Interview: Record house prices on the horizon once more

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Sean Aylmer: Welcome to the Fear and Greed daily interview. I’m Sean

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Sean Aylmer: Aylmer. The dip in house prices looks to be behind

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Sean Aylmer: us. Domain is forecasting a steady, well- established recovery over

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Sean Aylmer: the next financial year. What’s more, some capital cities have

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Sean Aylmer: predicted to reach record high prices. Dr. Nicola Powell is

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Sean Aylmer: the Chief of Research and Economics at Domain. Nicola, welcome

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Sean Aylmer: back to Fear and Greed.

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Dr Nicola Powell: Thank you for having me on again. It’s so great to be here.

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Sean Aylmer: A steady, well established recovery, what does that mean exactly?

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Sean Aylmer: What does that look like?

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Dr Nicola Powell: Yeah, look, that is the simple explanation really. We have seen

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Dr Nicola Powell: the early part of 2023 a recovery being led by Sydney.

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Dr Nicola Powell: So we’re already seeing prices rise and actually when you

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Dr Nicola Powell: drill down onto smaller geographic level, within our capital cities,

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Dr Nicola Powell: some of these areas, those premium areas troughed in price

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Dr Nicola Powell: mid last year. So the areas such as the eastern suburbs,

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Dr Nicola Powell: lower North Shore, those kind of areas, Mornington Peninsula, inner

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Dr Nicola Powell: east of Melbourne. So we’ve got some of these areas

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Dr Nicola Powell: that have seen consecutive months of price rises. But what

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Dr Nicola Powell: we’re expecting over the next financial year is largely Australia- wide,

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Dr Nicola Powell: we will see all of our capital city markets move

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Dr Nicola Powell: into a recovery. It is still going to be led

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Dr Nicola Powell: by Sydney. Sydney’s recovery is well established already and we are predicting,

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Dr Nicola Powell: particularly for house prices, they’re going to continue to lead.

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Dr Nicola Powell: And we’re predicting or forecasting that house prices could rise

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Dr Nicola Powell: between 6 and 9% over the next financial year, which

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Dr Nicola Powell: means that house prices, by the end of next financial year, will

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Dr Nicola Powell: have fully recovered from the 2022 downturn.

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Sean Aylmer: Okay, because I think you’ve also predicting houses in Adelaide

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Sean Aylmer: and Perth could also reach record levels in the next

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Sean Aylmer: 12 months or so.

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Dr Nicola Powell: That is absolutely correct. And we’re also forecasting that unit

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Dr Nicola Powell: prices in Brisbane, Adelaide and Hobart could also be at

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Dr Nicola Powell: new record highs by the end of next financial year.

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Dr Nicola Powell: I think the interesting part of this is the cities

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Dr Nicola Powell: that stood out to me were Adelaide and Perth, and

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Dr Nicola Powell: our forecast suggests that Adelaide and Perth could avoid any

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Dr Nicola Powell: material loss in prices, because we are still expecting them to

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Dr Nicola Powell: continue to rise. And Adelaide is the one that has

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Dr Nicola Powell: always been that quiet achiever, and historically, when you look

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Dr Nicola Powell: at the past 30 years of price data for Adelaide,

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Dr Nicola Powell: Adelaide house prices very rarely go backwards. They go through

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Dr Nicola Powell: these periods of sideways movement in growth and that is

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Dr Nicola Powell: what we’re predicting. We’re actually predicting that Adelaide house prices

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Dr Nicola Powell: and Perth are probably going to avoid a downturn entirely.

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Sean Aylmer: Wow. The one that stood out to me was Melbourne,

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Sean Aylmer: only because it doesn’t seem to be keeping up with

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Sean Aylmer: the rest of the capital cities. Is that right?

