What’s driving the Australian property market?

What's driving the Australian property market?

When making decisions about property investment, it is of critical importance to understand the wide range of factors that determine the performance of any real estate market, irrespective of time or location.

Chief amongst these factors are the broader macro-conditions which determine the overall state of the economy, as well as trends on property markets.

These macro-level factors are far-ranging and diverse, encompassing population growth, interest rates and access to finance on the demand side, and housing volume and dwelling construction rates on the supply side.

Demographics and employment levels underpin demand

The relationship between supply and demand is one of the fundamental laws of economics, serving to set price levels in any market where goods and assets are freely transacted.

In the case of the housing market, demand is chiefly determined by population levels — which determine the number of potential buyers of homes; as well as wage and employment levels, which is reflective of their spending ability.

Immigration levels are an especially important factor for forecasting housing demand in Australia, given that migration is a key driver of demographic change, and newcomers to the country have a strong impact upon the housing market.

Since the turn of the century migration has had a major influence on Australian housing prices, with a study by researchers from RMIT finding price levels would have been around 1.1 per cent lower per annum in the absence of immigration.

Job and wage levels also warrant consideration when assessing demand for housing, given that home buyers need to be gainfully employed and adequately remunerated in order to pay off their mortgages.

Australia is faring well right now on the jobs front despite the impact of COVID-19, with ABS figures putting unemployment at 5.6 per cent, a mere 0.4 percentage points above levels just prior to the start of the pandemic.

Citi economists expect unemployment to fall to 5 per cent by year end and 4.5 per cent next year, although we believe it will need to fall below 4 per cent to drive higher wages growth and put pressure on interest rates to rise, and we do not expect this to happen until late 2023, which is inline with thinking by the Reserve Bank of Australia (RBA).

Interest rates and financing are critical for buyers

Financial conditions are a major factor that influences market demand, as they determine the ability of buyers and investors to access borrowed funds.

This is especially important in the case of the property market, given that houses are large-sum purchases for which most buyers will invariably need to borrow.

The financing environment is itself chiefly determined by prevailing interest rates, which are best understood as the cost of money for people borrowing funds to make purchases or investments.

In Australia’s case, borrowing is on track to remain very cheap for the foreseeable future, as the RBA has stated repeatedly in recent months intends to keep interest rates at record low levels in order to maintain the health of the economy post-COVID-19.

Following its decision to keep interest rates on hold in early May Reserve Bank governor Philip Lowe repeated previous statements that the official cash rate will remain at a historically low levels until “at least 2024,” as wage growth is expected to remain tepid until then.

Financial accessibility is also important, because even if the cost of borrowing is low this brings no benefit to homebuyers if they can’t access funds.

The Australian government has adopted a slew of measures to ensure that home buyers — and first-time purchasers in particular — have ample access to affordable funds for property investment.

This includes the First Home Owner Grant (FHOG) — a long standing scheme to provide grants of up to $20,000 to new home buyers, and the First Home Loan Deposit Scheme (FHLDS), which was expanded by 10,000 places in the 2020-2021 budget, and reduces the deposit requirement for new home loans to as little as 5 per cent, as compared to 20 per cent under normal conditions.

Supply depends on dwelling starts and government land approvals

On the supply side of the equation lies the number of homes available to aspiring owners and investors, as well as the land on which such dwelling places are perched.

For this reason, the rate of new dwelling starts is a highly important factor to consider when assessing supply levels on the housing market.

Supply levels in Australia are on track to improve in the near-term, with the total number of dwelling units commenced rising 18.6 per cent in the December quarter to 51.055 dwellings, according to data from the Australian Bureau of Statistics. This marks the largest quarterly lift in 19 years, as well as the largest number of quarterly dwellings starts in a two year period.

The availability of land on which houses themselves are built should also be considered when assessing potential supply levels. In the case of Australia, this factor is very much in the hands of local government, through land release and planning approvals.

This is exemplified by the recent decision of the Queensland government to build a new residential district at Caboolture West in Moreton Bay, just north of Brisbane, which will greatly expand regional housing supply.

Overall consideration of these supply factors in tandem with the aforementioned demand factors should provide property investors with a solid foundation for assessing future trends in the real estate market, as well as making their own purchasing decisions.

The article content provides general information about banking or services associated with banking. Consumers should refer to the terms and conditions financial institutions provide for various products.

