Westpac has joined the growing ranks predicting big increases in dwelling values.
Westpac call is that dwelling values are expected to lift by 20% over the next two years (calendar 2021 and 2020) with annual growth split somewhat evenly between the next two years.
We stated last year that 2021 looked like it is shaping up to be a sweet spot for residential property.
Over the short-term dwelling values are influenced by the balance between supply and demand.
Low interest rates – with the RBA repeating that they will stay at their current ultra-low official setting over the next couple of years – and recently relaxed home loan assessment criteria have helped lift demand.
This was best illustrated to me by a recent email from a colleague.
“We spent some time yesterday with a mortgage broker and asked him why he thought the market was so hot. He summarised it as follows:
- A heap of the banks withdrew finance to weak clients when covid hit.
- People who withdrew super mid last year to use it as their ‘deposit’ couldn’t as it wasn’t seen as genuine savings. But the banks now accept it – with some low level caveats – as part of a home loan down payment.
- In addition, the credit assessment criteria have been dramatically reduced and this lessens even further from 31st March.
- The banks used to use a 7% to 8% interest rate setting to assess borrower’s serviceability up until mid-last year. Now they use the actual borrowing rate plus a 2% buffer, therefore for most new borrowers it is now set between 4% and 5%.
A household’s income needs now to only be $70,000 pa compared to $110,000 pa to afford a $450,000 house.”
In addition, JobKeeper has also helped stop a fall in demand, whilst HomeBuilder has brought demand forward.
Some 90,000 Australians have received the $15,000 to $25,000 HomeBuilder subsidy to buy, build or renovated a home since March last year.
On the flipside – influenced considerably by covid restrictions – supply is tight.
For example, house sales across the Brisbane region have increased by 4% over the last 12 months, but the supply of houses for sale across the same area have dropped by 16% over the same time period.
And as recently discussed, investment dwelling additions have been falling over recent years, resulting in declining rental vacancy rates. For now.
The media echo chamber has added further demand momentum, headlining positive property media releases, in part to help boost reader traffic to their real estate digital advertising portals.
As a result, buyers are clamouring to get into the market, evident by recent weekend auction clearance rates of over 90%.
This might be good news for those households that own their home, either outright or with a mortgage. However, it may not be so good for those trying to get into the housing market.
It also has a negative impact on ‘change-over’ owner-resident households and in particular those looking to downsize. It is much harder to buy and sell, well, in a rising market than in a market which is flat or even falling.
Medium to long term outlook
But for mine this sweet spot won’t last.
Yes, the circumstances seem to be aligning well for 2021 and although interest rates are likely to remain low by historical comparison – however, I do think they will rise and sooner than many think – there are other factors that might cause people to wonder if dwelling prices are likely to rise as much as has been forecast.
These factors include:
- persistent high unemployment and underemployment, which according to Roy Morgan – best Aussie poll on these statistics – is a combined 21.7%!
- the collapse of immigration, the guesswork restart date and ongoing debate about the level of future intakes,
- a pending plunge in the birth rate as people generally don’t have kids when their confidence is low and financial future is uncertain,
- potential overbuilding (due mostly to HomeBuilder),
- likely increases in dwellings listed for sale as people often put their home on the market when they think they will get a high price and a quick sale,
- rising costs, including a lift in the mandatory superannuation contribution to 10% in July this year, and
- limited wage growth.
This is not the recipe for a price boom.
And taking the long view, limited wage growth is the big brake on substantiable dwelling price growth.
There is a close, long-term relationship – causation not correlation – between wage growth and dwelling value increases in Australia.
Chart 1 shows that wage growth downunder is a long way from supporting dwelling price growth.
Furthermore, table 1 outlines what Westpac’s current price forecasts actually look like when it comes to increases in median dwelling values.
I cannot see how future first home buyers will be able to service such high dwellings prices given low wage growth. Borrowing the difference only has a limited shelf life.
The share of 25 to 34 year olds who own their home (or have a mortgage) has fallen from 61% in the early-1980s to be closer to 39% these days.
Our ratio of dwelling prices to household income was one of the highest in the world. That was when the ratio was around 4.
But the recent lending criteria has lifted this ratio to 6.5 on new home loans. That makes it a world beater.
And if this headline figure persists, it has housing bust written all over it.