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Dr Nicola Powell: Yeah, that is true. So it’s a much more modest outlook I

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Dr Nicola Powell: think for Melbourne. House prices really could be stable, see

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Dr Nicola Powell: growth of maybe 2% over the next financial year. I

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Dr Nicola Powell: think Melbourne’s an interesting one, really was impacted by demographic

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Dr Nicola Powell: shifts and it’s almost like it’s still got that pandemic

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Dr Nicola Powell: hangover from those demographic patterns. Now, what I mean by

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Dr Nicola Powell: that is obviously we’ve got net overseas migration roaring back

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Dr Nicola Powell: into Australia. We know that roughly 35% go to New

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Dr Nicola Powell: South Wales, about 30% go to Victoria, about 17% go

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Dr Nicola Powell: to Queensland and the rest is distributed elsewhere. So we

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Dr Nicola Powell: know that net overseas migration into Melbourne is strong currently,

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Dr Nicola Powell: but most overseas migrants do rent upon arrival. And I

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Dr Nicola Powell: think it’s why we’ve seen Melbourne’s rental market really tight

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Dr Nicola Powell: and it’s got such a low vacancy rate, currently sitting

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Dr Nicola Powell: at 0. 9%. But I think when you look at

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Dr Nicola Powell: interstate migration, that was really one of the big demographic

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Dr Nicola Powell: shifts that we saw during the pandemic and there’s still

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Dr Nicola Powell: a bit of tailwind there, being created from that shift.

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Dr Nicola Powell: There was this negative outflow from Victoria into other states

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Dr Nicola Powell: and territories and actually the latest data from ABS still

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Dr Nicola Powell: shows that it is running into the negative as well. The

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Dr Nicola Powell: other point I would make for Melbourne is, Melbourne is

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Dr Nicola Powell: not as far advanced in its property price cycle as

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Dr Nicola Powell: a market like Sydney. You tend to find these big cities,

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Dr Nicola Powell: Sydney and Melbourne, they follow one another quite closely. They see

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Dr Nicola Powell: quite wild, big upswings, big downturns in price compared to

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Dr Nicola Powell: other capital cities. But what we’re seeing in Melbourne is

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Dr Nicola Powell: quite delayed compared to Sydney. I would say it’s maybe

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Dr Nicola Powell: about six months behind in terms of where it’s at

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Dr Nicola Powell: in the property cycle compared to a market like Sydney.

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Dr Nicola Powell: We’ve only just started to see Melbourne stabilise overall at

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Dr Nicola Powell: that macro level for a city recently. And we’ve got

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Dr Nicola Powell: some of those premium areas now increasing in price. As

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Dr Nicola Powell: I mentioned earlier, Mornington Peninsula and the inner east of Melbourne.

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Dr Nicola Powell: So a few reasons and a few different dynamics going

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Dr Nicola Powell: on for the Melbourne market.

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Sean Aylmer: Okay. What about the supply side of the equation? So

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Sean Aylmer: you mentioned the rush of migration that we’re seeing at

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Sean Aylmer: the moment and we’ll see for a while, and that’s

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Sean Aylmer: a well told story. What about a lack of supply?

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Sean Aylmer: Is that a reason for pushing up prices, particularly in

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Sean Aylmer: those cities like Sydney?

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Dr Nicola Powell: Absolutely the case. I would say that the lack of

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Dr Nicola Powell: supply has really been the backbone that’s been underpinning the

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Dr Nicola Powell: price recovery so far in 2023. We’ve seen new listings

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Dr Nicola Powell: really unseasonably weak since spring of last year. When you

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Dr Nicola Powell: look at that combined capitals, new listings are still 11%

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Dr Nicola Powell: below the five- year average, but total supply is even

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Dr Nicola Powell: worse in comparison. Total supply on the market is 19% below the five-

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Dr Nicola Powell: year average, so there is a lack of choice. There’s

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Dr Nicola Powell: a lack of supply. It does differ, depending upon the

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Dr Nicola Powell: capital city, and actually Melbourne is one of those cities

