Housing prices have surged by 18.1% in 2021-22, the largest annual increase since records began. The COVID-19 pandemic has prompted many inner-suburban Australians to move to the outer suburbs and regional towns, while higher demand for housing has driven price growth over the past three years. These trends, coupled with low interest rates, have contributed to an annualised 5.2% rise in housing prices over the five years through 2021-22. However, as pressures from the COVD-19 pandemic ease, housing turnover is expected to slow. This easing will likely reduce prices over the next five years.
Immigration stagnation
While immigration levels are expected to rise from pandemic-induced lows, the Federal Government reduced the yearly permanent migration cap from 190,000 to 160,000 in 2020-21. This move will likely place downwards pressure on migration rates, constraining demand and limiting growth in housing prices.
Fragile demand conditions have come at a time of rising supply, further undermining residential house prices. The Federal Government’s HomeBuilder scheme has contributed to an increase in housing supply. The scheme was implemented to provide an economic boost in response to the COVID-19 pandemic, contributing to a 24.0% increase in dwelling commencements in 2020-21.
Looking ahead
Homeowners and investors are anticipated to face weak house price performance over the medium-term, as well as an increase in month-to-month volatility in the next 12 months. ‘Greater global economic uncertainty and the damage to investor confidence caused by the Russia-Ukraine conflict is expected to constrain demand, weakening housing prices’ said IBISWorld Senior Industry Analyst Matthew Reeves.
Some local housing markets have already displayed signs of price declines. Data from CoreLogic has revealed prices in select inner suburbs of Sydney fell by as much as 9.2% over the three months through February 2022. IBISWorld expects this shift to mark the start of a period of price volatility, leading to a 5.2% fall in housing prices in 2022-23.
Weakening demand conditions, low net migration and a greater supply of completed projects are forecast to drive an even greater price decline in 2023-24. Prices are expected to slightly recover from 2024-25, but not return to the heights of 2021-22. This translates to an average annual fall in residential housing prices of 1.1% over the five years through 2026-27.
‘The negative outlook for house prices has been driven by a wide range of factors’, explained Mr Reeves. ‘These include monetary policy, the effects of the COVID-19 pandemic, a loss of consumer and investor confidence as a result of the Russia-Ukraine conflict, and a hangover from escalating house prices in recent years.’
Interest rates fell to record lows during the COVID-19 pandemic, but are expected to rise following economic recovery. Overseas interest rate movements are putting pressure on the Reserve Bank of Australia to act. In the United States, the Federal Reserve raised interest rates 0.25 percentage points in March to 1.00% and are anticipating another six rate rises over the over the remainder of 2022. Central banks in the United Kingdom and New Zealand have also raised official interest rates following recovery from the pandemic. However, the RBA has insisted that it won’t increase interest rates until inflation is sustainably within its target range of 2% to 3%.
‘Pressure from other overseas reserve banks may prompt the RBA to raise the cash rate in 2021-22, but certainly in 2022-23,’ said Mr Reeves. IBISWorld expects the cash rate to rise at an average annual rate of 0.27 percentage points to 1.45% in 2026-27. As the cash rate rises, banks will pass this on to consumers in the form of higher lending rates, weighing negatively on demand for housing.
Tighter lending standards will likely exacerbate rising mortgage rates. This is due to the Banking Royal Commission, which mandated improved lending standards for lower income earners. Interest rate rises come at a time of high levels of household debt. Borrowers are more susceptible to small changes in interest rates during high levels of household debt, and debt stress could trigger a decline in housing prices.
IBISWorld reports used to develop this release:
- House Construction in Australia
- Multi-Unit Apartment and Townhouse Construction in Australia
- Residential Housing Prices
- Cash Rate
- Dwelling Commencements
- Net Migration
To request any of the IBISWorld reports used in this media release, or to arrange an interview with an analyst about this story, please contact Nikola Brajdic at mediarelations@ibisworld.com.
