A brief overview of recent national property market indicators.

AUSTRALIAN RESIDENTIAL PROPERTY PERFORMANCE OVER THE LONG TERM

Australian residential property has been a good long term investment. Capital growth over the last hundred years is shown in the chart below. While there are deviations around the trend, the long-term trend has been consistent, with less volatility than the other strong long-term performer (equities). Investment in residential property also has the advantage of being easier to fund from banks (because of its relatively low risk), and a predictable income through rent and the substantial depreciation allowances for new property.
Long term asset class returns

GLOBAL RESIDENTIAL PROPERTY PERFORMANCE

Australian residential property performance is not unusual by international standards – it has been better than most, but not all developed economies, and is about what would be expected from a developed economy with relatively strong growth in population and the economy. In October 2017, the Bank for International Settlements (BIS) released a Working Paper looking at housing prices around the world. It showed that over the previous 55 years Australian average house price growth was 8.1% pa, better than the average of advanced economies, but not exceptional as 5 of the 20 advanced economies showed stronger growth. More detailed review (link).
The Knight Frank Global House Price Index Q2 2020 (link) ranked19th in the world for house price growth for the year to June 2020, with an increase of 6%. Seven countries exceed 10% growth, mostly in Eastern Europe.

COVID 19 IMPACT

Before COVID 19 hit, most regions of Australia were in a upswing. Even in the month of April, national housing figures improved. However, COVID 19 has created considerable uncertainty and survey data (as at May 2020) (link) indicates that more people expect property prices to fall over the next year than to rise.

However, significant price reductions are not yet apparent – the month of April 2020 was still positive for housing prices on a national basis. For the month of May 2020, there was according to CoreLogic (refer link below) only a modest decline nationally of -0.4%, following an increase over the quarter of +1.1%, and over the year of +8.3%. However, SQM found that national house prices rose over the week and month to 2 June 2020 (and of course also over the preceding quarter and year). While COVID-19 has stopped the upward momentum, there is not yet any sign of prices falling in any substantive way.

A range of independent property research experts argue that now is not necessarily an inappropriate time to purchase property if other circumstances suggest that it makes sense – refer this May 2020 ABC article (link) with opinion from researchers from two independent research houses (CoreLogic and SQM), and two universities (Curtin and Adelaide).

Part of the reason that property prices have not generally fallen (at least until end May 2020) is that it is not in the interests of governments or regulators for property prices to fall significantly, and it is not in the interests of property owners to sell in a market impacted by negative sentiment. Factors that will reduce the need for forced sales include:

  • federal & state government economic rescue packages
  • current record low interest rates which are set to stay low for at least the next two years
  • mortgage repayment holiday offered by the banks
  • most households are ahead on their mortgage repayments
  • the disruption is only temporary (although the length of the disruption is unknown)
  • the market was in upswing before COVID 19 hit
  • it is expected that when COVID 19 passes the market will improve

We therefore expect to see a reduction in both:

  • demand for property – less tourists, less overseas students, and reduced capacity to pay for those working less; and
  • supply of property – as:
    • property owners defer selling until the market improves
    • developers defer building new product

With reduction in both demand and supply, it is difficult to determine where prices will move:

  • Property prices might fall because of:
    • the expected reduction in employment and incomes
    • the associated negative sentiment
  • Upward pressure might result from:
    • the very low interest rates
    • the expected reduction in supply
    • possible increase in offshore demand for Australian property because of:
      • the attractive exchange rate
      • the success of Australia’s COVID19 management increasing the attractiveness of Australia as a place to own property and potentially reside

RESIDENTIAL PROPERTY FORECASTS & PROJECTIONS

Many forecasters have projected a solid fall in housing prices – and it is the negative views that grab the headlines. The major banks initially projected falls of 10%+ [ANZ -10% (link); CBA -10% (link); NAB 10% approx (pdf)], UBS (link) initially -10% to -20% but then improved in early June 2020 to -5% to -10%; Morgan Stanley up to -15%;  HSBC between 2% and 12% in the 2021 financial year – May 2020  (link), AMP up to 20%. These are primarily based on assumptions that COVID19 will reduce income (which is true) and that this will lead to forced sales in an environment where there are few purchasers.

However, after several months of COVID19, prices have remained resilient, on average rising over the three months to May. Most forecasters have revised down the extent of any expected declines in prices. Hotspotting founder Terry Ryder comments (link) that forecasts of major banks are typically wrong, and typically conservative. After the failure of any significant price correction over the period to July 2020, he notes that the new negative projections of “the ‘September Cliff’ is just the latest property economic nonsense” (link – https://www.propertyobserver.com.au/terry-ryder/115136-the-september-cliff-is-just-the-latest-property-economic-nonsense-hotspotting-s-terry-ryder.html )

We agree that these forecasts are pessimistic. COVID19 has been underway since the beginning of 2020 but property prices remain solid.

