Australia’s housing market faces headwinds as supply likely to outpace demand, analysts say

·4-min read

Australian home prices are likely to slow down or even decline as supply is poised to outstrip demand this year, according to analysts.

The highly infectious Omicron strain of the Covid-19 pandemic and various restrictions on foreign homebuyers – made up in large part by Chinese investors – will also weigh on the housing market.

Residential prices in Australia rose to a historic high in November, surging 22.2 per cent from a year ago and adding about A$126,700 (US$90,278) to median home prices, according to an analysis by CoreLogic.

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From November 2019 to November 2021, home values increased by 23.8 per cent despite the pandemic, as the nationwide vacancy rate fell to a decade low of 1.6 per cent in October, according to the French investment bank Natixis. The trend is unlikely to hold.

“The housing boom in Australia is turning the corner with a slowdown in price growth, said Kohei Iwahara, senior economist, Japan and Pacific, at Natixis CIB Asia Research. “The tailwinds that supported the market are changing … Furthermore, if border controls and foreign investment regulations remain tight for a prolonged period, then housing prices could decline.”

The housing market was propped up by monetary policies including a yield curve control which helps the authorities target long-term inflation by buying and selling bonds, which helps stabilise the interest rates on mortgages and loans. But this has been recently wound up as the employment rate returned to pre-pandemic levels.

The Australian Prudential Regulation Authority tightened its lending rules in October, mandating banks to raise requirements for borrowers, effectively reducing the maximum borrowing capacity for a typical borrower by about 5 per cent.

Lunar New Year decorations hang above a deserted China Town at the start of a five-day lockdown in Melbourne, on Saturday, February 13, 2021. Photo: Bloomberg
Lunar New Year decorations hang above a deserted China Town at the start of a five-day lockdown in Melbourne, on Saturday, February 13, 2021. Photo: Bloomberg

Housing supply is expected to increase this year with 150,000 units to be completed. However, the winding up of loose monetary policies means domestic demand is unlikely to keep up with supply, as wage growth has stagnated over the past decade and housing debt has remained close to a historically high level of 140 per cent of disposable income, according to Natixis.

The restrictions on foreign investments are also likely to crimp demand.

“Increasing infections from Omicron suggest that border controls will remain tight for the time being, limiting population growth from larger immigration,” said Iwahara.

“Furthermore, with a surge in housing approvals, demand for housing is unlikely to be sufficient to absorb larger supply.

“The vacancy rate is expected to rise from the recent low … to possibly above the pre-pandemic level of 2.5 per cent. The deterioration in the demand-supply balance will lead to lower housing prices and rents.”

Chinese buyers have been among the biggest investors in the Australian property market, ploughing US$2.5 billion into the sector before taxes and surcharges and capital controls were rolled out by both Canberra and Beijing. Relations between the countries also frayed when Australia banned Huawei Technologies from building its 5G telecommunications network while trade suffered over the origins of coronavirus. The tensions are likely to have affected Chinese investors’ sentiment towards Australian real estate.

Other analysts have a more sanguine outlook for the segment.

“The border closures have put temporary pressure on inner city and coastal yields that were reliant on either international students or tourists,” said Chris Orr, residential director at Savills Australia and New Zealand. “While the yields in these areas dropped 10 to 15 per cent over the shorter term, the uplift in capital values has already been significant.”

State governments have also indicated their intent to increase migration numbers for skilled workers over the next five years, which is likely to boost housing demand, he added.

While the Omicron mutation is posing risks, Orr said the “local sentiment is now one of caution but very much getting on with things.”

“The latest variant of the virus isn’t believed to be a threat to the economy as we open up, due to extremely high vaccination rates,” he said.

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