Australia’s residential real estate market reached $9 trillion in value. What’s next?

According to Corelogic, the overall residential real estate market in Australia was valued at $9 trillion in September 2021 (1).
Several reasons contributed to this growth, including record low mortgage rates and higher household savings. Here are some key takeaways from a recent Macquarie property market webinar.
    Covid-19 is causing Sydney property values to increase in Some Residential Areas. Is It Time To Sell?

    “Household savings jumped 22% in the June quarter of 2020, with lower spending on overseas holidays and big-ticket items – which meant some people found they had a house deposit,” said CoreLogic’s Head of Australian Research, Eliza Owen. Significant government support, in the form of JobKeeper and JobSaver, also mitigated the risk of forced sales – keeping supply tight.

    Given house values rose $1 trillion in a matter of months (2), the big question is when will it hit $10 trillion? CoreLogic analysis suggests growth rates will continue to diminish, and it is likely to peak around that new milestone in late 2022.

    “By the end of the 2022 calendar year, housing market growth rates will drop from just over 20% in 2021 to 7% or 8% in 2022 – bearing in mind the correlation with sales and listing volumes,” said Eliza. This diminishing growth rate has already taken hold, with affordability constraints setting in – particularly in cities like Sydney and Melbourne, which account for a large proportion of Australian housing stock and value.

    Supply imbalance set to ease

    With lockdown restrictions now easing in Sydney and Melbourne, physical property inspections have resumed. New listings have increased in line with the historic pre-COVID-19 spring seasonal bump, with about 45,000 new properties hitting the market in the four weeks to mid-October. And while volume growth has been faster in unit stock than housing, with investors seeking to exit poor performing rental markets, there has also been supply growth in popular lifestyle areas – including Sydney’s northern beaches, Geelong and the Mornington Peninsula.

    Yet this recent lift in listings still isn’t keeping pace with demand. Sales to new listing ratios are as high as 1.8 in the Australian Capital Territory and Adelaide, with only Perth and Melbourne units dipping below 1.0.

    New residential developments may also add to housing stock supply once they are completed, but developers are currently challenged by shipping disruptions causing building material delays, leading to cost and timeline blowouts.

    Real estate principals and sales teams will undoubtedly welcome any increase in new listings. “It’s been very competitive out there, with pressure on sales commissions,” noted Dominic. “Postponed transaction activity, with the spring selling season only just underway, indicates it’s likely to be very busy right through to Christmas.”

    Rental market recovery

    While residential sales teams have been riding the wave, property management teams have been challenged by rental yields and vacancy rates.

    The new Australian Prudential Regulation Authority (APRA) serviceability assessment requirement is likely to impact investor borrowers more than owner occupiers. “From a financial stability perspective, APRA’s decision to increase the buffer on residential mortgage lending assessments to 3.0% makes sense,” she said. “Some have described it as a relatively subtle intervention targeting the investor segment, and it’s likely to reduce the maximum loan size for all borrowers by about 5%, on average.”

    There are, however, some positive signs for investors – and rent rolls. Unit rents are finally showing signs of recovery after a widening divergence with house rents. Initially, rental markets were also impacted with disruption to to Airbnb lettings, but that market has recovered.

    New patterns of migration

    Regional growth is likely to be a long-lasting impact of the pandemic. Australian Bureau of Statistics data indicates an uplift in people leaving capital cities for the regions since the onset of COVID-19, while regional residents have been less likely to move to cities for work or study.

    International migration is unlikely to return to typical numbers until 2023, and it is a strong predictor of rental market growth.

    “Demand has been wiped out of those inner city rental markets, leading to subdued rent and capital growth,” noted Eliza. “But what might they look like when international migration returns? New arrivals might also seek the regional lifestyle areas of Australia. This could create some new dynamics in the market in a few years.”

    With the longer-term impacts of the pandemic still unknown, it’s possible traditional growth cycles could become less predictable. However, even if residential real estate growth rates ease in the year ahead, the total value of Australia’s housing market is now around 28% higher than the estimated value of superannuation, the Australian Securities Exchange and commercial real estate combined (3). And that makes it increasingly important to household wealth and consumer confidence.

    Source: Macquarie Business Bank’s analysis; Corelogic report