Property Pulse: Housing Economics

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Below is a transcript of the podcast.

Evan Lucas: Hello and welcome to Property Pulse. This week, I am joined by Cameron Kusher, Director Economics at REA Group. Cameron, welcome to the program, it’s a perfect time to have someone like you on. Can you take us through what you saw in the economics in May and where the housing market is going across the country? 

Cameron Kusher: Yeah, thanks Evan. In May, we obviously got our first interest rate hike since 2010. Interest rates have been consistently falling since late-2011 and the market was already slowing before we got that interest rate hike but it certainly exacerbated that slowdown. We’ve just got some new data on May property prices and we’ve seen falls again in Sydney, we’ve seen price falls in Melbourne as well and we’re starting to see a larger slowdown in price growth across the other capital cities and regional markets as well. The expectation from here is obviously that interest rates are going to go higher, so we can expect that property prices are going to go lower.  

We have seen also this month the number of sales each week has started to slow as well, so it’s been very much a market that’s favoured sellers over buyers and I’d say the market at this stage still favours sellers more so than buyers, but we’re definitely moving more closely towards equilibrium and I would expect over the next few months we might actually see conditions starting to favour buyers more so than sellers. The demand side of things is holding up quite well and we’ve still got a relatively low volume of stock available for sale, we have seen quite strong numbers of new listings coming to the market, we’re still seeing that, that’s really highlighted each week by the high volume of properties going to auction.  

But demand is still quite strong, but not as strong as it was, so you do have this great sense of urgency that people had sort of 6 to 12 months ago when there was very little on the market and there was so many people competing for properties, that has eased back a little bit over the last few months as well. The housing market certainly isn’t in the same position than it was 6 to 12 months ago and with more interest rate hikes to come, we think that things are going to cool further from here.  

EL: So, is that suggesting that you’re seeing more of a psychological reason that people are backing out of the housing market rather than an actual physical change? Is it the forward planning? Is that what you’re sort of saying and seeing in the data?  

CK: I think so. Remember, up until November last year, the Reserve Bank was telling everyone that they didn’t expect interest rates to increase until 2024 and here we are in May of this year and we’ve already got an interest rate hike. I think people were already starting to see the writing on the wall and that interest rates weren’t going to be as low as expected for as long and that took some of the heat out of the market. We also obviously had the impact of interest rates originally being cut and we had restrictions on how people could spend, so given that interest rates reduced dramatically, people’s borrowing capacities increased dramatically and then they were told they couldn’t travel overseas, Sydney and Melbourne had a number of lockdowns and people couldn’t even go to the office, they couldn’t go out to restaurants, they couldn’t spend on any of these things, so they were dedicating a lot more of their income towards housing.  

Come October of last year, when the restrictions were largely dropped and everyone came out of lockdown, people realised that there were other ways to spend money as well, so I think that contributed to the slowdown in the rate of growth in the housing market because people just didn’t continue to bid up prices because now they could go and do all those other things. From here obviously though, the challenge is as interest rates increase, people are going to have to start dedicating more of their income again to housing costs and paying off that mortgage which is going to leave them less money to go and travel and do all those entertainment things that they’re really enjoying doing a the moment and it’ll probably have a broader impact on the economy as well as spending throughout the economy starts to slow as those interest rates start to go higher.  

EL: On those interest rates, where does REA actually see rates getting to, what’s your economic outlook with regards to where rates will be?  

CK: I think by the end of this year, we’ll probably see a cash rate of around somewhere between 1 and 1.5 per cent. Our view is very much though, once you start getting the cash rate above that 1.5 per cent, I think that the impact of that is going to be very strong and probably stronger than what people think. I wouldn’t be surprised if the peak of the interest rate cycle at least initially is sort of 1.5-1.7 per cent cash rate and that’s when we really start to see the broader economy slowing down. We’ve already seen from a housing perspective, construction costs are surging so that’s going to slow people’s appetite to do renovations, it’s going to slow people’s appetite to go and buy brand new homes.  

Even though petrol prices in the scheme of things are a very small part of a household’s expenditure, people are going to the petrol station every week and seeing that 6 to 12 months ago, they were paying $1.60-1.70 a litre, now it’s $2.15-2.20 a litre, that’s going to change people’s behaviour and just the cost of everything at the moment is increasing at a time when interest rates are also increasing so people are going to have to cut back on their spending. So we’re certainly nowhere near as bullish as some others out there as to how high and how quickly interest rates are going to go to those very high levels.  

