1. Supply constraints will continue to drive house prices up: Dwelling approvals have been below average, particularly in the apartment category, leading to a constrained supply of housing.
2. Record net overseas migration will contribute to higher home values: With a projected net increase in migration of 715,000 people in the next two years, the influx of migrants, particularly in Sydney and Melbourne, will drive up home values and rents.
3. Demand outweighs supply in most markets: The absorption rate of new listings suggests that demand still surpasses supply in most markets, leading to a favorable environment for sellers.
4. Interest rates are expected to peak: With inflation trending down, the RBA predicts that it won’t reach its target until 2025. While one more rate rise is likely, the expectation is that interest rates will stabilize soon.
5. Home prices are expected to continue rising: Despite a per capita recession and rising mortgage rates, the combination of supply constraints, migration, and market dynamics leads to the belief that Australian home prices will surpass record highs and continue to rise over the next 18 months.
Leading Sydney real estate agent, John McGrath, has provided insights into the current trajectory of the Australian housing market. He predicts that house prices will continue their upward trend for another 18 months. This follows an 8.4% increase in dwelling values across the 5-city aggregate since they reached their lowest point on 29 January, as reported by CoreLogic.
Key Factors Driving the Market:
- Supply Constraints: McGrath highlights that the supply of dwellings will remain limited. This is evident from the fact that dwelling approvals have averaged 13,355 per month over the past six months, marking a 23% decline from the decade’s average. The most significant drop in approvals is observed in the apartment sector.
- Record Net Overseas Migration: Australia is witnessing an unprecedented surge in net overseas migration. Government projections indicate an expected net increase of 715,000 migrants over the next two years. A significant portion of these migrants are anticipated to settle in Sydney and Melbourne, which will further drive up home values and rents in these cities.
- High Demand vs. Limited Supply: The market is experiencing a robust absorption rate of new listings, suggesting that demand continues to surpass supply. Current listings are 17.1% below the five-year average, as per CoreLogic data.
- Interest Rates Nearing Their Peak: McGrath believes that the Reserve Bank of Australia (RBA) is nearing the end of its rate-hiking cycle. He mentions that while inflation is on a downward trend, the RBA’s target of 2% to 3% inflation is not expected to be achieved until 2025. Despite the anticipation of one more rate hike, McGrath feels that buyers and sellers have adapted to the new norm of elevated mortgage rates.
While there are concerns about the domestic economy, including a per capita recession and a weakening labor market, McGrath remains optimistic about the future of the Australian housing market. He anticipates that Australian home prices will surpass previous records and continue their ascent over the next 18 months. This sentiment is further bolstered by the likelihood of the RBA reducing rates next year, which could provide an additional boost to the housing market.