Why house prices never seem to fall
Sam Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. The Reserve Bank board may have kept rates on hold for now, but with 12 increases in just over a year, it’s still a hard time for borrowers up and down the country. So what effect is that having on the housing market and house prices? Well, surprisingly, very little. They’re rebounding again today. Business reporter Michael Janda on why the property market never seems to take a hit. Michael, the Reserve Bank has held rates steady for only the second time in just over a year. Are we finally seeing signs that this rapid series of rate hikes may have come to an end, or at least they’re coming to an end?
Michael Janda: Yeah. Look, it may not be quite at an end yet, even though the Reserve Bank chose to pause yesterday.
Jeremy Fernandez: A welcome reprieve this month for consumers with the Reserve Bank leaving the cash rate on hold at 4.1 per cent
Michael Janda: There is still a feeling in the markets and amongst many of the economists that they might hike at least one more time probably in August when they’ve had a chance to look at the quarterly CPI figures, which are the full inflation data from the Bureau of Statistics. But last week’s monthly figures did at least show a big drop in headline inflation.
Sally Sara: There are signs that inflation, while still uncomfortably high, is slowly starting to fall. The latest monthly reading shows the pace of inflation fell to 5.6 per cent in the year to May.
Michael Janda: Of Course we have a whole lot of people rolling off very cheap fixed mortgages at the moment onto very much higher, 2 or 3 times the level of repayments and interest rates that they were on under those fixed loans. And the Reserve Bank is going to want to see perhaps how that plays out in terms of demand in the economy before it hits people with the next rate rise if indeed it does need another rate rise.
Sam Hawley: No, let’s hope not, because there is a feeling as well, isn’t there, Michael, that the Reserve Bank may have gone too far already because a number of the rate rises that it’s put in place haven’t actually kicked in yet.
Michael Janda: That’s right. There’s a huge lag in how interest rates affect the economy. So it takes the banks about three months to pass through into your minimum repayments. The extra repayment amount that the Reserve Bank has put through in a cash rate increase. So the kind of interest rates that are coming out of people’s bank accounts now are where interest rates were about three months ago. So these latest rate rises will have an impact in three months time.
Sam Hawley: I want to have a look with you now, Michael, at house prices, because this is all connected. And we were told by economists that house prices would fall when interest rates started rising and kept rising. And we’ve had so many rate rises now, but it still doesn’t seem like that’s happening. The house prices are still seemingly really high.
Michael Janda: Yeah, they did drop quite a bit at first.
Reporter: The housing downturn is deepening across the country. Prices have fallen throughout much of 2022 and are set to continue to fall throughout 2023.
Michael Janda: But the capital cities as a whole lost around 10 per cent peak to trough from the peak of the pandemic boom to the low point in about January this year. The market as a whole, including regional areas, lost about 9 per cent across the country. Sydney saw the biggest capital city decline of almost 14 per cent peak to trough over that decline. But then again, it’s also started leading the rebound. It started rising in February and now Sydney prices are up almost 5 per cent from January’s low. Melbourne prices have increased by 1.6 per cent in the past three months. Brisbane by almost 2 per cent. Adelaide by more than 1 per cent, Perth by about 2.5 per cent. And those gains have been accelerating. Prices rose by 1.2 per cent in the month of May and that was despite a rate rise at the beginning of May. So that certainly didn’t put off enough buyers to see prices stabilise or fall. If these trends continue, those losses could be erased by the end of the year.
Sam Hawley: So you better just explain this a bit more for me because why is it that even though we’ve had all these rate hikes, the house prices are still going up? It just doesn’t seem to make sense.
Michael Janda: Yeah, there’s a few hypotheses and we don’t really know for sure which is correct or which combination. One is population. It’s pretty clear that’s having an influence. Borders reopened and net migration in 2022 was close to 400,000 people coming into the country extra than what left Australia. So all of those people need somewhere to live. That adds to housing demand and that’s expected to continue this year with almost as many people coming in again as we saw last year. One interesting thing is we shifted to smaller household sizes during COVID. More people moved out by themselves, ditched housemates. So, you know, that change in household size actually added as much demand as reopening the borders last year. At the same time, of course, rising interest rates, rising materials and labor costs meant that approvals to build new homes have now fallen to the lowest level in more than a decade. And we spoke about that just a few weeks ago. But it’s not just that fewer owners of existing properties, ones that are already are built, have decided to sell them. And so that results in less properties on the market. Then on top of that, you add the increase in rents. So that’s narrowed the gap in the cost of a mortgage versus the cost of renting. And then of course there’s fear of missing out. And as the market starts to turn, Sam, everyone then wants to pile in while the prices are still down from those peak levels.
Sam Hawley: Michael, let’s just return to that point that you made before that there are a whole lot of people about to come off fixed loans and that means they’ll have massive increases in their repayments. And we hope this isn’t the case, but some of those people at least will need to sell their homes because they won’t be able to afford the repayments anymore. Will that change the dynamics at all?
