Strong demand, a constrained supply of properties for sale, and record-low low interest rates combined to make a perfect storm for house price growth in 2021.
But the real driving force was the ongoing reassessment of lifestyle wants and housing needs by Australians, which when combined with the cheap cost of borrowing, allowed many to afford larger mortgages and bigger budgets.
The arrival of the Omicron strain is a timely reminder that despite our best efforts, predicting the year ahead is often an exercise fraught with uncertainty.
Still, we look at what could be some of the big themes that may drive residential real estate in the year ahead.
More choice and less competition
2021 finished very differently to how it started.
There were three consecutive months of elevated new listings, with November bringing a decade high for new listings in capital cities. The easing of COVID restrictions in New South Wales and Victoria boosted seller confidence and buyers took advantage of the choice available.
This trend has continued into the new year and across capital cities January 2022 was the busiest for new listings in eight years. We expect new listings to remain elevated during the start of 2022, as would-be sellers respond to strong price growth, meaning some buyers can expect the intense levels of competition seen in 2021 to ease.
Greater willingness from sellers to list their properties will mean more choice and an improved balance between supply and demand. This should also contribute to easing price growth this year.
Price growth to slow from the breakneck speeds seen in 2021
Already high home prices, along with bottoming mortgage rates, will slow annual price growth. Savings made from lower interest rates were very quickly absorbed by higher housing prices and that commensurate boost to affordability from low rates is expiring.
This will contribute to a slower pace of price growth in 2022. In addition, the Australian Prudential Regulation Authority’s macroprudential changes, which took effect late last year, have moderately reduced borrowing capacity for new buyers.
But even as last year’s runaway surge eases, annual price growth in the coming year is still likely to match or exceed long-term trends.
Equity gains a tailwind for activity
Remote work arrangements and the experience of lockdowns have seen many buyers seek larger homes and more space. And after the significant rise in housing prices, many existing homeowners are sitting on substantial equity.
This combination is likely to add to strength in upgrader transaction volumes, especially as the shift in lifestyle preferences is still being compounded. The emergence of Omicron has further prolonged remote work necessity.
As cases subside, this year will hopefully be less hindered by restrictions, and buyers and sellers who have held back until now will have the opportunity to transact unencumbered – providing another tailwind for activity.
However, the price gap between units and houses, which has widened this year, will make it more difficult for apartment upgraders looking to purchase a house.
Immigration and international students return driving demand for units
The reopening of international borders and subsequent return of skilled migrant workers and international students is likely to see increased demand for inner-city rentals.
Rents in regional areas have surged while largely remaining flat or declining in inner-city locations due to pandemic-induced preference shifts. Almost two years after COVID-19 lockdowns first emptied city apartments, demand could be set to recover as life returns to CBDs.
The premium of house prices over unit prices has reached record highs, with the pandemic driving one of the biggest shifts we’ve ever seen when it comes to housing preferences. But with credit conditions tightening and a normalisation of migration placing pressure on rental markets, demand for units could rise as buyers look for affordable options.
Future landlords looking around
Investor activity picked up significantly in 2021, and this is another reason why we could see increased demand for units. The proportion of enquiries to real estate agents from investors is currently at the highest level seen in more than two years.
Since investor loans typically have higher interest rates, APRA’s increase to the serviceability buffer applied to new home loan applications will impact investors more than owner occupiers.
With this in mind, and units currently historically cheap relative to houses, the added pressure in rental markets and affordability factors could drive demand.
Investor mortgage demand has increased from a record low of around 20% of new lending to more than 30%, and with APRA modestly tightening credit conditions, investors may look to capitalise on rental recovery and the unit discount.
Wages growth MIA
The Reserve Bank cut interest rates to record lows in 2020, fuelling record demand for property and seeing housing prices surge Australia-wide as a result.
The latest inflation data was stronger than expected and many are now pointing to the possibility of rate hikes as soon as June this year, a significant compression of the 2024 timeline that was signalled by the RBA only a matter of months ago.
This would see mortgage rates increasing and borrowing costs headed higher, thus reducing the amount people can borrow – a handbrake on price growth.
However, before the RBA raises rates, governor Philip Lowe has consistently highlighted that both inflation and wage growth are necessary preconditions. The RBA’s preferred measure of underlying inflation (trimmed mean inflation) may be back within their 2% to 3% target range, but there will need to be a significant pick-up in wages for the cash rate to rise this year.
Wages growth is the number one determinant of sustained inflationary pressures (what the RBA is seeking) – and currently the missing link. Crucially, the RBA is waiting for wage growth to be closer to 4%.
The possibility has increased that faster-than-expected progress continues to be made if the labour market continues to strengthen at the current pace, leading to a 2022 rate hike. But until there is evidence of broad-based stronger wages growth, don’t expect interest rates to rise. The RBA is also likely to wait for at least two more strong CPI prints before raising the cash rate which renders August 2022 the earliest possible in that respect.
However, even if the RBA holds out until later in 2022 or early 2023, mortgage rates are likely to rise regardless. Fixed rates have already bottomed, and variable rates are likely to creep higher this year. Even though mortgage rates are likely to rise, they will remain historically low.
So all up, though not a match for 2021’s historic year, 2022 is still expected be a strong year for housing.
Author: Eleanor Creagh