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Dr Nicola Powell: that does differ. So supply is a little bit better

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Dr Nicola Powell: in Melbourne compared to say Sydney. Sydney really has struggled

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Dr Nicola Powell: for supply. And I think that really does reflect the

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Dr Nicola Powell: different dynamics in the two markets. And I think the

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Dr Nicola Powell: pullback from sellers is pretty normal. It falls into that

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Dr Nicola Powell: behavioural economics category. You don’t want to sell when prices

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Dr Nicola Powell: are softening. Throw in the fact you’ve got interest rate

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Dr Nicola Powell: rising and you’ve got high levels of inflation. We have

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Dr Nicola Powell: seen sellers sit on the sidelines. I would say probably

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Dr Nicola Powell: the pullback from sellers has been a bit more substantial

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Dr Nicola Powell: this time round. The last time, 2017 to 2019, we did

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Dr Nicola Powell: see a pullback from sellers, but I would say this

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Dr Nicola Powell: time round particularly late in 2022, that hesitancy has definitely

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Dr Nicola Powell: been there.

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Sean Aylmer: Stay with me, Nicola. We’ll be back in a minute.

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Sean Aylmer: My guest this morning is Dr. Nicola Powell, Chief of

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Sean Aylmer: Research and Economics at Domain. I want to get into

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Sean Aylmer: regional areas, but we better mention Brisbane and Hobart, because

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Sean Aylmer: we don’t want to leave those two capital cities out.

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Sean Aylmer: Brisbane always, I find quite an interesting market, because auction

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Sean Aylmer: clearance rates, for example, so the figures you guys put

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Sean Aylmer: out, often not so much in recent weeks, but mostly

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Sean Aylmer: it’s way below the other capital cities and it’s a

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Sean Aylmer: quirky market it seems to me.

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Dr Nicola Powell: Yeah, so auction clearance rates, I probably would say is

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Dr Nicola Powell: not a good indicator of market health for Brisbane. It’s

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Dr Nicola Powell: not a very good auction centric market. I would say Sydney, Melbourne, Canberra,

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Dr Nicola Powell: and I would include Adelaide at the moment, in terms

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Dr Nicola Powell: of auction clearance rates are a really good pulse check.

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Dr Nicola Powell: They’re frequent, every Saturday you can see how the market’s tracking. Brisbane,

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Dr Nicola Powell: for some reason, the method of selling by auction is

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Dr Nicola Powell: not really ingrained in the market behaviour, but what we

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Dr Nicola Powell: saw during the pandemic boom was a really unusual period

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Dr Nicola Powell: where those clearance rates were roaring in Brisbane. But I

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Dr Nicola Powell: do think what we’ve seen is the fluctuations and the

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Dr Nicola Powell: lower clearance rates coming out of Brisbane is just, its

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Dr Nicola Powell: reverting back to what it would normally see. Private treaty,

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Dr Nicola Powell: selling by private treaty is the method that selling a

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Dr Nicola Powell: home dominates in Brisbane.

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Sean Aylmer: Okay. So what about regional Australia? How do you think

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Sean Aylmer: that’ll perform over the next 12 months or so?

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Dr Nicola Powell: So we are expecting prices to rise in regional Australia,

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Dr Nicola Powell: overall across the combined regionals, between 1 and 3% for

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Dr Nicola Powell: house prices, a little bit more subdued for unit prices.

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Dr Nicola Powell: It is different depending upon location. So for example, regional

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Dr Nicola Powell: Queensland out of the three major states is expected to

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Dr Nicola Powell: be the better performer, see between 3 and 4% increase

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Dr Nicola Powell: in house prices over the next financial year. But largely

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Dr Nicola Powell: speaking, the trend for regionals is much more subdued. I

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Dr Nicola Powell: think what we’re seeing are patterns are going back to

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Dr Nicola Powell: what we would tend to see historically, and that focus

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Dr Nicola Powell: is going to be on our capital cities led by

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Dr Nicola Powell: Sydney, and that is what we historically tend to see.

