October housing outlook

By Cameron Kusher, Executive Manager – Economic Research at REA Group
October 2020

Overview

The outlook for the housing market is brightening, notwithstanding some regional variations. With Melbourne real estate agents now allowed to take buyers on inspections of homes, the outlook for that city is also now starting to improve. The stimulus of historic low mortgage rates, along with HomeBuilder, the First Home Loan Deposit Scheme and individual state-based incentives, are driving a surprisingly high level of demand in the residential property market.

Of course, this is not to say there will not be challenges in the future. The latest data from the Australian Prudential Regulation Authority (APRA) showed that while many mortgagees have started to repay their mortgages, as at the end of August 2020, 9 per cent of all housing loans were still deferred. In some instances these deferrals will be extended until January but for some, restarting mortgage repayments is likely to be a challenge.

Over the first 40 weeks of 2020, the number of transaction volumes captured weekly by realestate.com.au is 10.5 per cent higher than over the same period last year. In fact, Tasmania and Northern Territory are the only states with a lower volume of sales than at the same time last year. The vacant land market has been the strongest performing sector, with sales so far this year 54.7 per cent higher than last and higher across all states.

The latest price data continues to show a slowdown in the rate of growth but minimal price falls across most capital cities. Any price falls are more pronounced in the unit market than houses and are tending to be more prevalent in the inner-city housing markets.

There was a slight fall in the volume of email enquiries to agents for established properties in September 2020; however, there was an increase in enquiries to agents of new properties. In both instances there has been a significant year-on-year increase in enquiries, reflecting much higher levels of interest relative to the same time last year.

The number of searches for properties for sale returned to a historic high in early October 2020. This indicates an ongoing, strong interest in monitoring what is available for sale and as the sales data shows, it has led to a lift in sales volumes relative to a year ago.

Another indicator of demand, views per listing, decreased marginally in September 2020; however, it has lifted dramatically since its recent low and is almost 40 per cent higher nationally than it was in September of last year.

All the indicators for the housing market are currently quite strong, but there is still the potential for some challenges to emerge over the coming months.

The data shows very strong demand for vacant land and new homes; however, that segment of the market is receiving significant stimulus in the form of state government incentives, HomeBuilder and the recently announced extension of the First Home Loan Deposit Scheme. HomeBuilder is due to expire at the end of this year and the First Home Loan Deposit Scheme has limited spaces available. All these stimulus measures are pulling forward demand for new homes, particularly from first home buyers, but once it is ended the new homes sector is likely to face some challenges.

The challenge this sector is likely to face is the fact that so much demand has been pulled forward by these stimulus measures, there is little demand left. This is potentially exacerbated by the fact that international borders appear set to remain closed and population growth is set to sink to its lowest level in more than 100 years. Population growth and household formation contributes to housing demand and in new housing, in particular, non-citizen purchasers are a key source of demand.

The shut international borders also means reduced demand from renters. We’re already seeing reductions in rental rates in inner-city markets and those around major universities and they are likely to continue as rental demand remains reduced. For owners of investment properties in these markets they may consider selling their property but even if they don’t, the rental income they receive is likely to be reduced.

As already mentioned, the other challenge the market faces is what will happen as mortgage holidays end. Whilst banks have to date been quite pragmatic, and they can afford to be when borrowing costs are so low, borrowers are going to have to either restart repayments on their mortgages or offload some of their housing assets over the coming months. Depending on where these properties are and when they become available for sale, it could create some localised market weakness.

Low borrowing costs for several years will go some way to offsetting these risks, but it is difficult to imagine that all parts of the property market will come through the first recession in almost 30 years unscathed.

Established properties

The volume of searches for properties for sale hit a historic-high over the first week of October. What’s most notable is the dramatic increase in search volumes occurring in Victoria as inspections become possible again.

While searches for properties for sale are rising, searches for rental properties have started to pull-back over recent weeks. Despite the pull-back, search volumes are substantially higher than they were a year ago, which is most likely being driven by renters and landlords continuing to closely monitor the market for price adjustments and rental availability.

