House prices rebounded in month interest rates were cut
Home prices jumped in the month the Reserve Bank cut interest rates, with Australia already looking to have exited one of its shortest and mildest property downturns on record.
CoreLogic’s widely watched Home Value Index (HVI) posted a 0.3 per cent national rise in February, ending a shallow three-month downturn where prices eased just 0.4 per cent.
While February’s rise was modest, CoreLogic’s Eliza Owen said it was a major turnaround from the downward trend that was taking hold, especially at the top end of the market, which often leads to broader price moves.
“It seems that the February rate cut was almost like a pilot pulling a plane out of a tailspin,” she told ABC’s The Business program.
“It seems that the rate reduction has staved off what looked like a bit of a decline and a crunch in response to affordability constraints.“
In fact, the turnaround in property markets took hold early last month, ahead of the February 18 rate decision, as lower inflation figures made an RBA move look increasingly certain.
“That tells us that some of this movement in the market is to do with expectations of rate decline, as well as some of the boost to sentiment that this rate cut signifies, including a marker that we’re getting over the inflationary hump,” Ms Owen added.
It is an unwelcome development for prospective buyers such as Shimam, who is searching for his first home in Sydney’s south-west suburbs.
“[The rate cut] is helpful but, at the same time, there’s a correlation between when the interest rate goes down and the prices do go up. So it’s a Catch-22 on that one,” he said after being outbid at a recent auction in Punchbowl.
Nancy and her brother just sold the house their parents owned for more than five decades. (ABC News: Michael Janda)
The vendors of that house, Nancy and her brother, were on the other hand delighted with the price they received for their parents’ home.
“We were hoping to get reserve, but we’ve got way above what we were hoping. So we are grateful,” she said after the auction.
Lower rates, bigger loans
Economists will not be surprised by the reaction.
Productivity Commission chair Danielle Wood says additional supply has been a major factor keeping Victorian home prices steady. (ABC News: Daniel Irvine)
Put simply, the Productivity Commission’s chair Danielle Wood explains that lower interest rates allow people to take out bigger home loans.
“The more you can borrow, the more you can kind of bid up the price of houses,”
she explained.
Modelling from the Reserve Bank and other institutions shows the outsized effect rate reductions have on property prices.
Peter Tulip says the ability for supply to respond more quickly to demand would dampen the price impact of rate cuts. (ABC News: John Gunn)
“When, as econometricians, we try to estimate changes in housing prices, interest rates are the single-most-important variable,” former RBA economist Peter Tulip, who is now chief economist at the Centre for Independent Studies, explained.
“They explain a lot of the very short-run variation well and, in fact, they explain a lot of the longer-run variation also.
“But that’s because the supply is fixed. If supply were responsive, then changes in interest rates would have more effect on construction and less effect on prices.”
Another house price boom unlikely, rents slow
While one interest rate cut appears to have staved off the nascent downturn in property prices, CoreLogic’s Eliza Owen is not expecting the current RBA cash rate of 4.1 per cent to trigger another boom.
CoreLogic’s head of research Eliza Owen says Victoria has become the most attractive state for first home buyers due to its lack of price growth. (ABC News: John Gunn)
“It’s hard to imagine a material, strong uplift like what we saw in 2021, for example, when the cash rate was 0.1 per cent,” she said.
“I think what we’re looking at is a little bit of a delay in a downturn and a weakness in the market that would be a reflection of affordability constraints.”
That sentiment is shared by Reserve Bank governor Michele Bullock, who generally dismissed concerns that the February rate cut might spark another housing boom.
“Certainly I don’t think 25 basis points makes a huge difference,” she told this reporter when asked that question at the post-meeting press conference on February 18.
The Reserve Bank will announce its next interest rate decision on April 1, with markets only pricing in about a 20 per cent chance of an immediate follow-up cut in rates.
But Ms Owen said even a few more rate cuts this year should not do too much to stoke the housing market.
“If we saw a rate reduction of one percentage point over the year, that would probably boost purchasing capacity by about 12 per cent, but it doesn’t take the average purchasing capacity anywhere near where the median dwelling value is in Australia,” she said.
Independent economist Gerard Minack, from Minack Advisors, agreed that it would take far lower interest rates for Australia’s most pricey property markets to set new records, at least relative to inflation and income levels.
