A Market Correction?

The RBA’s hand must surely be hovering over the big red interest rate button as, like most of us it ponders just how there can be so much conflicting data that really doesn’t make a lot of sense. However it is all starting to line up in a more traditional sense and it really doesn’t look all that great. The Population Ponzi Scheme at this point really does have a lot to answer for.

If one looks at the net international migration numbers alone since the pandemic through to the end of 2023, Australia has needed to create 393,000 additional dwellings. And whilst this is a substantial number of new dwellings, as at March 2024 Australia had circa 227,000 new dwellings under construction. As at this quarter, depending on what data is used, the Nation had an additional 41,000-46,000 dwellings added, either seasonally adjusted or on trend, depends which narrative you need to prosecute to make headlines. Either way it remains a significant shortfall.

The capital city median house price on the east coats of Australia has softened in Sydney and Melbourne which should be starting to gently tap the warning bell. This is particularly relevant for the Melbourne housing market which has seen a decline of $135,000 from it’s peak in December 2021. This potentially puts some households in a negative equity position which is fine so long as those households can service their debt, though financiers will be or should be starting to review their loan portfolios in this market with a fine tooth comb.

This trend has had less of an impact on Brisbane which has continued to improve off a low base. Having stated that though, Brisbane’s median house price is now more expensive than Melbourne and this will flow through to less people migrating north from Victoria. Theoretically this should take some of the heat out of the market with regard to housing additional people.

There should also be some concern around the declining rate of sales in the residential market despite the high population growth rates. This should create a buoyant market for the residential sector and one must now start to question whether the argument of people not selling because they can’t find another house to move into is in fact something more than that. If this argument was universally true, theoretically house prices should be rising, yet they are not.

Interestingly, most capital cities have also seen a slight increase in the level of residential vacancies and weekly rents are no longer escalating at the same rates they were for the past three years. The author suspects more group households being formed and more independent children boomeranging back home…or simply not leaving home.

An interesting and not so fun fact, the average age people buy their first home is now 36. The average age a couple has their first child is now over 31 years, up from 30 just four years ago. Not only does this reflect the lower birthrate, it also reflects that young couples have changed the narrative on buying their first home and then having children. This may well be the first generation in Australia where this is the case.

Which leads us to perhaps the most crucial point, household savings are starting to reach the point of causing genuine trauma to people’s daily lives. Many Australian’s are now approaching or having to use some equity gained over the past four years in order to service their household obligations. This is particularly hard on young families where the greatest inflationary growth has come in the form of medical, finance and Insurances and education. Big ticket items for younger households.

With retail spending now relatively flat and people only making purchases when the products they are looking at are on sale, this also paints a picture of challenging financial conditions for households. Geo-political events continue to place additional stress on supply chains and the cost of energy and fuel prices which flow through to every aspect of Australia’s economy.

One has to question whether the measure of inflation is indeed correct in how it is being applied to these extraordinary circumstances, or whether a significant correction is what is needed, aka Paul Keating in 1990.

Perhaps August is the time for some household relief with a small interest rate cut?

One short, final point. Those that postulate this is all about supply and demand have missed the point about how we got into this mess and how we will get out of it. In terms of the urban environment, housing typologies, feasibility of those typologies and a failure of government to recognise this suggest that there will be more pain to come. Because if the house price is softening, the capacity to meet infill targets just got a lot further away.

Matthew Gross  |  Director  |  mgross@nprco.com.au