Transaction volumes are lifting in most states and have generally been much higher this year relative to last. Western Australia (19.5%) and Queensland (15.9%) have seen the largest uplift in weekly sales so far this year compared to the same period last year.

There was a slight reduction of email enquiries to agents in September; however, they remain elevated on a historic basis. Houses and buyers continue to be the overwhelmingly largest sources of enquiry, although enquiries from first home buyers and for vacant land remain elevated.

The number of views per listing for properties for sale reduced slightly in September but has risen substantially since the low in March 2020, up 38.7 per cent. Tasmania and New South Wales are receiving the highest volume of views per for sale listing, while Northern Territory and Queensland have recorded the greatest growth in views since the March low.

Rental views per listing reached a low in April 2020 and by September 2020 they were 27.3 per cent higher. Rental listings in South Australia and Tasmania are receiving the highest average views per listing, while the strongest growth since April has occurred in Western Australia and Northern Territory.

New homes sector

The volume of enquiry for new apartments, land estate and retirement properties increased in September 2020 relative to the previous month, up 0.5 per cent. September 2020 was the third highest month ever for enquiries to developers, behind June and July of this year, with enquiries 67.6 per cent higher than in September 2019.

Since the announcement of HomeBuilder in June there have been 162,456 enquiries on realestate.com.au to developers. Over the previous four months there were 93,615 enquiries, which highlights the uplift in interest that has been created by the HomeBuilder scheme.

Land estate enquiries have seen the strongest uplift in demand, with enquiries up 134.8 per cent in September 2020 compared to the previous year. Over the same period, retirement enquiries are 89.4 per cent higher and apartment enquiries 12.0 per cent higher.

HomeBuilder is clearly proving to be very effective at driving demand for new housing; however, it is also clear that this is new housing in the form of houses, with apartment developments largely missing out on the benefits. With the program set to finish at the end of the year, developers are making hay while the sun shines. However, 2021 could be much more challenging absent any further stimulus, given that so much demand has been pulled forward to 2020. Particularly if international borders remain shut throughout most of next year.

Outlook

The housing market outlook for the remainder of 2020 looks to be quite positive, particularly with residents of Melbourne now once again able to transact and rent properties. The combined stimulus of JobKeeper, JobSeeker, HomeBuilder, mortgage repayment holidays and historic low borrowing costs are helping to support the market and increase demand for properties.

While conditions seem quite positive currently, there are certainly some potential challenges for the market on the horizon. The initial six-month mortgage repayment holidays end this month but, in some instances, will be extended for another four months. JobKeeper and JobSeeker are being tapered over the coming months and will be removed in early 2021 and HomeBuilder finishes at the end of 2020.

All these measures have helped to reduce the economic impact of the recession and have also undoubtedly helped the housing market avoid more severe price falls. As the economy weans itself off these measures it could create some broad economic and housing market challenges. While low borrowing costs for the foreseeable future will undoubtedly assist in the recovery, it is likely some of the 9 per cent of properties on a mortgage repayment holiday will need to be sold and household incomes will be reduced as JobKeeper and JobSeeker are tapered.

Potentially, 2021 looms as a challenging year for the housing market as these support measures are removed and the harsher realities of a recession, such as reduced household incomes and job losses, become more of a reality. The new development sector in particular, which is so reliant on first home buyers and non-citizen buyers, is likely to be challenged by the fact that first home buyer demand will likely be exhausted due to HomeBuilder, and there will be little alternate sources of demand due to the shut international borders and much slower rate of population growth.

Low borrowing costs are and will continue to help support the market, but this alone is unlikely to be able to do all the heavy lifting in 2021. Given the size of the housing and construction industries and the multiplier effect it has throughout the economy, I suspect it may receive further stimulus for 2021; however, absent any stimulus announcements to date, at this point 2021 does look like a potentially challenging year for the market.

Homeowners who are unsure about the state of the market or their finances should be speaking to their mortgage advisers about the best way to manage through COVID-19. Whether that be applying for a mortgage holiday if they lose their job or have their hours reduced, or if there are better mortgage rates available to them.

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