When making decisions about property investment, it is of critical importance to understand the wide range of factors that determine the performance of any real estate market, irrespective of time or location.

Chief amongst these factors are the broader macro-conditions which determine the overall state of the economy, as well as trends on property markets.

These macro-level factors are far-ranging and diverse, encompassing population growth, interest rates and access to finance on the demand side, and housing volume and dwelling construction rates on the supply side.

Demographics and employment levels underpin demand

The relationship between supply and demand is one of the fundamental laws of economics, serving to set price levels in any market where goods and assets are freely transacted.

In the case of the housing market, demand is chiefly determined by population levels — which determine the number of potential buyers of homes; as well as wage and employment levels, which is reflective of their spending ability.

Immigration levels are an especially important factor for forecasting housing demand in Australia, given that migration is a key driver of demographic change, and newcomers to the country have a strong impact upon the housing market.

Since the turn of the century migration has had a major influence on Australian housing prices, with a study by researchers from RMIT finding price levels would have been around 1.1 per cent lower per annum in the absence of immigration.

Job and wage levels also warrant consideration when assessing demand for housing, given that home buyers need to be gainfully employed and adequately remunerated in order to pay off their mortgages.

Australia is faring well right now on the jobs front despite the impact of COVID-19, with ABS figures putting unemployment at 5.6 per cent, a mere 0.4 percentage points above levels just prior to the start of the pandemic.

Citi economists expect unemployment to fall to 5 per cent by year end and 4.5 per cent next year, although we believe it will need to fall below 4 per cent to drive higher wages growth and put pressure on interest rates to rise, and we do not expect this to happen until late 2023, which is inline with thinking by the Reserve Bank of Australia (RBA).

Interest rates and financing are critical for buyers

Financial conditions are a major factor that influences market demand, as they determine the ability of buyers and investors to access borrowed funds.

This is especially important in the case of the property market, given that houses are large-sum purchases for which most buyers will invariably need to borrow.

The financing environment is itself chiefly determined by prevailing interest rates, which are best understood as the cost of money for people borrowing funds to make purchases or investments.

In Australia’s case, borrowing is on track to remain very cheap for the foreseeable future, as the RBA has stated repeatedly in recent months intends to keep interest rates at record low levels in order to maintain the health of the economy post-COVID-19.

Following its decision to keep interest rates on hold in early May Reserve Bank governor Philip Lowe repeated previous statements that the official cash rate will remain at a historically low levels until “at least 2024,” as wage growth is expected to remain tepid until then.

Financial accessibility is also important, because even if the cost of borrowing is low this brings no benefit to homebuyers if they can’t access funds.

The Australian government has adopted a slew of measures to ensure that home buyers — and first-time purchasers in particular — have ample access to affordable funds for property investment.

This includes the First Home Owner Grant (FHOG) — a long standing scheme to provide grants of up to $20,000 to new home buyers, and the First Home Loan Deposit Scheme (FHLDS), which was expanded by 10,000 places in the 2020-2021 budget, and reduces the deposit requirement for new home loans to as little as 5 per cent, as compared to 20 per cent under normal conditions.

Supply depends on dwelling starts and government land approvals

On the supply side of the equation lies the number of homes available to aspiring owners and investors, as well as the land on which such dwelling places are perched.

For this reason, the rate of new dwelling starts is a highly important factor to consider when assessing supply levels on the housing market.

Supply levels in Australia are on track to improve in the near-term, with the total number of dwelling units commenced rising 18.6 per cent in the December quarter to 51.055 dwellings, according to data from the Australian Bureau of Statistics. This marks the largest quarterly lift in 19 years, as well as the largest number of quarterly dwellings starts in a two year period.

The availability of land on which houses themselves are built should also be considered when assessing potential supply levels. In the case of Australia, this factor is very much in the hands of local government, through land release and planning approvals.

This is exemplified by the recent decision of the Queensland government to build a new residential district at Caboolture West in Moreton Bay, just north of Brisbane, which will greatly expand regional housing supply.

Overall consideration of these supply factors in tandem with the aforementioned demand factors should provide property investors with a solid foundation for assessing future trends in the real estate market, as well as making their own purchasing decisions.

The article content provides general information about banking or services associated with banking. Consumers should refer to the terms and conditions financial institutions provide for various products.