The worst is over: Optimism rises as Australia’s declining property market shows signs of deceleration
At the turn of the New Year, Australian property prices fell to the lowest they have been since the Global Financial Crisis, but signs are beginning to emerge that may be indicating that the worst is behind us.
House prices across Australia have continued their downward trajectory to be down 7.2% over the past twelve months, the largest annual fall since February 2009. Throughout April, price falls began to affect all capital city markets and regional areas, broadening the decline across the country. Australian capital city home prices have now fallen for 19 consecutive months, equalling the duration of the last downturn but exceeding it in terms of price declines.
However, despite the negativity, the latest data from CoreLogic confirms that while the decline in home values continues across the country, the fall has lost its momentum. The monthly capital city declines that surpassed 1% at the beginning of 2019, led by significant price falls in Sydney and Melbourne, are now occurring at only half the pace.
The median capital city price slipped by only 0.5% in April in average weighted terms, showing that the rate of home value decline has begun to decelerate.
This moderation is in line with improved consumer sentiment and auction market conditions, aided by the APRA deciding to relax its macroprudential controls on investor and interest-only loans.
These tentative signs of optimism and improvement in the market, supported by a rise in mortgage related valuations activity, suggest that Australia’s housing market may have moved through the worst of its latest downturn.
Despite harsher scrutiny on both prospective buyers and established lenders, the housing market is the most accessible – at least in terms of price – it has been for new buyers over the last decade, and this can be seen in the number of first-home buyers who are using it as an opportunity to get into the market.
Source: CoreLogic, ABS
Economists have forecast that Australian house prices will continue to decline for the remainder of the year – albeit at a slower pace – meaning the sense of optimism and opportunity will remain for people entering the property market. A willingness to buy and overall buyer psychology will continue to improve in the current year, as more Australians consider home ownership.
However, the impact of the upcoming Federal Election will ensure the property market remains subdued. People will likely stay out of the market until they know what the election outcome means for them, particularly in regard to the Labor Party’s policy on negative gearing.
While rental growth throughout the country continues to slow, mainly off the back of falls throughout Sydney and slowing rental growth elsewhere, gross rental yields are beginning to rise quite rapidly across the country (with a national gross rental yield sitting at 4.1% as of March 2019) – signalling that rental growth remains stronger than value growth.
Another tentative sign of optimism is the national auction clearance rate that is currently sitting within the mid-50% range – although this isn’t a strong sign of improvement, it demonstrates that the worst declines of the market may be over.
Conditions will inevitably remain challenging for developers focusing on the large cities, as Sydney and Melbourne endure their overdue correction phase. Smaller capital cities that were exempt from price elevation have not experienced the same price declines, although more regions across the country are now seeing housing values slip as the downturn becomes more geographically diverse.
House prices have proven the most resilient in Brisbane and Adelaide, with Queensland reporting high levels of interstate migration and consistent investment. Despite constrained construction activity, dwelling approvals and commencement have remained relatively robust in Queensland and the ACT, suggesting that the residential markets in these states may perform better.
The Built-To-Rent (BTR) sector is forecast to continue growing, with more developments breaking ground and investors seeking sites that are protected from the changing conditions in the residential market. The previous hurdle of affording land for new projects has been somewhat offset by the continuous decline in property prices.
Depending on the newly-elected government, this sector might attract even more interest due to the Labor Party’s promise of significant benefits for investors and developers in the BTR and affordable housing sectors.
Nevertheless, for property developers in all sectors, this month signals a turning point for Australia’s property market. In previous volatile periods, we have seen the RBA ease policy and cut Australia’s cash rate to support house prices.
The current climate suggests that rate cuts are likely this year, with lower mortgage rates potentially coming to the aid of house prices.
Buyers and investors will soon act according to the election outcome and potentially capitalise on declining prices and less stringent lending conditions.
For more information on current market conditions, watch Baxter Gamble’s latest market update here.
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