With Australian house prices on the rise, diverging sharply from the trajectory of New Zealand property values, OneRoof asked Eliza Owen, CoreLogic Australia’s head of residential research, why the market is glowing for sellers across the Tasman.
Q: What is driving the housing market recovery in Australia?
The big one we’re thinking is probably the net overseas migration figures. Australia has had a strong bounce back and the return of overseas migration since we reopened our borders in February last year. Net overseas migration for this financial year is forecast to be 400,000 and historically our pre-Covid decade average was quoted at 215,000.
It’s also because Australia has had a few policy changes throughout the pandemic which allowed shorter-term visa holders to stay for longer so it's not just the strong return of people coming back to Australia. It's also less people leaving Australia, and also a bit of a backlog in visa processing so that threw a bit of a pile-up of people who were allowed to stay in Australia on temporary visas. We haven’t seen as much deportation so that’s all helped to boost the net overseas migration figure.
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Q: Why is housing supply so low?
I think it's because vendors are holding their property off the market and holding out for more price growth. Even though we've now seen three consecutive months of price growth home values are still lower year-on-year. The year-on-year decline across Australian home values is still sitting at 6.8% so even though selling conditions are starting to improve we’re not finding as many vendors bringing their property to the market.
Q: You say Australia’s trough was in February but did Australia really have a slump?
Yes, there was a slump but it came off an especially strong upswing in values. We had an upswing of around 26% from the onset of Covid and then from the peak in April 2022 we had a peak to trough decline of 9.1% where the market bottomed out in February of 2023. It was one that we characterised as a short but sharp decline and because it came off an even stronger swing home values were still higher than at the onset of Covid even when they bottomed out.”
Q: Has New Zealand seen more intervention in the housing market than Australia?
The only major intervention in the lending space from our banking regulator was an increase in the serviceability assessment buffer. That happened back in October of 2021 and basically people were being assessed on serviceability to repay at 2.5 percentage points above the product rate that increased to 3 percentage points.
CoreLogic Australia’s head of research Eliza Owen: “We've had slightly more hawkish language from the RBA in the past few weeks.” Photo / Supplied
So there was a marginal uptick in serviceability of assessment but it happened right in the middle of a strong upswing so it didn't really have much of an impact on the market at the time. It was more forward-looking to try and implement some form of protection against the subsequent lift in rates that started to happen from 2022.
Q: What are the major headwinds for the Australian market?
The major headwinds for the market in 2023 include any further interest rate rises. We've had slightly more hawkish language from the RBA in the past few weeks, which has prompted some banks to revise their forecast for a peak in the cash rate to 4.1%, so a 25 basis point lift. The other major headwind is the fact that even though around 70% of our mortgage market is on variable terms we've got an unusually high portion of fixed rate borrowers transitioning to a variable rate this year. That’s because our typical fixed interest rate terms only last two to three years on average so it's been deemed the ‘fixed rate cliff’.
Q: Australians tend to sign up for floating rates – why is that and why did so many fix?
I think it comes back to pricing. Historically, variable rates have been cheaper than fixed rates as we moved into a structurally lower interest rate environment over time and I think banks were pricing variable higher because it allowed them to take advantage of shifts in the interest rate. During the Covid period, however, banks were I think fighting quite hard to win a lot of customers and trying to be quite competitive so for the first time in a long time there was a period over 2020 and 2021 where fixed rates became cheaper than variable rates. It was only a temporary condition but that's why we saw a swelling in the portion of lending that was going out on fixed terms. Historically, around 15% of new mortgage lending in Australia is on fixed terms. During that temporary period where fixed rates hit a floor it increased to about 46%, so there was a massive bulge in fixed lending and that's now expiring.
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