Predictions of a house price crash in Australia are commonplace – barely a week has gone by in the last 15 to 20 years that someone doesn’t bring up some obviously inadequate “research” that leads them to the conclusion that house prices will crash, collapse or some such emotive expression.
It turns out that these predictions were generally wrong: they never predicted that home prices would fall slightly, then rise sharply and continue to reach new record highs.
Such pessimistic predictions are dangerous because they may induce potential homebuyers to postpone their purchasing decisions in the hope that the outlandish predictions of a 20-30% price decline will prove correct and that they will be able to save on the purchase price at these lower levels as a result.
Related
On the contrary, prices have been trending upwards every year, so any decision to postpone a purchase will inevitably come at a cost – one that’s usually measured in tens of thousands of dollars.
Home prices nationwide have hit record highs every month of the past year, according to CoreLogic data, and further gains are all but certain in July, according to the company’s high-frequency daily home price data.
Do you have a story to share? Get in touch with us at yahoo.finance.au@yahooinc.com
But some things are changing
Before we get into the big issues, it’s important to note that it’s highly unlikely that house prices will “crash” over the next few years. However, a series of issues are beginning to emerge that suggest we’ll likely see a period of flat to slightly declining house prices for several years, albeit with differences between urban and rural areas.
Decades of information about how the housing market works and the issues that drive home prices provide a clear picture of what is driving prices, and the early signs are that home prices will continue to decline over the next few years, if not longer.
Clearly, house prices are driven by demand driven by population growth and household formation, supply driven by the level of new home construction, the health of the labour market, particularly the level of unemployment, and the costs of construction, including materials and labour.
Over the past few years, home prices have risen significantly, fueled by a few obvious and simple issues.
-
Strong demand due to rapid population growth.
-
Supply is limited as construction has been weak and many promising rental properties have shifted to Airbnb.
-
A healthy labor market, with unemployment near its lowest level in 50 years and accelerating wage growth, has led to strong lending growth.
-
Rising construction costs including material costs, labor costs, interest rates, etc. Rising construction costs directly affect the selling price.
All of these are changing, and if the trends in these variables continue for a reasonable period of time, home price increases should stop and prices should stabilize or even fall.
One key issue to watch is that net immigration has recently “plateaued”: Post-pandemic population growth is over and immigration is returning to normal, meaning that underlying demand for housing is cooling.
The “slow-burning” problem
At the same time, while some cities and regions continue to experience housing shortages, the supply of new housing is no longer scarce.
New listings of homes for sale are on the rise and, although it’s still early days, the government is beginning to gain momentum with plans to build 1.2 million new homes over the next five years.
This will be a “slow-moving” issue, but building permit numbers are starting to slowly rise.
Unemployment is on the rise. This is the most important issue that lenders consider when making a mortgage. If you don’t have a job, you can’t get a loan. Simple.
If the unemployment rate falls to 5%, from a low of 3.5% in 2023, which is likely, not only will large sections of the population be unable to borrow, but there is a risk that forced sales will increase as the newly unemployed struggle to make mortgage payments.
Rising construction costs and labor shortages are also easing, allowing developers to increase new construction more cost-effectively and profitably.
Taken together, these effects suggest that home price growth may stall out even if there is a rate-cutting cycle in the coming months.
How long the housing price slump will last will depend on the trends in the factors driving prices.
That said, if construction surges after 2025, population growth slows further, and the unemployment rate stays closer to 5% rather than 4%, home prices could well stagnate for a few years.
To get the latest Yahoo Finance news, follow us Facebook, LinkedIn and Instagram.