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Dr Nicola Powell: So I think the outlook is much more muted I

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Dr Nicola Powell: think for the regional markets. And we’ve got to remember what

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Dr Nicola Powell: we saw during the pandemic price cycle was highly unusual

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Dr Nicola Powell: and really regional areas did avoid any massive downturn in

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Dr Nicola Powell: price and nothing compared to what we saw coming out

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Dr Nicola Powell: of Sydney. And I think if we’re going to drill down

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Dr Nicola Powell: even smaller, I think in those regional areas, we saw

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Dr Nicola Powell: an uplift during the pandemic across every single regional area.

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Dr Nicola Powell: There’s almost no corner of Australia that didn’t get a

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Dr Nicola Powell: boost in property price. I think what we’ll see now is

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Dr Nicola Powell: those local areas, Ballarat, Geelong, Orange and Wollongong, those areas

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Dr Nicola Powell: that are within close proximity to either a major capital

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Dr Nicola Powell: city or themselves have a major employment hub, they’re the

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Dr Nicola Powell: areas that will continue to perform well. We’ll probably see

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Dr Nicola Powell: much more subdued, muted conditions in further flung regional areas.

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Sean Aylmer: Okay. Are you surprised by the results, Nicola? I ask

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Sean Aylmer: that, because we still have rising interest rates and the

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Sean Aylmer: idea that some of these cities will be hitting new

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Sean Aylmer: highs at a time when the full impact of interest

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Sean Aylmer: rate rises will be hitting buyers is slightly surprising.

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Dr Nicola Powell: It is. And look, in the decade that I’ve been

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Dr Nicola Powell: looking at property data, I have decided never to be

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Dr Nicola Powell: surprised by anything that unraveled.

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Sean Aylmer: Good motto. Yes.

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Dr Nicola Powell: Look, and I think I was thinking about this report and how

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Dr Nicola Powell: your everyday Australian would react to knowing that many cities

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Dr Nicola Powell: will have really recovered by the end of next financial year.

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Dr Nicola Powell: And I think for somebody who doesn’t pour their time

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Dr Nicola Powell: over property data, yes, it’s absolutely surprising. I think that

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Dr Nicola Powell: we’ve got a lot of headwinds still ahead of us

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Dr Nicola Powell: and there is going to be an element that affordability

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Dr Nicola Powell: is going to contain price growth anyway, because as you said,

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Dr Nicola Powell: we still haven’t felt the full impacts of rising interest

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Dr Nicola Powell: rates overall, economically, and we still are not at the peak cash rate. So

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Dr Nicola Powell: we’re likely to see one, maybe two more rate hikes

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Dr Nicola Powell: from the RBA. It’s very clear that they will move

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Dr Nicola Powell: again higher. So there is buyers out there really battling

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Dr Nicola Powell: that deterioration in borrowing capacity and I think that affordability

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Dr Nicola Powell: is definitely front of mind and that will really contain

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Dr Nicola Powell: the rate of price growth. I think once we get

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Dr Nicola Powell: to the point where we see a stabilisation of the

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Dr Nicola Powell: cash rate or we potentially see the cash rate being

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Dr Nicola Powell: cut in the first half of next year, I think that might

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Dr Nicola Powell: be a stronger catalyst to see greater rates of growth

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Dr Nicola Powell: within our housing markets.

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Sean Aylmer: Nicola, thank you for talking to Fear and Greed.

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Dr Nicola Powell: Thank you.

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Sean Aylmer: That was Dr. Nicola Powell, Chief of Research and Economics

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Sean Aylmer: at Domain. This is the Fear and Greed daily interview.

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Sean Aylmer: Join us every morning for the full episode of Fear

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Sean Aylmer: and Greed, Australia’s most popular business podcast. I’m Sean Aylmer,

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Sean Aylmer: enjoy your day.