The economists’ data backs him up. High debt-to-income borrowers are disappearing from the housing market; the number of borrowers with debt worth more than six times their total income in the second half of last year was only one-third of what it was three years ago, according to statistics from the Australian Prudential Regulation Authority.
Barrenjoey chief economist Jo Masters reckons that was the bank of mum and dad, or bank of grandparents, on full display, transferring some of their wealth while they are still alive to help their family into nicer homes, and topped up by pandemic-era savings.
“Another anecdote is multiple-family homes, where families or friends pool income and/or savings to purchase a property together,” she says.
Those factors, along with resurgent immigration and a better than expected jobs market, combined to underpin strong buyer demand in 2023.
Buyers largely shrugged off the Reserve Bank of Australia’s 13 cash rate increases and sent home values surging 8.1 per cent. That number surprised economists, who didn’t expect such a strong bounceback following a tough year for house prices in 2022, and were worried about borrowing capacity, interest rate rises and the cost of living.
Prices in Perth, Brisbane and Sydney were all up more than 10 per cent.
The other – and just as important side of the story – is supply. Existing home listings last year were down nearly 20 per cent, while new house construction was also softer. Listings were down about 20 per cent, and was particularly noticeable in the first half.
Commonwealth Bank chief economist Stephen Halmarick says house prices were “one of the biggest surprises of 2023”. He calls it a good reminder of Economics 101 principles – when demand exceeds supply, prices go up – and also points to a large increase in net migration, low building activity, and the low number of dwellings listed for sale.
Other economists also call out the fall in the number of people per household, which occurred during the pandemic.
What happens in 2024? Tipping house prices is tough, although Halmarick forecasts 5 per cent increases across the country, and Barrenjoey’s Masters is similar, forecasting house price growth of 4.8 per cent.
There is plenty beneath that national headline number, and there are already signs of weakness in Australia’s two biggest markets, Sydney and Melbourne.
Masters reckons Sydney properties will gain only 3.8 per cent this year, considerably below the national average, while Melbourne will be less at 3.2 per cent. “We think that demand will become a bit more sort of re-anchored back towards borrowing capacity as people have used pandemic savings,” she says.
And on the supply side, she expects listings to return to more normal levels as more borrowers roll off cheaper fixed-rate mortgages and as lending constraints force more people to sell a home before they buy a new one.
If listing volumes do not bounce back, then house price growth may be more than the expected 4.8 per cent, she says.
Halmarick worries about supply of new housing; he keeps close to the construction industry and new supply will fall well short of government targets again this year. “Dwelling approvals per 100,000 people are near historic lows,” he says.
Macquarie chief economist Ric Deverell says unemployment is an important swing factor. He expects nominal house prices to be “up a bit” on a national basis this year, although admits it is hard to forecast with accuracy given the many moving parts.
“But affordability is very challenging, and if people start losing their jobs, it has to come down a bit,” he says.
How do the economists’ 5 per cent or so predictions sit with McGrath, who oversees about 130 agencies up and down Australia’s east coast?
He cuts the market into different segments; the top of the market ($5 million to $10 million and upwards) will be hot, he says, while the rest will “hold steady”.
McGrath says the average buyer is nervous, as are first home buyers. Those nerves were covered up by a severe shortage of listings last year, which meant more bidders at every auction and ultimately higher prices.
He expects those buyer nerves to be there until there are interest rate cuts. Most economists expect those cuts to start later this year; Masters forecasts a first cut in August, while Halmarick says September.
McGrath agrees the rate cuts could come this year. “The rate increases have hammered a huge amount of the population. The supply shortage was kind to prices; we would have seen fairly significant declines in the market if it wasn’t for the low level of listings.”
While new housing construction will take time to ramp up, one thing that could drive supply is the banks. But McGrath says there are no signs that banks are worried about over-leveraged mortgagees or forcing home owners to repay debts by selling.
One person that is a bit more worried about that scenario is Seven Group boss Ryan Stokes, who says it is difficult to see how Australia avoids a material correction in house prices if the cash rate stays where it is.
Stokes, whose company owns construction sector suppliers including Coates Hire and Boral, told the annual Chanticleer survey in December that he was worried about mortgage distress.
“The concerted efforts of the RBA to stifle the economy risks pushing widespread mortgage distress into foreclosures. That may be the catalyst for a material correction in the housing market,” he said.
For now, the banks’ own results show little rise in bad debts. The RBA’s financial stability review in October also found only 5 per cent of borrowers could not cover basic expenses and mortgage payments, which was a 1 per cent increase from April 2022, when Australia’s cash rate was still at a rock bottom 0.1 per cent.
Indeed, the strong house prices are also propping up the banks’ share prices. Commonwealth Bank of Australia’s shares closed at a record high of $113.35 on Tuesday, reflecting market sentiment about Australia’s economy, consumers and the housing market.