Downunder Digest — Australian housing: more boom than bubble
- House price growth has been strong in Sydney and Melbourne, where demand is high and housing supply is insufficient…
- … in the regions where housing supply has ramped up, price growth has slowed: in short, the fundamentals are working
- Increased supply, a pullback in the foreign bid, and higher RBA rates are expected to cool Australia’s housing market in 2018
Expect the housing market to cool in 2018
Australia’s housing cycle has been largely driven by the use of the RBA’s cash rate setting to manage the mining boom. A high cash rate in the earlier period (4.75% in 2011) held back housing to make way for the mining boom. Subsequent cash rate cuts (to 1.50%) drove a housing construction and price boom. This has mostly been a good story. The housing construction boom has helped to fill the growth gap left by falling mining investment. It has also helped to reduce a housing undersupply that had accumulated. Not many houses were built during the mining boom.
The housing price boom has also presented some challenges. National housing prices have risen 50% since mid-2012 and much of the rise has been driven by rising household debt. This has reduced housing affordability and also raised questions about whether Australia has a housing bubble.
However, just because prices and housing debt have risen does not necessarily mean that there is a bubble. The key question is whether the rise is in line with fundamentals? In our view, to a large degree, it has been. Housing prices have risen very little in regions where housing demand has been weak, or supply has been boosted. In contrast, where supply has not kept up with demand, house price growth has been strong. For example, housing prices have only risen 6% in Perth, 11% in Adelaide, and 21% in Brisbane, where the mining retreat has had its biggest effects. In contrast, Melbourne and Sydney prices have risen 60% and 80%, respectively. In addition to low interest rates, demand for housing has been supported by migration (both international and domestic) and foreign investment: factors which have been strongest in Sydney and Melbourne.
These fundamental factors largely explain the price boom and, as a result, we do not judge it to be a bubble. Nonetheless, we expect these markets to cool in 2018 as we forecast supply to gradually catch up to demand, continued tight prudential settings, a pullback in the foreign bid (partly due to new taxes), and the RBA to lift its cash rate from early 2018.We see national housing price growth slowing from 8-10% in 2017 to 3-6% in 2018.