September housing outlook

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

Overview

The housing market, at this stage, is proving to be quite resilient. Of course, there are regional variations and there have been price falls in some areas; however, when you consider the broader economic position, the housing market appears to be holding up well. Whether that continues to be the case as economic support is withdrawn remains to be seen.

Transaction volumes nationally over the first 36 weeks of 2020 were 9.0 per cent higher than over the same period last year. While 2019 wasn’t a particularly strong year for sales, it does show that there is a level of confidence in the current market. Vacant land sales have been strong, especially since HomeBuilder’s announcement, with sales volumes so far this year 48.8 per cent higher than they were at this stage last year.

Enquiries to real estate agents and developers have also increased dramatically from where they were a year ago. Year-on-year email enquiries to real estate agents were 81.3 per cent higher in August 2020, while enquiries to developers were 66.0 per cent higher. Enquiries for land have been particularly strong. Enquiries for vacant land were126.6 per cent higher year-on-year, while enquiries to developers of new land estates were 116.4 per cent higher. Again, HomeBuilder is clearly having some influence here; however, demand for both vacant land and new land estates was starting to climb prior to the announcement of the scheme.

Search volumes have eased somewhat throughout August; however, they remain much higher than they were a year ago for both properties for sale and properties for rent.

Although it has pulled back over the past few months, we are also seeing a heightened volume of enquiries for new homes, particularly land estates, due to the availability of HomeBuilder.

While housing market conditions currently look reasonably strong, that does not mean there aren’t some potential challenges that may emerge over the coming months.

Lenders will offer some borrowers additional mortgage holidays over the four months from September to January these lenders are going to attempt to get these borrowers repaying. Some will be able to, but given the perilous state of the economy other people won’t and may end up having to sell their homes.

With international borders shut and many domestic borders also shut, not many people are currently moving to Australia. This is a challenge in the new housing sector given that high rates of migration over the past decade and the fact that most migrants are required to purchase new homes.

Rental markets are also being extremely challenged by closed borders, which are impacting on demand. Furthermore, HomeBuilder is encouraging current renters to move into home ownership, further reducing rental demand and likely pushing rental rates lower.

Low borrowing costs for the next 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.

General market activity

The volume of searches for properties for sale on realestate.com.au has been trending lower throughout the past month. While Victoria being in lockdown has certainly driven weakness across that state, similar trends are being experienced across most of the remaining states. Search volumes remain significantly higher than they were a year ago, but have pulled-back from their record highs.

There has also been a pull-back in demand for properties for sale, but once again it remains much higher than it was at the same time last year. Demand has most likely been easing due to the low number of properties coming to market. While there remains historically high levels of demand, it seems that low listings mean it is slim pickings for those serious about purchasing.

Lockdowns have resulted in a slump in new listings in Victoria, but in most other states new listing numbers sit at similar levels to where they were at the same time last year. With close to historic high volumes of searches and near-record high demand, it seems what the market desperately needs at this point is an increase in new properties for sale to cater to this demand.

Despite enduring the first recession in almost 30 years, weekly transaction volumes have been consistently higher than they were last year. In fact, in many states the volume of sales each week is now higher than it was prior to the initial lockdowns. Sales of all property types are higher than a year ago; however, vacant land sales have overwhelmingly seen the greatest lift.

New homes sector

August 2020 was the third highest month on record for enquiries to property developers via realestate.com.au, with the previous two months the only ones with more enquiries. The announcement of HomeBuilder in June 2020 has led to a surge in interest in the new housing sector.

Over the three months since HomeBuilder has been available, there have been more than 125,000 enquiries to developers from the realestate.com.au website. To put the volume of enquiry into perspective, over the previous three months there were around 66,000 enquiries and over the same three-month period last year there were 67,000 enquiries.

While there has been a surge in overall enquiries, land estates is where it becomes most obvious with more than 78,000 enquiries over the past three months compared to almost 33,000 over the previous three months and just under 29,000 enquiries over the three months to August 2019.

After the initial rush of demand in June, we have seen a tapering of enquiries over the past two months; however, I would expect that enquiries will remain elevated for the remainder of the year. In fact, we may see a rush in enquiries towards the end of the year as the availability of HomeBuilder expires.

While demand for new homes has surged, so too has demand for established vacant land. With HomeBuilder offering incentives for people looking to build, clearly many buyers are targeting established vacant land rather than necessarily going into brand new housing estates.

Post-2020, the outlook for the new housing and vacant land market is somewhat murky. HomeBuilder is clearly pulling forward demand for new homes, particularly for first home buyers, while at the same time investor participation remains low. Assuming international borders remain closed and barring any additional stimulus it is reasonable to expect a sharp fall in demand for new homes next year.

Outlook

The broader economy is receiving unprecedented levels of government support and the housing market is of course no different. JobKeeper is providing an income to people who can’t work, unemployment benefits have been temporarily increased and HomeBuilder is offering incentives for people to build new homes. Furthermore, the Reserve Bank (RBA) has cut official interest rates to historic lows of 0.25 per cent, with very little likelihood of increases for several years. Lenders have also supported the market by offering six-month mortgage deferrals (which expire in September), with some borrowers now being offered the ability to defer for a further four months.

While the support measures have minimised the economic fallout to-date, as these support measures are wound-down there may be some significant economic challenges, which could also impact on the housing market.

The latest data from the Australian Prudential Regulation Authority (APRA) shows that around 11 per cent of all mortgages are currently deferred. Separate data from the Australian Banking Association shows that of all business and home loans that were deferred, around 13 per cent have already commenced repayment.

Of course, the unemployment rate has increased and historically it takes many years for the rate to fall back to the levels before the economic slowdown. Given this, the reality is that there is likely to be an increase in mortgage arrears and some households will be forced to sell their homes.

From the new homes perspective there are likely to be challenges in 2021, barring further stimulus, due to the heightened volume of first home buyers currently with demand pulled forward and the potential ongoing closure of international borders. Migrants are an important source of demand for new homes given that non-citizens typically must buy or build new properties rather than purchase existing homes.

Although there may be some challenges for the housing market over the horizon, most of the metrics, at least currently, remain strong – outside of Victoria.

Probably the most underestimated impact on the housing market currently is the very low cost of borrowing. According to data from the RBA, the average new owner-occupier three-year fixed rate mortgage is a record-low 2.3 per cent. The RBA has also flagged that any short-term increases in official rates are extremely unlikely. Historically, lower mortgage rates have increased demand for property and it certainly appears that this trend is being repeated.

I expect the next few months will continue to improve, as we’ve seen with housing conditions in Victoria as the state (hopefully) comes out of lockdowns. We are also likely to see a rush in demand late in the year due to the expiring availability of HomeBuilder.

In 2021, conditions are a lot less clear but it seems reasonable to expect that there will be further housing market stimulus, a trend we have repeatedly seen play out in times of economic hardship. Furthermore, the cost of borrowing will still be at record-low levels. The great unknowns of course are when the borders will open and how many people will have to sell their homes.

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, have had their hours reduced, or if there are better mortgage rates available to them.

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