Analyst Christopher Joye in an 15 May AFR article Why the housing bears are wrong (pdf) predicts that “Aussie house prices will flatline over the next few months, with the risk of a modest softening of prices up to 5 per cent. Thereafter we forecast that the 2019-20 boom will reassert itself, with prices climbing by another 10 per cent to 20 per cent on the back of the 75-150 basis point reduction in mortgage rates over the past year. This has massively boosted purchasing power, pushing down interest repayments as a share of disposable incomes to their lowest levels in decades.”

PIPA analysed the property performance from the start of each downturn from 1973 to the GFC. In each case, prices rose in each capital city (link). Top performers for the five years ending: 1980 – Sydney 101%, Perth 65%, Brisbane 50%; 1988 – Melbourne 68%, Sydney 64%, Perth 62%, Hobart 52%; 1996 – Darwin 47%, Perth 27%, Brisbane 23%; 2014 – Sydney 40%, Melbourne 19%.

In March 2020, Corlogic undertook an fairly-detailed assessment of “Coronavirus And The Australian Property Market” (link – https://www.corelogic.com.au/node/2758). This showed that Australian residential property has historically fared well against many negative economic shocks. While property prices do fall from time to time, they rose during the Black Monday stockmarket crash of the 1980s, the Asian Financial crisis of the 1990s, the Dot-com Bubble Burst of the 2000s, and the China Steel Glut of the 2010s – so negative shocks do not necessarily translate into falls in property prices. The overall conclusion is that the “coronavirus outbreak clearly presents some downside risk for the Australian housing market, but ultimately, the impact remains highly uncertain”. On 25 May this outlook was updated in The Property Market In 2020: What Lies Ahead?. The summary (pdf) indicates that, as at the date of publication, national monthly price growth had moved from positive to flat, although Melbourne prices had fallen 0.5% over the month. The market might therefore be considered to be on the cusp of a downturn. However, there are some reasons to be optimistic about Australian property in 2020:

  • Historic negative economic shocks have seen dwelling values relatively insulated.
  • Supply is reducing
    • Sales volumes fell 40% over April
    • The amount of stock available for sale is about 25% lower than around the same time last year.
    • Rent prices are likely to be more affected than property prices.
  • Reductions in the cash rate typically have an inflationary effect on house prices, with a 1% reduction in the cash rate increasing property prices by about 8% over two years. However, due to extraordinarily low levels of consumer confidence, it is less likely that the record low cash rate would lead to further increases in prices in the short term.
  • APRA is adopting measures to compliment easier lending conditions amid COVID-19

The Compass view is that prices will not fall much because vendors will not sell when sentiment is negative and the end of COVID is in sight. They will be able to hold on because banks interest rates are extremely low and banks are prepared to provide a repayment holiday.

Nevertheless, with the negative sentiment we feel that it is a buyers’ market more than a sellers’ market, and for sellers that cannot hold on and must sell, some type of price discount might be available. Recorded prices could therefore fall a bit, but on lower volumes. This provides opportunity for those with a reliable income – the buyers’ market and the historically low interest rates provide opportunity to acquire a property that will be strongly cash flow positive while waiting for capital growth to return.

There is considerable variation in house price forecasts and expectations.

  • 13 Coronavirus property questions answered by Hotspotting’s Terry Ryder (link)
  • Analyst Christopher Joye in an 15 May AFR article Why the housing bears are wrong (pdf) predicts that “Aussie house prices will flatline over the next few months, with the risk of a modest softening of prices up to 5 per cent. Thereafter we forecast that the 2019-20 boom will reassert itself, with prices climbing by another 10 per cent to 20 per cent on the back of the 75-150 basis point reduction in mortgage rates over the past year. This has massively boosted purchasing power, pushing down interest repayments as a share of disposable incomes to their lowest levels in decades.
  • Property commentator Peter Wargent (link) in May 2020 makes the point that unemployment has not historically been a good indicator of property prices. In his view, the main drivers are: interest rates (ie affordability), underlying demand (i.e. population growth, which although temporarily on hold is expected to soon rebound), and underlying supply (i.e. construction and listings – both of which are very low).
  • HTW-Property-Market-Indicators (PDF) – Herron Todd While is Australia’s largest independent valuation firm. As at May 2020 they had the cycle position for Melbourne & Brisbane either at the bottom or early upswing stages, which is the ideal time to buy
  • CoreLogic Weekly Property Market Indicator Summary (PDF)
    • Auction clearance rates: highest since March.
    • Combined 5 major capitals home value changes: weekly -0.2%; Monthly -0.4%; Yr to date +2.8%; 12 mth +10.1%.
    • Capital city properties listed for sale 12 month change: New listings -28.6%; Total Listings -26.0%
    • CoreLogic Mortgage Index (lead indicator to housing finance commitments): rolling three month trend -0.4%; Month on month change +9.9%
  • NAB Residential Property Survey (PDF) – On 7 May 2020, NAB forecast price falls over the two years to end 2021 of -10% to -15%. However, in the same report NAB notes that a survey of property professionals forecast on average an increase in house prices over the next two years of +2.4% (reduced from before COVID19).
  • SQM House price-GDP ratio vs long term trend (PDF) – these charts are a bit dated but still of interest

NATIONAL PROPERTY  INDICATORS
These charts look at long term trends for the Australian property market in general.
Each region performs differently – for this data please refer to reports for individual regions.