Michael Janda: Yeah, and it is too early to see the full effect of whether this is going to happen and how bad it will be because the biggest roll off of those fixed mortgages only started in around April and May and then the peak months of the roll off are in June and into July and August. There were signs already, though, in data up to the end of March that a growing number of recent buyers were reselling their properties quickly, with more of them making a loss than you’d usually expect. So figures out from CoreLogic show that less than 6 per cent of homes sold towards the end of 2021 had been purchased within the two years previously. That rose to 8.4 per cent earlier this year, so a lot more people reselling their home within two years.
Sam Hawley: Which shows you they’re under stress.
Michael Janda: Potentially and the thing that really shows you they’re under stress, more people are making a loss on quick resales. So you go back a couple of years, end of 2021, only 3 per cent of loss making sales were properties that had been held for less than two years. That’s now almost 12.5 per cent. So when we see the June quarter data, we’ll be getting a picture of people who are already in mortgage trouble earlier this year. And it’s probably not until late this year that we’d start to see the full effects of that fixed mortgage cliff show up.
Sam Hawley: Yeah. Okay. So it could be troubling time ahead for a lot of people. Michael, I think the question is and I think it’s a question that all Australians really care about is what can we do? So young people can actually get a foot in the market because at the moment it’s unreachable for so many people because the property prices are just too high.
Michael Janda: Yeah. So the general approach in Australia has been to throw more money or subsidised access to home ownership at first time buyers, whether it’s through grant schemes run by the states and sometimes bankrolled by the federal government, or these low deposit schemes where you can now buy a home with as little as a 5 per cent deposit through a federal government guarantee. None of those actually improve the problem in the in the medium to longer term because they allow more people into the market short term, which increases demand and just pushes up prices even further. So a lot of economists say the biggest problem is supply and many of those put the finger squarely on zoning rules and NIMBYs… Not in my backyarders, as who reject developments in established areas of the city and therefore, you know, reduce the amount of apartments that can go up, reduce the housing supply and push up the price of the homes that they already own in those areas. Then you can also look at demand, which is the area a lot of economists completely ignore. Do we have policies that allow and encourage people to own more homes or bigger homes than they need? As I said, there’s a limit to how many homes you can build. So if supply is constrained, perhaps if we want to lower prices, we do need to look at demand as well. Negative gearing and the capital gains tax discount encourage investment to minimise tax. The problem though, is the government is reluctant to tackle the demand side or the supply side because in the end home owners are two thirds of voters and they don’t want to see their property values fall.
Sam Hawley: Right. So that’s about votes at elections.
Michael Janda: Yeah, essentially there’s the cold calculus of policies that favour renters versus owners. And on that front, the renters are in the minority.
Sam Hawley: Right. Okay. But that might not always be the case, I suppose.
Michael Janda: No. And it’s rapidly changing. We’re also seeing how housing issues are shaping society more generally and the political views of younger people. So there’s some interesting research out last week from the conservative Centre for Independent Studies think tank warning the Coalition that they risk becoming electorally obsolete because typically in the past with Gen X and baby boomers, as people got older, they tended to shift to the right and gravitate towards the coalition. But this study from the Centre for Independent Studies showed that’s not happening to anywhere near the same degree with Gen Y, with the Millennials, and it’s even the reverse with Gen Z, who as they progress through their 20s, are actually shifting further to the left as they become perhaps more disenchanted with the fact that they can’t buy a home. And now their rents are also going up sharply. And when you look at it, you know, home ownership is probably a key to that. Certainly Liberal Party founder Robert Menzies was a big supporter of promoting home ownership in the 1950s and 60s because he saw it as a bulwark against communism and other radical politics. People with assets have something at risk from radical changes and the more people in society who don’t own anything, particularly don’t own a house, that big asset in your life, the more radical people and the more support for radical policies you’re likely to see.
Sam Hawley: So if the government doesn’t address this, though, or doesn’t make some changes, what can we expect in terms of our housing situation, do you think? In the in the short term?
Michael Janda: Look, certainly we’re seeing a lot more people in insecure housing. We’re seeing reports of rising homelessness. We’re seeing a lot more people under both rental and mortgage stress. You know, we used to have about a quarter of the population living in rentals and now we’re up to roughly a third. And that’s only getting higher as home ownership rates plummet amongst millennials and Gen Z’s. So unless something changes, renters are going to eventually rule the roost, albeit maybe in a few decades time.
Sam Hawley: Michael Janda is a reporter with the ABC’s business team. The current cash rate is 4.1 per cent, up from 1.35 per cent a year ago. This episode was produced by Veronica Apap, Flint, Duxfield, and Sam Dunn, who also did the mix. Our supervising producer is David Coady. I’m Sam Hawley. To get in touch with the team, please email us on [email protected]. Thanks for listening.
