Relationship Breakdown: How the Housing Market Defied Economic Indicators

⚡️ Highlights:

1. Historic relationships between interest rates and home values have broken down, with home values continuing to rise despite record increases in interest rates in 2023.

2. Factors such as strong population growth, tight rental markets, and active buyers with less reliance on housing credit have helped support the housing market recovery in 2023.

3. Consumer sentiment, as measured by the monthly consumer sentiment index, reached its lowest average monthly reads since the early 90s recession in 2023.

4. Despite low consumer sentiment, dwelling sales volumes trended higher in the second half of 2023, reaching a peak in October.

5. Economic and housing data towards the end of 2023 suggest there may be a time limit on how long housing values and sales can defy high interest rates, but early indicators in 2024 show market conditions heating up again in some weaker capitals.

In an insightful analysis released on Valentine’s Day 2024, CoreLogic explores the intriguing dynamics between economic indicators and the housing market’s performance throughout the pandemic and beyond. Despite traditional correlations suggesting that rising interest rates and low consumer sentiment would dampen housing demand, the market’s recovery in 2023 presented a stark contradiction.

Interest Rates vs. Home Values

Historically, there’s been an inverse relationship between interest rates and home values. Typically, as interest rates climb, borrowing capacity and demand for debt diminish, leading to a slowdown in housing demand. Conversely, falling interest rates tend to stimulate price increases. However, from late 2022 to mid-2023, the housing market witnessed an improvement in growth trends despite a record rise in the underlying cash rate.

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What Drove the Anomaly?

Several factors contributed to this anomaly. A significant rebound in population growth from mid-2022, following the easing of international border restrictions, saw net overseas migration soar to 518,000 in the 2022-23 financial year. Additionally, tight rental markets, characterized by high rent growth and low vacancy rates, encouraged more people to purchase housing, further buoying home values.

Consumer Sentiment and Sales Volumes

Another interesting relationship is between consumer sentiment and dwelling sales. Despite the lowest average monthly consumer sentiment reads since the early ’90s recession, the second half of 2023 saw a trend of higher rolling six-month average sales volumes, with monthly sales peaking in October. This divergence suggests that factors such as tight rental markets and strong population growth played a role in driving sales volumes higher, even amid gloomy consumer sentiment.

Looking Ahead

While the early part of 2024 shows signs of heating market conditions in some capitals, the longevity of housing values and sales defying high interest rates remains to be seen. Sydney, for example, recorded a final auction clearance rate of 70.6% for the week ending February 4th, the strongest result since mid-2023, indicating a potential early boost to market conditions through 2024.

This analysis by CoreLogic underscores the complex interplay between economic indicators and the housing market, challenging conventional wisdom and highlighting the resilience of Australia’s housing market.

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