Long term historical trends in property prices are shown in charts below.
Shorter-term movements in property prices vary, because the various research houses use different methodologies and report their findings at different times.
Australian dwelling price growth over the past year show the following movements:

Daily data is typically too volatile to be a useful guide, some data are here: Corelogic (link) and SQM Asking Prices (link)
Rent movements are estimated by SQM-Rent-Indexes (link).
Vacancy rates are estimated by SQM Vacancy Rates (link).
Population movements are released by ABS

COVID19 will temporarily slow migration and therefore population growth, but this is expected to rebound once the COVID19 restrictions are lifted. Australia’s COVID19 success will make it an even more attractive destination. Australian governments will benefit presumably be attracted by the age profile of the migrants and their desire to obtain work and pay the associated taxes to repay the COVID19 debt. ABS migration data (link) shows that 81% of recent migrants were aged 20-44 years on arrival. The labour force participation rate for recent migrants and temporary residents was 70% (80% for those with citizenship), compared with the total participation rate for Australia of 66%. The unemployment rate for migrants with citizenship was very low at 3.3%, but higher overall at 7.4% compared with 5.4% for those born in Australia.

Number of Property Listings/Stock on Market & Days on Market – SQM (link) NATIONAL ECONOMIC INDICATORS
The Charts below are mostly from the RBA.  Commentary from Compass Capital.
RBA-Economic Indicators Snapshot (link)
RBA-Financial-Stability-Snapshot (link)
RBA-Economy-Composition-Snapshot (link)


The global economy, after considerable volatility during and after the GFC, had settled and Australia’s trading partners had been growing around trend. COVID-19 saw a sharp reduction in activity.


COVID19 has seen growth forecasts reduced to a substantial fall in world output in 2020, followed by a recovery in 2021.


Very high commodity prices before the GFC led to many new projects being initiated. The resulting increase in the supply led to a fall in commodity prices. The price fall led to some supply reduction. At the same time, the world economy improved and commodity prices recovered somewhat.


The Australian exchange rate has tended to move with commodity prices.


For some time before COVID19, the Australian economy had been growing steadily, although slowly compared with earlier periods. GDP has fallen since COVID-19,


Following COVID19, growth has fallen but is expected to return to growth in 2021.


Unemployment data can be misleading. A person is defined as “employed” if they are in a paid job for one hour or more in a week.
Because many defined as employed would like to work more hours, the situation before COVID19 was one where the defined un-employment rate was falling, but the under-employment rate was rising.
Both measures have worsened since COVID-19.


A more meaningful indicator of the labour market status is perhaps the average hours worked, which has been declining for around a decade.


Increasing numbers of workers desiring more hours of employment, explains why growth in wages has been low for several years despite unemployment (as defined) falling.


RBA forecast a strong rise in unemployment to around 10%.
It is expected to some years to return to pre-COVID-19 levels.


Subdued wages growth is keeping inflation below the RBA’s target range of 2-3%.


RBA expect COVID19 to result in inflation outcomes that remain below the target range for a number of years.
The minutes of the RBA Board meeting of 5 May 2020 stated that: “The Board determined that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.” This suggests low interest rates for a few years.


COVID19 has seen a sharp fall in equity prices.


COVID19 has seen consumer sentiment fall dramatically, bottoming in April 2020. Subsequent releases (link) have seen considerable recovery, but sentiment remains weak.


COVID19 has seen business sentiment and conditions also fall dramatically.


Even before COVID19, business investment had been declining for a number of years.


The cyclical downturn in mining investment was not offset by the subdued business investment in other sectors.


The RBA target cash rate is at historically low levels.
Housing interest rates are also at very low levels.


Housing prices had been rising nationally before COVID-19. Prices have now steadied but overall remain higher than a year earlier.


The steady prices reflect in each capital city, as well as in average national terms.


Prior to COVID19, the market upswing had encouraged the number of residential dwelling approvals to start increasing, after a period of decline. Poor sentiment is expected to lead to a decline in approvals.

Since 2015, owner occupiers had tended to increase housing loan commitments, while investors had tended to reduce them. Just prior to COVID19 both groups were increasing commitment. For more detailed commentary, please refer to the latest: