Growing debt and tighter lending point to only a gradual property market recovery
Property values have risen for the first time since October 2017.
But analysts say high debt levels and tighter lending conditions mean a quick recovery is unlikely.
Average dwelling values in Sydney and Melbourne rose for the third consecutive month in August, lifting by 1.6 per cent and 1.4 per cent respectively, according to CoreLogic’s latest home value index.
The significant increases in Australia’s two largest cities were the main drivers behind the first monthly rise (0.8 per cent) in national dwelling values since October 2017.
Suburbanite principal and property valuer Anna Porter said the data was further evidence the market had stabilised.
But she told The New Daily that tighter lending conditions and affordability constraints meant prices would still be “quite flat for a number of years”.
“Whilst it’s getting easier [to get a loan], it’s not as easy as it has been, and we’ve got an affordability issue,” Ms Porter said.
“When you’re buying in Sydney, a number of the suburbs have median values up and around the million-dollar-plus mark – and Melbourne’s not far behind that – so we’ve got an affordability crunch.
“We haven’t had rental growth and wages growth catch up with that. We haven’t had inflation growth catch up with that.
“So until we get the economy catching up with what’s happening in the property market, we won’t see a growth cycle come through.”
Total new stock levels are down 17 per cent year on year, CoreLogic said.
And Ms Porter predicts demand won’t rise enough in spring to meet the seasonal increase in supply, which means prices will stagnate.
AMP Capital chief economist Shane Oliver also acknowledged that the high auction clearance rates came on “very low volumes” of properties for sale.
He said the current rates – “based on past relationships” – pointed to house prices in Sydney and Melbourne rising between 10 and 15 per cent over the next nine to 12 months.
But a range of factors meant those gains were unlikely to be realised, he said.
“Compared to past recovery cycles, household-debt-to-income ratios are much higher, bank-lending standards are much tighter … the supply of units has surged with more to come … and unemployment is likely to drift up as overall economic growth remains weak,” Dr Oliver wrote in a note.
“So notwithstanding the bounce in Sydney and Melbourne prices seen in August, we don’t see a return to boom-time conditions, and expect constrained gains through 2020 – e.g. around 5 per cent or so, which we have revised up slightly.”
But SQM Research’s Louis Christopher believes we’re on the cusp of another boom.
“We’re seeing auction clearance rates in the mid-70s in Melbourne, and we’re seeing mid-to-high 70s for Sydney,” Mr Christopher told The New Daily.
“In my experience, when we’ve had those types of clearance rates in the past, especially in markets going into recovery, it’s tended to translate into double-digit-percentage house price growth.”
The Coalition’s surprise election victory, the RBA’s rate cuts and a loosening in lending restrictions had paved the road to recovery in Sydney and Melbourne, Mr Christopher said.
And the trajectories of past recoveries suggest analysts shouldn’t read too much into the limited stock in today’s market.
“New market recoveries have always started on lower volumes … and the low volumes are very normal compared to previous cycles,” Mr Christopher said.
“What’s probably a little bit different is the time it’s taken for the market to turn around. It has all happened in a very short time.
“We’ve gone from auction clearance rates in the mid-to-high 40s all the way up to the week of the election to now, in just over three months, getting auction clearance rates in the 70s, which is a sign of a boom market.”
The rapid speed of the recovery, coupled with the current high level of household indebtedness, meant all eyes should now be on APRA and the Reserve Bank, to see if they introduce policies aimed at curbing price growth.
“I would have thought the way forward is putting restrictions on lending again … [while] cutting rates at the same time, to help the rest of the economy,” Mr Christopher said.
“I would have thought that would be the way to play it, but when they do it is going to be critical.
“Are they going to wait until they actually see double-digit house price growth on the official numbers? Or are they going to respond to the indicators now?
“My bet is that they will respond, but not immediately … because the federal government’s view will be that high house prices improve consumer confidence, which apparently is what the economy needs.”