This isn’t supposed to be happening.
Against all logic and decades of previous experience, housing prices appear to have not just stabilised but turned the corner.
Coming off the back of the most-punishing series of interest rate hikes in Australian history, it undoubtedly will give rise to some sobering discussion when the board members of the Reserve Bank of Australia (RBA) gather on Tuesday at Martin Place.
Every capital city, bar Darwin, saw a rise in real estate prices in April with Sydney leading the way. The regions eked out minor gains as well.
Last month, initially, may have been considered an aberration by some analysts but successive months of national rises and three months of strong gains in Sydney points to a recovery as an emerging trend.
At face value and — there are board members who will argue — at that level, further hikes appear necessary to contain the trend.
The pause in interest rate hikes last month, they may argue, sent the wrong message through the economy and more needs to be done.
One of the givens in economic management in recent decades has been that lower interest rates generally spur asset prices. And the opposite holds true too: Higher rates lead to lower lending levels and a lift in forced sales.
That’s been particularly true here over many years, and especially when it comes to property.
Rightly or wrongly, real estate has become a vital component of our economic management. Rising residential housing prices spur consumption as owners spend against their windfall gains.
And that is precisely what the RBA has been attempting to restrain for the past year. It’s worked until now.
Lending crashes back to Earth
Home lending by the banks has followed the playbook to a tee.
It went into orbit through the pandemic, as the RBA slashed interest rates to a whisker above zero, and returned to Earth since it began its savage series of rate hikes a year ago.
The top line of this graph shows total lending falling, from a shade under $35 billion at its record-setting peak a little over a year ago, to around $24 billion, as of February this year.
Owner-occupiers — the middle line in red — and, particularly, first-home buyers exited en masse.
However, investors — the lower line — backed off substantially as well.
On cue, real estate — particularly in the big capitals — began a serious descent. By early this year, Sydney housing prices had dropped 14 per cent.
Suddenly, not only has it ended, it has reversed.
The perfect storm brewing in the housing market
There are three main factors behind this highly unusual event: Two relate to supply, the other impacts demand.
Whenever housing markets take a dip, a large number of would-be sellers withdraw.
Having convinced themselves the true worth of their property is the amount they could have received at the peak, they opt to stay put.
That’s been happening for most of the past year.
Last weekend, a grand total of 1,730 properties were put under the hammer across the nation’s capitals. That’s way below the 2,699 that were on the block on the same weekend last year.
That’s a large reduction in supply which, in even ordinary times, would help stabilise price falls.
This time, however, it’s been compounded by an extraordinary reduction in new housing being built.
The Homebuilder scheme created a pandemic construction boom, which unravelled spectacularly when surging materials costs sent many firms to the wall.
According to Australian Securities and Investments Commission data, by the start of March, 1,236 companies in the construction sector had gone into liquidation, receivership or administration this financial year.
Add to that, an extraordinary lift in demand as the sudden re-opening of borders spurred immigration along with a huge intake of foreign students.
This financial year is likely to see a record 400,000 new arrivals. They all have to live somewhere and many now are being forced to bid up the price of rentals by astronomical amounts.
That trend now appears to be filtering through to residential sales.
This graph from AMP economist Shane Oliver neatly charts the problem. That sudden influx of new arrivals has coincided with a large drop in building completions.
Where, just a short time ago, we had an oversupply of properties — prompting many share house renters to take advantage of cheaper rents to move into their own accommodation — we now have the reverse.
The large gap between the blue and red lines on the far right of the graph indicate a serious undersupply of accommodation that is forecast to grow.
Already, anecdotal tales of rent increases of 40 per cent or more are commonplace.
The most recent CoreLogic data indicates annual unit rents rising between 12 per cent in Adelaide to 19 per cent in Sydney.
Meanwhile, bidding among homebuyers has intensified, particularly in Sydney and Melbourne, where auction clearance rates have suddenly lifted.
Population growth wildcard could bring ‘significant pressure’
At its last outing, the RBA board put its finger firmly on the problem.
Higher immigration “could put significant pressure on Australia’s existing capital stock, especially housing, which would, in turn, manifest in higher consumer prices”, it noted in its recently released minutes.
“Although higher immigration might reduce wage pressures in industries that had been experiencing significant labour shortages, members noted that the effect of a sudden surge in population growth could be somewhat inflationary for a period,” the minutes said.
It was a not-so-subtle warning for the federal government.
If immigration levels continue at this pace, the current rental crisis threatens to get out of hand and given rents feed into the Consumer Price Index, it will push inflation higher.
That will increase the pressure on the RBA to lift interest rates again.
While it is likely that the RBA will keep rates on hold in May, the most-recent inflation numbers — while an improvement to 7 per cent from the previous annual rate of 7.8 per cent in the December quarter — are still way too high for its liking.
It needs everything to run extremely smoothly to maintain its preferred trajectory of a “soft-landing”. That is, to reduce inflation to between 2 and 3 per cent without crashing the economy.
An immigration-fuelled inflation breakout is not what it had planned.
Even if the building industry was humming, rather than being in the midst of a chaotic meltdown, it would be impossible to cater for the sudden spike in demand caused by record immigration now underway.
It takes far longer to build a house or an apartment block than to process an arrival application.
As for affordable housing, the simple arithmetic suggests that may be an unattainable pipedream.