a new report by comparison site CANSTAR.

CANSTAR surveyed 2,026 consumers on their views on property prices and home buying. Nationally, 47% of respondents expected steady growth in house prices, with a further 8% predicting prices would ‘skyrocket at some point’.

Just 11% of respondents thought prices could fall in the next two years.

Even in Perth, where according to CoreLogic, values fell 2.5% over the past year, just 7% of respondents thought prices could fall. Conversely, 37% of Perth respondents believed prices could rise.

Sydney was the most pessimistic city, with 16% predicting values would fall. CANSTAR’s results were timely, with the Harbour City experiencing a quarterly decline of 0.6% in October.

Are Australians just naive?

With many Australians preparing to invest in property, driven by optimism on house prices, CANSTAR’s results may be cause for concern.

QBE recently published their 2017-2020 Housing Outlook, which predicted that the price of units would fall in four of Australia’s capital cities.

Unit prices in Sydney would fall by 3.8% over the three years, with units in Melbourne and Brisbane falling by 4.8% and 7.2% respectively.

However, house buyers are far better placed, with falls only predicted for Sydney and Darwin.

Housing – All About Supply and Demand; But Not What You Think

The Government view is high home prices is ultimately driven by lack of supply, relative to demand, including from migration. So the solution is to build more (flick pass to the States!). It has nothing to do with excessive debt, nor does the fact the average number of people per home is falling signify anything. And tax policy is not the problem.

However, a new working paper “Regional housing supply and demand
in Australia” from the ANU Center for Social Research and Methods blows a mighty hole in that mantra. They suggest that demand factors (availability of loans, tax concessions etc.) have a significant impact, while demand and supply equilibrium varies significantly across different regions, with some hot spots, and some where vacant property exists (yet prices remain high, because of these demand factors). Significantly, much of the surplus is in areas where high-rise development has been strong. We think this may signal further downward pressure on prices in these areas.

Over the year to June 2017 Australia built nearly 220,000 dwellings. Construction rates of units and other attached housing have more than doubled this decade, with around 103,000 units, townhouses and terrace houses completed in the latest financial year. Most of these completions are high-rise units in Australia’s capital cities (which is why the average home size is falling). Detached house completions have also trended up in recent years, but the growth has been more modest. This paper accounts for differential in the type of stock being built, with detached housing supporting a greater number of persons per dwelling than units and townhouses.

The paper measures the gap between housing supply and demand at
a regional level in Australia. They have taken into account a range of complicating factors such as changing demographics, building types and the increase in unoccupied dwellings at the regional level.

Previous research efforts in Australia focus on national estimates of the housing ‘gap’ or shortage but here we recognise that housing markets tend to be regional and that house price movements and affordability are likely to be as influenced by local demand and supply conditions as by broad national conditions.

Between the years 2001 and 2017, we estimate the Australian housing market experienced an oversupply of 164,000 dwellings. However, there are significant regional differences with some regions experiencing significant undersupply while others have significant housing surpluses.

Nationally, we do find periods of significant undersuppy, particularly between 2007 and 2014 but for other periods beyond 2001 we find oversupply more than compensated.

The majority of Australia’s housing surplus is situated in the inner-city areas of its major capitals, with Inner Brisbane, Melbourne and Sydney all oversupplied due to recent strong growth in unit developments. Many regional centres, particularly those in mining-sensitive areas such as North
Queensland and Western Australia, also retain housing surpluses.

Many regions in the middle and outer rings of our major capital cities, particularly Sydney, face modest housing shortages.

The modelling suggests that there is some evidence, albeit relatively weak, that a housing shortage is associated with higher house price growth.

The analysis exclusively concerns the concept of underlying demand, recognising that this may not be representative of the demand for housing in a traditional economics sense. The paper also acknowledges the limitations of the analysis in terms of both its conceptual basis and the data it relies on.

This paper does not conclude that people’s housing needs are being met or that what is being supplied is at an affordable price point for all families.

The lack of a housing shortage may have significant implications for housing policy in Australia and the economy more broadly. If Australia’s current record home-building levels are not balanced by a large housing shortage, then there is the risk that these current levels will reduce in the near future. Policy makers will also need to place greater emphasis on other potential drivers of house price growth and housing affordability, such as a range of demand influences.