House Prices, Interest Rates and Forecasts, Part 2
In the last newsletter we discussed the lack of relationship between house prices and the interest rate cycle. One of the more logical points being that if interest rates were the key driver, then perhaps every residential market should cycle at the same rate, clearly it does not.
So, if you were looking at the South East Queensland residential market as a specific example, what would be the better indicator of price growth? Historically, one of the strongest correlations has been the house price differential between east coast capital cities, particularly Sydney. The higher the differential between Brisbane and Sydney, the greater the escalation in interstate migration and equally, pressure on house prices until the differential abates (usually because Brisbane becomes less affordable) and the pull factor of more affordable housing abates.
There are four components to the above chart that help shed some light on potential price growth outlooks. The purple infill represents interstate migration to Queensland. The black line is the median house price for Brisbane and is used as the benchmark. The orange line is the difference in median house price for Sydney compared to Brisbane, whilst the plum-coloured line is the median house price compared to Melbourne.
When interstate migration reached its peak in the early 2000’s, the median Sydney house price was $444,000 and Brisbane was $208,000. You could effectively buy two Brisbane houses and have change left over when compared to Sydney. The September 2021 data is again starting to approach those ratios with the median Sydney house price at $1,220,000 whilst Brisbane is at $680,000. Queensland’s net interstate migration gains are on track to achieve growth rates in excess of 615 new residents per week, or demand for circa 220 new dwellings each week. However, the peak appears to have passed as indicated by the price differential between capital cities and tapering interstate migration.
Other factors though that will continue to place upward pressure on prices extend from the above criteria. The demand for over 200 new homes per week has placed significant pressure on what is an already stretched construction sector, both in terms of supply chain and qualified trades. The need for more trades has not been a slow accumulation. Research undertaken by The National Property Research Co. with Construction Skills Queensland identified this problem almost a decade ago and the situation has seen little improvement since. So, trade shortages are contributing to built form cost escalation and time to complete residential accommodation of all forms.
Not only is there a stretched building industry, the supply of new land has been highly constrained with very little added. Reviews to the SEQRP which has continued to push the line for greater densities has meant that many local government areas have been caught short in terms of greenfield sites. Real estate economics suggests that the difference in house and apartment prices may well see higher densities as the only option for many purchasers who are new to the market.
Whilst the author has no issue with higher densities, the scale has to be more about creating master planned vertical communities rather than single high-rise buildings. As unpalatable as this may be in some quarters, legislative amendment may be required for compulsory acquisition in order to facilitate the development process, particularly where the amenity is not comparable to inner city suburbs like West End/South Brisbane, New Farm and Fortitude Valley. The ‘missing middle’ is missing because in part it is not scalable, and secondly because it is not economically viable. Chicken or egg, the end point is the same. There are very few high-rise residential projects in the immediate past that have outperformed the housing and or land markets. Whether this is a knee jerk response to the impacts of Covid-19 can be debated endlessly, however the facts simply point to divergent price growth between apartments and houses.
The supply of raw land is also highly problematic in many LGA’s. The Sunshine Coast and the Gold Coast would both be considered highly constrained/undersupplied and relying on very few developers to carry the load. The Moreton Bay Regional Council also has considerable land supply problems and whilst the Caboolture West precinct continues to offer promise, it will be some time before any significant quantity of residential land is delivered to the market. This solution leaves the author wondering what happened to growing the railroad towns north of Caboolture that are already serviced by rail, road and where the cost of delivering civils is considerably cheaper…this is not a new idea, it was put forward in previous iterations of the SEQRP. The land monitoring process put forward by the current State government has unfortunately miscalculated what developable land was available, however the sharp increase in interstate migration only served to make the problem much more visible.
So, the shortage of land will continue to see prices for new homes escalate significantly because the competition for purchasing greenfield sites has meant that developers are having to pay an absolute premium. In addition, those developers with existing projects can reap the benefits of an upward cycle where limited competition means staged price growth is easily achieved. On top of all of this, has been the constant interruptions to the council approval process through Covid-19 related working constraints that has meant longer timeframes before development can actually occur. The perfect storm perhaps?
Looking ahead, what does 2022 look like at this point in time, when the cities are quiet, the roads actually flowing during “peak hour” and omicron running rampant through society?
1. Interstate migration to SEQ will slow but remain substantial.
2. Population growth will continue to highlight the inadequacies in the current supply chain and supply of raw land.
3. Overseas migration will return, international students should gradually filter back into the system placing additional stress on the rental market.
4. Price growth is more likely to favour the apartment market as the price gap between medium to higher density and houses widens. In qualifying that, houses will see greater dollar value growth, apartments are more likely to experience greater percentage growth coming off such a low base.
5. APRA is not done with the industry yet; they will be watching to see what the market does and are ready to step back in.
6. The Federal election will be toxic and will probably stall the market from the time it is announced. Hopefully it is a short election period.
7. Infrastructure planning and investment will continue to drive the local economies.
8. Interest rates will remain benign, they are highly unlikely to be the cause of any asset devaluations or unwinding of prices in 2022.
9. Employment will remain robust, but challenged by the spread of the virus making for a lumpy year.
Those are our thoughts on both why those forecasting interest rates as the determining factor for price growth in what is a highly complex economic and social environment are overly simplistic. Our outlook for 2022 is very much glass half full, though we acknowledge that there will be some slowing in certain sectors of the market, which is a considerably more sustainable outcome for almost everyone.
Matthew Gross | Director
