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Have property prices peaked for now? These factors suggest so
By Robert Baharian
Weakness could emerge in Australian house prices in the second half of 2024, especially in Sydney and Melbourne, with the Reserve Bank of Australia (RBA) potentially keeping interest rates on hold until the year’s end given the persistence of inflation across the nation.
The RBA could deny home owners a rate cut this year given excess spending and demand in the economy, which is keeping inflation about its 2 per cent to 3 per cent band. Inflation in Australia remains sticky, especially services inflation, as the RBA pointed out at its May interest-rate setting meeting.
Predicting the future of property prices can be hard, but there are a range of factors weighing them down.Credit: Monique Westermann
Part of that is due to the very low level of unemployment in Australia at around 4 per cent, which is keeping money in people’s wallets and spending relatively high.
Eventually, however, the relatively high level of interest rates could cap growth in house prices, especially in the eastern states of Australia including NSW and Victoria, as credit costs continue to mount. The average mortgage size in NSW reached $744,000 in March 2024, well above that in Victoria at $590,500, and compared to an Australian average of $608,000.
There is a strong correlation between house prices and housing finance commitments. Housing finance typically leads house prices by about six months. Home lending growth has slowed, and we expect house price growth to do the same.
With inflation where it is today, and variable mortgage rates over 6 per cent, that could put a lid on how much people can borrow and therefore pull down mortgage growth.
While both the unemployment and underemployment rate have been rising slowly, they remain at historically low levels.
After a bounce in house prices off the bottom in most capital cities last year, we could be seeing a slowdown in the growth rates for property prices. Melbourne and Sydney have certainly turned from their peak, while other capital cities have continued their climb higher in recent times. This may stall later this year as high credit costs feed through the economy.
With sharemarket gains slowing too recently, this also suggests that property prices may have peaked in the short term, and house price growth could slow.
Higher bond yields have dragged down gains in sharemarkets. This could impact smaller companies more than larger companies, many of whom have fixed their debt at lower rates, and with maturity some years away, they have a bit of breathing space.
In such an environment, with unemployment still very low and inflation sticky, it’s hard to see the RBA cutting interest rates this year, unless of course we have a material shift in the environment.
Having said this, inflation is falling and heading in the right direction – probably slower than what the RBA wants. People are still spending, so inflation could remain high for the remainder of the year about the central bank’s 2 per cent to 3 per cent band.
Australians are funding their consumption out of their wages and also out of household savings, and this is pushing up the cost of services such as travel, leisure activities and eating out.
While both the unemployment and underemployment rate have been rising slowly, they remain at historically low levels. This may also keep inflation stickier for longer as Australians’ spending power is high.
Meanwhile, household interest payments as a percentage of household disposable income are now starting to trend up (at 6.9 per cent) after reaching historical bottoms in 2021-22. Despite this pressure on households’ budgets, almost all borrowers have been able to continue to service their debts, so they have been able to withstand the impact of higher rates so far.
Eventually, particularly if the unemployment rate does edge higher, this could impact retail sales and the broader economy as borrowers look to protect the last line of defence – their home. Naturally, this could push down demand for housing and therefore growth in property prices around Australia.
Robert Baharian is the founder and chief executive officer of Ekam Capital.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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