Economist Gerard Minack does not think there is scope for prices in Australia’s most expensive markets to increase much further. (Supplied: Gerard Minack)
“Our most expensive cities, Melbourne and Sydney, are probably as expensive as they’ll get relative to income,” he argued.
“And that’s because we reached that peak level of expensiveness when interest rates, in the aftermath of the pandemic, were realistically as low as we will ever see them.”
Meanwhile, it appears that affordability constraints are also putting a lid on rents after a few years of large increases.
“Rent growth continued to reduce on an annual basis, down to 4.1 per cent,” observed Ms Owen, the smallest rise since the 12 months ending in March 2021.
“So not quite back at its 2010s averages, but it’s getting there.
“And, for the Sydney market, annual rent growth was 2.6 per cent, so that actually is back to its pre-COVID, 2010s growth level.”
Victoria ‘the first home buyer state’ as prices stagnate
Despite the strongest price rise in February, Melbourne property values are still down on their peak levels and lower in real terms than before the pandemic. (ABC News: Darryl Torpy)
The general trend for the states and territories in the CoreLogic data last month was that those which had been booming over the past couple of years showed signs of continued slowing, while those that had been falling rose the most.
“Melbourne and Hobart, which were well below their peaks in 2022, showed a 0.4 per cent uplift in the month,” Ms Owen observed.
“Our modelling suggested this — that Sydney and Melbourne, and generally markets that had a stronger reaction to rate rises, were going to see the biggest benefit from a rate reduction.”
Of the major property markets, Melbourne is a stand-out for prices that have grown far less than inflation and incomes since the start of the pandemic in 2020, meaning real purchase prices have fallen.
“Over the past five years, Melbourne home values are only up about 8 per cent compared to a broader uplift of around 30 per cent across the country,” Ms Owen observed.
“Unit values haven’t moved at all and, overall, the price growth has just been more subdued.”
Ms Owen said this was due to a range of factors working together, including increased land taxes, charges on the owners of vacant homes, and a new short-stay accommodation levy that started on January 1 this year.
“On the demand side, you had a big outflow from interstate migration through the pandemic. From March 2020 to date, the loss from interstate migration is about 55,000 people, and even though it was made up for by overseas migration, that demand skewed through to the rental market rather than purchases,” she noted.
“We’ve also seen subdued investor interest in this market. And that could be because of low capital growth but, certainly from the start of 2024, you had a reduction in the threshold at which investors would pay land tax. So that’s probably contributed to less demand and lower prices as well.
“On the supply side, you’ve had a lot more dwelling completions across Victoria over the long term, the past 15 years, whether it’s high-rise inner-city units or the development of new houses and land on the fringe of the metropolitan area.
“So the supply- and demand-side factors mean that price growth has been more subdued and there’s more supply to absorb existing demand.“
Economists say urban sprawl has been easier and more prevalent in Melbourne than in Sydney. (
ABC News: Peter Drought
)
Ms Wood said Melbourne had added about 30 per cent more homes per person than Sydney over recent years, partly because it had a more conducive geography for urban sprawl, which had helped counter the difficulty in getting approvals for infill developments nearer the city centre.
“Sydney has a lot of constraints. You’ve got water, you’ve got mountains, you’ve got national parks,” she explained.
“Melbourne continues year-on-year to expand outwards, and I think something like more than 40 per cent of the growth in supply has been at the been at the fringes.
“So, in a world where we constrain what we can do in terms of density, Melbourne has an advantage.”
Mr Minack argued a combination of all those factors, along with relative economic underperformance since COVID-19, had now made Melbourne more affordable than many other Australian cities.
“Bundle that up together — lower incomes, more supply, tax changes and making it less favourable for investors,” he said.
“The whole investor point’s an interesting one. Whenever there are measures that potentially discourage investors, you always hear people say, ‘Oh, well, this isn’t good for tenants.’
“Well, the fact is, for every investor that sells, guess who buys? It used to be a tenant. Someone who didn’t own a home buys a home.“
Ms Owen said that recent housing finance data compiled by the Australian Bureau of Statistics showed “Victoria is the first home buyer state”.
“It attracts the highest share of first home buyer finance and reflects a state where people can kind of catch up with the market and realise the Australian dream of owning a home.”
