Introduction January 2020 - Square Yards Australia
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Introduction
January 2020
Welcome to the January 2020 edition The property market is showing signs of strength as we
start a new year. Sydney and Melbourne housing prices rose
of the Macquarie Property Insights strongly in the final few months of 2019 and prices in other
capital cities also improved.
Report, which reveals recent trends in
The about-turn in the property market has been supported by
the local residential real estate market. lower interest rates, with the Reserve Bank of Australia (RBA)
cutting the cash rate three times since mid-2019. Macquarie
It’s full of important information expects one more 0.25% cut in early 2020 to bring the cash
that’s useful to everyone from first rate down to 0.5%, which should further stimulate the market.
time buyers to people refinancing There has been some conjecture that the sizeable increases
in housing prices in Sydney and Melbourne have been the
or buying their next home, as well result of thin sales volumes. However, sales volumes have
strengthened and Macquarie expects volumes to rise further
as property investors. as rising property prices give sellers more confidence in the
market turnaround.
While the domestic economy was unexpectedly soft in 2019,
it’s anticipated Australia’s GDP growth will look a bit better
as 2020 progresses, which should also help support the
property market. While Australia’s unemployment rate has
risen modestly, at 5¼% it still remains low in an historical
sense.
In this issue of the Macquarie Property Insights Report,
we take a look at how Australia’s property market performed
in 2019 and the key factors that will drive the property market
in 2020, with the help of Macquarie’s senior economist
Justin Fabo.
Macquarie Property Insights Report – January 2020 Page 2
How did the residential property
market perform over the course
of 2019?
The residential property market continued to strengthen in the “The pick-up in Sydney housing price growth has been the
final quarter of 2019, in the wake of three interest rate cuts in fastest in several decades, with Melbourne price growth also
June, July and October. very strong by historical standards”, says Fabo.
CoreLogic data show that nationwide dwelling prices rose Sydney and Melbourne dwelling prices both rose 5.3% over
4% over the three months to December 2019. Sydney and 2019, but were still below their mid-2017 peaks by 6.4% and
Melbourne led the national rebound, with dwelling price 2.3%, respectively. Nonetheless, high-frequency data reveal
growth of a little more than 6% in both cities over that period. that prices in both cities have continued to rise so far in 2020.
Sydney and Melbourne home prices have risen 10% from the
mid-2019 troughs. [Figure 1] Aside from the combined 75 basis points of RBA rate cuts
since June, the housing market has benefitted from several
igure 1. Dwelling prices in Sydney and Melbourne have
F
other factors that have worked to lift home buyer sentiment.
lifted sharply Firstly, the outcome of the federal election helped to settle
housing policy uncertainty. Secondly, the Australian Prudential
Change in dwelling values Regulation Authority’s (APRA’s) changes to the minimum
(as at 31 December 2019) interest rate thresholds used to gauge a borrower’s ability
to repay a home loan. [Figure 2]
Median Month Quarter Annual Since
dwelling peak
price igure 2. Dwelling prices began to lift following the outcome
F
of the federal election and RBA and APRA policy changes
Sydney $840,072 1.7% 6.2% 5.3% -6.4%
Melbourne $666,883 1.4% 6.1% 5.3% -2.3% Daily Dwelling Prices
Index Hedonic series
Australia $537,506 1.1% 4.0% 2.3% -3.1% 180
Sydney Federal election Oct rate
Source: CoreLogic 175 June rate cut cut
170 July rate cut +
APRA changes
165
160 Melbourne
155
150 5 capital cities
145
140
135
130
Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Source: CoreLogic, Macquarie Macro Strategy
Macquarie Property Insights Report – January 2020 Page 3
These factors helped support gains in other capital cities. There are signs that the prolonged fall in Perth home prices
Outside of Sydney and Melbourne, dwelling price growth is abating, with prices broadly flat over the past four months.
has recently been strongest in Hobart and Canberra, where Nonetheless, Perth dwelling prices have fallen more than 20%
values rose 3.9% and 3.1%, respectively, over 2019. [Figure 3] since the peak in mid-2014.
“In Hobart, dwelling prices have been performing well since Darwin is still the worst performing housing market as sharply
2015 and after a slight dip in the middle of last year, the lower resources investment weighs on demand. Housing
market is again tracking at record highs”, says Fabo. prices fell nearly 10% over 2019 in Darwin and dwellings have
lost more than 30% of their value since the peak. The rate of
In Brisbane, dwelling values rose 2.4% in the final three decline in prices, however, slowed in the final months of 2019.
months of the year, ending 2019 0.3% higher than a year
earlier. Meanwhile, Adelaide saw a 0.5% increase in the month
of December, but dwelling values were still 0.2% lower than
12 months earlier.
Figure 3. Dwelling prices remain below peak in most capital cities, except Hobart and Canberra
Median dwelling price Month Quarter Annual Since peak
Brisbane $497,491 0.70% 2.40% 0.30% -0.10%
Adelaide $433,845 0.50% 1.40% -0.20% -0.20%
Perth $437,080 0.00% -0.10% -6.80% -21.40%
Hobart $474,186 0.20% 3.40% 3.90% at peak
Darwin $388,018 -0.50% -1.40% -9.70% -31.80%
Canberra $611,841 0.10% 2.30% 3.10% at peak
Australia $537,506 1.10% 4.00% 2.30% -3.10%
Source: CoreLogic
“In Hobart the
market is again
tracking at record
highs.”