EL: The next thing to move onto is something you’ve shown in your reports, is that the supply of properties is falling, I think you said it’s about 38.4 per cent lower than it was a decade ago. Is that a trend that’s likely to continue and is there also a difference between urban and regional areas, is that also speeding up?  

CK: We’ve seen a massive reduction in the supply of properties in regional parts of the country and that’s just because throughout COVID a lot of people moved regionally, brought properties there, maybe thought incorrectly that they were never going to have to go back into the office, so I think it will be an interesting trend to see how those regional markets hold up now that things are somewhat back to normal. But we have seen a big reduction in the supply of properties listed for sale in the capital cities as well. Keep in mind that the number of sales last year was 40 per cent higher than it was in 2020. So a lot of people were buying this stock up that hadn’t moved for quite a long time.  

In terms of where that goes now, I think it’s actually quite a tricky one to predict what’s going to happen with supply, because some people maybe over-extended themselves to get an investment property or get that second home, maybe they need to sell that up, maybe we see some of the people that moved regionally looking to come back into the capital cities. As I mentioned earlier as well, construction costs are very high at the moment. A lot of people like to buy a new home and then renovate or buy a home that has renovation potential. With the costs of renovation so high at the moment, maybe people will be more inclined when they get to that point that they need to do a renovation to sell that property and buy something that doesn’t need a renovation.  

You’ve also got the rental side of things as well. We’ve got a very, very tight rental market at the moment. Even though we’re expecting property prices to fall, we’re expecting rents to continue to grow and that might give some people the impetus to move from the rental market into home ownership and we know that the Federal Government is offering a lot of incentives, State Governments are offering a lot of incentives for first home buyers as well. The tightness of the rental market also means that we need more supply of rental stock and that means more investors coming into the market. There might be some impetus for people to sell those properties as investors are hunting around trying to find properties available to buy.  

So, in terms of where listings go, it’s really difficult. There’s no historic linkage between higher interest rates and fewer listings, nor is there a historic linkage between lower prices and fewer listings, but it’s really unprecedented times because we haven’t had higher interest rates for 12 years now.  

EL: We also then need to bring onto something else that’s sort of changed over the last couple of days, which is the changes from banks with regards to debt to income ratio. Is that also the next sort of headwind to how the property markets works with that tightening around DTI?  

CK: Definitely, it’s a potential headwind. I mean, APRA’s been talking about it for a while and we’ve seen the Council of Financial Regulators saying that they’re keeping a close eye on it. There’s been nothing official as yet from APRA but we have seen a number of banks announce that they are tightening up on debt to income ratios and higher debt to income ratio lending. I think it’s an interesting time to be doing this given that higher interest rates will reduce people’s borrowing capacities anyway and will largely do the job of that. In terms of who that’s going to impact, again, it’s probably investors that are going to be most impacted by these higher debt to income ratio speed limits some banks are imposing.  

Again, as I said, what we’re seeing in the rental market is a very tight rental market that really needs more supply of rental stock coming onto the market at the moment. If we go too hard on those higher debt to income ratio lending, you’re not going to get the supply coming back online and that’s going to be a real challenge for the rental market and exacerbate these challenges we’re seeing at the moment with, regionally rents have increased a lot, now that capital cities are opening back up, we’re starting to see a lot more rental growth coming back into inner-city areas, particularly in Sydney and Melbourne.  

EL: The last question that therefore comes out of all of this is, those that are looking to get into the housing market and the deposits they’re having to raise, do you think going forward now with what’s going on with rates and how people are viewing the property market, that it’s going to be more and more important than ever to reach that 20 per cent deposit or at least try to get there even harder?  

CK: I think so. I mean, the thing for first home buyers is there’s a lot of incentives now and I think the Federal Government’s really sort of realised that bringing property prices down is really the best way to improve affordability, but politically it’s not very popular. What they’re trying to do is improve access for people into the market and that’s why we’ve seen shared equity, that’s why we’ve seen the home guarantee scheme announced as well. I think we might actually see a bit of a turnaround in first home buyers over the coming few years because prices are going to be coming down.  

The Government’s giving you a lot of help to get into the market, plus you’ve got very strong increases that we’re expecting in the rental market which will provide more of an impetus for people to move out of renting into home ownership. But certainly, saving a bigger deposit is going to be important and I guess, higher interest rates will actually offer people that are saving for their deposit, a bit of a return on their investment. When we’ve had interest rates at record low levels, you don’t get anything for parking your money in the bank. Now you’ll at least start to get a little bit of a return as interest rates continue to climb.  

EL: And that is something we’re going to watch very closely over the coming years. Cameron Kusher, thank you so much for your time today.  

CK: Thanks for having me, Evan.