CoreLogic has reported four consecutive months of home price growth, with a 1.1 per cent increase in June, resulting in a cumulative growth of 3.4 percent since the low point observed in February.
According to Dr Oliver, AMP’s projections suggest that property prices have already hit the low point in the cycle and are expected to rise by around 5 per cent next year as interest rates start to fall.
However, he expressed the firm’s lack of confidence in this forecast, citing the high risk of another decline in prices despite the mitigating factors of increased immigration and limited housing supply that have helped offset the adverse effects of rising interest rates in recent months.
Namely, rising mortgage rates, anticipated unemployment growth over the coming year, and the now 50 per cent chance of a recession, all pose potential risks to the property market.
“Still rising mortgage rates risks hitting home buyer demand again at the same time that a collapse in economic growth and higher unemployment boosts distressed selling, helps alleviate the underlying demand/supply imbalance,” Dr Oliver said in his market outlook on Monday.
“At the same time, foreign demand is returning. So buyer demand has been strong but supply remains weak with listings remaining below normal.”
Interestingly, auction clearance rates, which rose alongside prices, are also showing signs of faltering again, with Domain data showing a lag in Melbourne over the last few weeks and a sharp fall in Sydney’s clearance rate.
“This could just be noise but it may also be consistent with ongoing mortgage rate hikes starting to get the upper hand again and constrain demand.”
Meanwhile, Dr Oliver highlighted the considerable impact of interest rate increases on home buyers’ affordability. According to AMP’s estimates, the purchasing power of borrowers with a 20 per cent deposit and average earnings has decreased by 29 per cent since April of last year.
“The now rapid reversal in the capacity to pay due to the rapid rise in mortgage rates threatens a downward adjustment in home prices at some point unless incomes rise dramatically or mortgage rates fall dramatically — both of which look unlikely for now,” he conceded.
“In the meantime, the RBA is still threatening to raise rates further particularly as wage growth risks accelerating, fixed rate mortgages are now resetting to much higher interest rates and on the RBA’s estimates, more than 15 per cent of variable rate borrowers will have negative cash flow by year end, all of which, combined with higher unemployment, could lead to an increase in listings by distressed sellers.”
Dr Oliver also acknowledged that the Reserve Bank of Australia (RBA) is concerned about the rebound in property prices and warned that rising prices could also prompt the RBA to raise interest rates more than initially planned to curb consumer spending.
“In past cycles, lower interest rates have been required to drive a sustained rise in home prices and this is unlikely until early next [year]. So the rebound lately looks premature relative to the normal cyclical relationship with interest rates.”
“So, while our base case is that home prices have bottomed, the risk of another leg down as the full lagged impact of interest rate hikes on the property market and on unemployment materialises is very high,” he concluded.