Macquarie Property Insights Report – January 2020 Page 4
What’s the outlook for
property prices in 2020?
Macquarie forecasts national housing prices will rise by a
igure 4. Strong population growth equates to fundamental
F
further 6% to 7% by the end of 2020, building on the strong housing demand
momentum in the market at the end of 2019.
The Sydney and Melbourne residential property markets are Population Growth
likely to lead this trend, with prices expected to rise by about Year-ended
%
8% to 10% in these markets by the end of this year, putting 2.5
* Calculated as the residual of population
dwelling prices once again at record highs. growth and natural increase
Total
“While the recent extreme rate of growth in Sydney and 2.0
Melbourne dwelling prices in 2019 is unlikely to be maintained,
it now seems likely that dwelling prices are set for a period of Average
1.5
sustained, solid growth,” says Fabo.
“Property prices in the two largest capital cities also
1.0 Net immigration*
experienced the deepest falls when property prices started
to retreat from mid-2017, so they have further to bounce back
than other markets,” he adds. 0.5
This year, rising property prices are expected to be further Natural increase
supported by historically low mortgage rates and the 0.0
possibility of further cuts by the RBA. 82 85 88 91 94 97 00 03 06 09 12 15 18
“This could lead, once again, to the emergence of “animal Source: ABS, Macquarie Macro Strategy
spirits”, or FOMO – the “fear of missing out”, says Fabo.
Ongoing strong population growth of around 1.5% per annum
is also helping to support demand for housing. [Figure 4]
“In our view, underlying demand for housing didn’t really
weaken over the past couple of years, it just went into
hibernation.”
“...it now seems
likely that dwelling
prices are set
for a period of
sustained, solid
growth.”
Macquarie Property Insights Report – January 2020 Page 5“Underlying
demand for
housing didn’t
really weaken over
the past couple of
years, it just went
into hibernation.”
Macquarie Property Insights Report – January 2020 Page 6What’s the outlook
for interest rates?
The RBA cut the cash rate by 0.75% in the second half of While the central bank has left the door open for further cuts
2019 to a new record low of just 0.75%. [Figure 5] in 2020, the RBA Board has been careful not to be overly
pessimistic about Australia’s economic outlook.
Figure 5. The effect of lower interest rates and APRA’s hange
to interest rate thresholds has been swift “The Bank’s view is the economy is gradually improving after
a soft period. We agree with their emphasis on the word
gradual,” says Fabo.
Dwelling Price Growth and RBA Rate Cuts
% “The sharp pick-up in established housing prices and activity
30 will be giving the Bank more confidence in its forecast that the
economy is on the right track”.
20 RBA Board members have agreed to reassess the economic
outlook in their first meeting of 2020.
10 Macquarie has pencilled in a 0.25% rate cut in the first quarter
of 2020 but expects Board members will then wait to see the
overall impact of recent rate reductions on the economy over
0
time. [Figure 6]
-10 igure 6. Macquarie expects another RBA cash rate cut in
F
early 2020
Dwelling price growth, annualised monthly
RBA cash rate cuts
-20 RBA Cash Rate Expectations
92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
%
5
Source: CoreLogic, RPA, Macquarie Macro Strategy
4
3
2
1
Macq
IB Futures
0
10 11 12 13 14 15 16 17 18 19 20 21
Source: RBA, Bloomberg, Macquarie Macro Strategy
Macquarie Property Insights Report – January 2020 Page 7The December RBA Board Minutes highlighted “only a small
share of borrowers had actively adjusted their scheduled
mortgage payments following the reductions in interest rates”,
suggesting the benefits of the rate cuts in terms of disposable
income are yet to register for many borrowers.
“Many observers have become very impatient and there has
been a degree of hyperventilating about the apparent lack
of pass-through to the real economy from policy support
delivered to date,” says Fabo. “More time is needed to
properly gauge the effects of last year’s 75 basis points of
cash rate cuts.”
“The upshot is that monetary policy works with a lag.
Historically, it has taken roughly six months for a pick-up
in housing prices and turnover to have an effect on private
demand in the economy.” [Figure 7]
igure 7. Rising dwelling prices give us some confidence that
F
private demand growth will eventually lift
Real Dwelling Prices and Private Demand
Year-ended growth
% %
25 10
20
8
Real dwelling
15 price growth
(LHS) 6
10
5 4
0 2
-5
0
-10
Growth in private final demand -2
-15 ex mining investment (RHS)
-20 -4
93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
Source: ABS, CoreLogic, Macquarie Macro Strategy
Like all central banks, the RBA has a close eye on slowing
global growth and potential geo-political risks.
“Our view is that the slowing in global growth since late
2017 and uncertainties associated with the US-China trade
and technology conflict have been a sizeable drag on the
“More time
Australian economy”, Fabo said. “There are tentative signs
that the worst may be behind us but it’s not yet entirely clear.” is needed to
properly gauge
the effects of last
year’s cash
rate cuts.”
