At the most simple level, demand is easing while supply is rising.
The house price spurt of 2023 is running out of puff. Not that a house price crash is likely, far from it.
Many of the key issues that drive house prices are changing, from being positive for prices to a point where the resurgence in demand for housing – and, with that, house prices – is petering out.
It’s been clear for the past month that, in the big cities, the auction clearance rates are off their highs and are now sluggish. Buyers are no longer bidding extreme prices just to get into the market. The prior boost to housing demand from the reopening of the international borders in mid to late 2022, and the surge in population numbers that accompanied that, has been largely satisfied.
Linked to that moderation in demand pressures is a substantial lift in housing supply or, more specifically, the number of dwellings listed for sale.
It is never completely clear what drives the change in the number of dwellings for sale at any particular time, and it inevitably depends on a range of economic and demographic factors. That said, the listings data from Corelogic and SQM Research show a clear upturn in the number of dwellings for sale. This is getting close to flooding the market with additional supply, which is the reverse of the case evident in late 2022 and the first part of 2023.
At the most simple level, demand is easing while supply is rising.
What is likely to be even more important for the trend in house prices is the weakening in the labour market. The unemployment rate is edging up. Demand for labour, as seen through the number of job vacancies and advertisements, is on a steady downtrend, a move which will inevitably see the unemployment rate rise in the next year or two.
The health of the labour market matters for house prices.
By way of example, it is difficult, if not impossible, to service a mortgage – buy a house in other words – if you are unemployed. What’s more, banks will scale back their loans to those unemployed or working fewer hours, which means demand for housing will fall as the unemployment rate goes up.
The RBA and Treasury are forecasting the unemployment rate to rise to around 4.25 to 4.5 per cent in late 2024 and into early 2025, which is materially higher than the low of 3.4 per cent reached in late 2022 and even the 3.7 per cent in the most recent data. This increase in itself will be enough to take the top off demand for housing, and with it, house prices.
If, as seems increasingly likely, the unemployment rate moves towards 5 per cent in 2024 and 2025, demand for housing will be crunched and some of those running into extreme financial difficulty with their mortgages will need to sell, a point that will add to supply.
Unemployment, more than most things, has a powerful impact on housing demand, almost regardless of interest rate settings.
If there are interest rate cuts in late 2024 and into 2025 – as financial markets are starting to anticipate – with weak growth, lower inflation and higher unemployment, there is unlikely to be a material impact on house prices. The reason is straightforward.
Interest rate cuts, when they are delivered, will be because the economy is weak – including with a rising unemployment rate. While there will be the usual short-term cyclical effect in terms of borrowing capacity, better cash flows for those with existing mortgages and improved sentiment, a sluggish economy with rising unemployment will be an important negative offset for house prices.
A sharp fall in house prices in 2024 is, nonetheless, unlikely due to the current protracted period of weakness in new dwelling construction. The increase in supply of newly completed dwellings over the next 12 to 24 months will be modest, at best. It will dampen the growth in new listings.
While price changes will vary from city to city and between regions and the cities, the nation-wide house price outlook is for a price fall of around 3 per cent in 2024. The falls could be larger than this if the labour market weakness is more extreme.
Suffice to say the hot demand, cold supply and low unemployment mini-boom in house prices in 2023 is set to turn to a moderate demand, supply increase and higher unemployment, with house price weakness in 2024.
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