Macquarie Property Insights Report – January 2020 Page 8How will dwelling price rises
impact housing affordability?
Should house prices rise as forecast across the country Fabo draws comparisons with the dwelling price growth
(growth of 6-7% over 2020), this would take typical mortgage experienced between early 2015 to the peak in mid-2017 –
repayment affordability to around its long-run average. a period where the cash rate was lowered by 1%, noting that
[Figure 8] “repayment affordability is starting more favourably this time.”
Lower dwelling prices have helped to improve mortgage
igure 8. A further 6-7% rise in national dwelling prices would
F repayment affordability over the past two years. Fabo explains
take repayment affordability back to its average that the parts of Australia’s housing market that are now
exhibiting the strongest improvement in prices, fell the most
Australia - Mortgage Servicing Cost* following the 2017 peak.
Per cent of average household disposable income
% % “While the largest recent price gains have been in Sydney
45 45
and Melbourne, these cities also experienced the largest prior
Declining
40 repayment 40
declines in prices (outside of the mining regions of Western
affordability Australia and the Northern Territory)”.
35 35
He adds: “dwelling prices have so far risen more strongly for
more expensive properties. But the prior price declines at the
30 Average 30
since 1981 top end were also greater,” he adds. [Figure 9]
25 25
igure 9. Higher-priced properties in Sydney and Melbourne
F
Average have fluctuated the most in recent years
20 since 1993 20
* Principal and interest on a loan equivalent to 75% of Dwelling Prices by Tier
15 15
the average dwelling price and with a 25-year term December 2009 = 100
Index Index
200 Sydney Melbourne 200
10 10
81 84 87 90 93 96 99 02 05 08 11 14 17 20
180 Bottom 5th to 180
Source: ABS, CoreLogic, Macquarie Macro Strategy 25th percentile
160 160
140 140
Middle 50%
120 120
Top 75th to
95th percentile
100 100
80 80
10 12 14 16 18 20 10 12 14 16 18 20
Source: ABS, CoreLogic RPData, RBA, Macquarie Macro Strategy
Macquarie Property Insights Report – January 2020 Page 9Repayment affordability has also improved amid falling
interest rates but there’s an inherent risk to the economy
from the elevated amount of debt being carried by Australian
households.
“Lower interest rates mean Australian households can
afford to repay larger amounts of debt relative to their
income compared with 20-30 years ago. But this has clearly
increased the fragility of indebted households and the broader
economy to persistent adverse income shocks,” says Fabo.
[Figure 10]
igure 10. The ratio of dwelling prices to household income
F
is forecast to hit a new historic high
Australia - Dwelling Price-to-income Ratio*
Ratio All regions
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
* Ratio of mean dwelling price to mean disposable income
2.0
(before deducting interest payments) per household
1.5
81 84 87 90 93 96 99 02 05 08 11 14 17 20
Source: ABS, CoreLogic, Macquarie Macro Strategy
Fabo admits to not being bullish enough about how quickly
house prices would strengthen in the latter half of 2019 and
suggests solid dwelling price growth is likely to again put
housing affordability issues on the radar.
“If you wind the clock back only three years the headlines
were about an ‘affordability crisis’. Those headlines quickly
and predictably turned to ‘risk of a house price crash’ as
dwelling prices declined. My guess is now the market’s
“My guess
turned again, we’ll start seeing the discussion about housing
affordability emerge again.”
is we’ll start
seeing the
discussion
about housing
affordability
emerge again.”
Macquarie Property Insights Report – January 2020 Page 10In summary
Against this backdrop, the ingredients Macquarie expects the rapid rate of price growth experienced
in Sydney and Melbourne in the final months of 2019 will ease
are in place to support further in the new year. However, dwelling prices in these markets are
still expected to grow 8-10% over the course of 2020.
strength in the residential property
Other capital cities are also likely to experience price growth.
market throughout 2020. This should The markets of Canberra and Hobart have already returned to
record highs, while Brisbane and Perth could see conditions
be enhanced by ongoing low interest improve as buyers take advantage of lower rates and more
rates and the potential for rates to go affordable prices in these markets.
even lower. Strengthening house prices may again put pressure on
housing affordability but there are still downside risks to the
property market outlook. Economists will watch for signs
of further weakening in global growth as well as domestic
warning signs that could impact confidence such as
unemployment and wages growth.
Macquarie Property Insights Report – January 2020 Page 11This information has been prepared by Macquarie Bank AFSL 237502. Neither Macquarie Group Limited nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. Information in this document, including forecast financial information, should not be considered as an offer, advice or recommendation to investors or potential investors in relation to holding, purchasing or selling securities or other financial products or instruments and does not take into account your particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters and seek independent financial advice. All securities and financial product or instrument transactions involve risks, past performance is not a reliable indicator of future performance. Some products and/or services mentioned in this document may not be suitable for you and may not be available in all jurisdictions. Read our regulatory and research disclosures at www.macquarie.com/about/disclosures/regulatory-disclosures © Macquarie Group Limited Job no. DCD-1486
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