Property prices seem set for growth but could a world of pain unravel expectations?

Property prices are marching higher and, with interest rate cuts forecast for later in the year when inflation is expected to have been reined in, it’s easy to assume there’s only one way they can continue to go.

But property price forecasts are notoriously unreliable, as seen with predictions by the big banks and many media commentators and industry experts of price collapses of 20 per cent during Covid when most real estate markets took off in the other direction.

So, in the face of so much optimism around where prices are headed in 2024, it’s worth at least keeping an eye on the factors that could turn expectations on their head.

Amid a combination of global conflicts and economic risks, as well as numerous issues closer to home, there are still myriad forces that could derail what seems like a relatively buoyant national housing market.

High interest rates, which borrowers are currently enduring, typically drive property prices lower but Australian units and houses alike are less affordable than they have been in decades.

For households of all incomes, the share of homes that are affordable is at its lowest in 30 years.

It’s not a uniquely Australian circumstance. House prices are high relative to incomes across the rich world. The US, China, Canada and New Zealand are also grappling with high property prices.

Domestically, it would seem the ingredients are prepared and ready to serve further price growth.

Inflation that has threatened the economic well-being of wage earners is seemingly coming under control (although the Reserve Bank of Australia did seriously consider lifting rates again last month), and the economy has proven resilient to international conflict and geopolitical muscle flexing.

Chronic housing supply shortages are fuelling demand, migration is strong and the Albanese Government’s broadening of the Stage 3 tax cuts later this year will put money in more pockets, and potentially the housing market.

Since ebbing in January 2023, house prices have jumped more than 8 per cent nationally and much faster in Perth, Brisbane and Adelaide.

So, what could possibly go wrong?

China, domestic debt and property price hurdles

Even allowing for the apparent macroeconomic robustness, inflation is still above target, real wages are going backwards in comparison, and a cursory scan of world news headlines shows the tenuous state of the global economy, international trade and peace and security.

Moody’s Analytics points to China as one of the potential thorns in the side of Australia’s property market and wider economy.

Economist Harry Murphy Cruise highlighted the lacklustre economic performance of Australia’s biggest trading partner.

“China’s economy just cannot kick into gear, with their property market’s woes, meek manufacturers and deflation all highlighting the economy’s struggle to gain traction.

“If China’s recovery stumbles, there will be major consequences for Australia’s outlook; demand would fall for Australian iron ore and coal, along with a drop in Chinese tourists and students travelling to Australia.

“If economic stimulus does not eventuate or China’s recovery stumbles, there will be major consequences for Australia’s outlook,” Mr Cruise said.

Chinese investors are already cooling on Australian property.

On a localised front, he said that while Moody’s expected property prices to rise in 2024 there were no guarantees.

“Although our baseline includes rising house prices, the systemic importance of the property market to the economy means a property downturn is a major risk.

“Australian households are among the most highly leveraged in the world, with that debt mostly tied to the local property market.”

“The country’s fight against inflation is well ahead of schedule, but risks remain.

“Some of the improvement in inflation is coming from temporary governmental support mechanisms and rebates and Stage 3 tax cuts could also be a spanner in the works.”

Second riskiest property market in the world

An International Monetary Fund report, A Rocky Recovery, recently ranked Australia second only to Canada in relation to housing risk. It did so after looking at five key metrics:

• Outstanding housing debt to household income in June last year. Australian housing debt is roughly 145 per cent, of the country’s total disposable household income.
• The very high share of housing debt on variable interest rates (as per graph below).
• The share of home owners with a mortgage—around 37 per cent.
• Cumulative cash rate changes from March 2020 to September 2022. The RBA has hiked rates 10 times since April last year.
• Real house price growth between March 2020 to March 2022, which in Australia amounted to a pandemic surge of about 25 per cent. 

Eliza Owen, Head of Research Australia, CoreLogic, played down the seemingly alarming report and the prospects of a property price crash.

“In my mind, a housing market crash is defined by the loss in value and a loss in mortgage serviceability, when you get to a situation where people can no longer service their mortgages, have to sell and when they try to sell, they can’t get enough money to cover the loan,” she said.

“That’s not something that we’re seeing in this market.

“Many households have accrued strong savings buffers through the low interest rate period, and labour markets remain extremely tight,” Ms Owen said.

“Housing market conditions are turning a corner amid low stock levels, rising demand from overseas migration, and consumer sentiment shifting higher as we approach what may be the end of the rate-tightening cycle.”

The RBA has shifted in recent months to a similarly optimistic view of global financial conditions. Its latest monthly board minutes said conditions had eased over prior months, a change of tone from previous board statements about global risks.

Middle East, Russia, or new wars and threats?

Is Australia’s economy and by extension its housing market immune from the devastation and disruption to supply lines unfolding in the Middle East and Ukraine, or China’s sabre rattling in the South China Sea?

Recent attacks on ships in the Red Sea by Yemen’s Houthis have upended trade in Asia.

Container trade in the region has declined by nearly 85 per cent since the start of the attacks. Goods are now being transported via lengthier shipping routes or costlier air options.

Higher transport costs will eventually be passed on to consumers but Australia’s economic reliance on mineral resource exports means it will be less impacted than other countries.

The Economist’s Economic Intelligence Unit pointed out that countries with a high share of trade in perishables are more vulnerable to disruption than Australia.

While Australia has a healthy export market in grain and other produce, China’s recent but wavering blockages of Australian wheat, barley, beef and wine exports showed that the nation’s wellbeing predominantly lies with mining.

For now, it would seem, local issues such as rapid population growth through migration, housing supply shortages and high savings levels will cushion the headwinds that exist at the moment, including global conflict, a struggling building sector and high construction costs, high levels of mortgage stress, and still-high interest rates.

While property price forecasts are always to be taken with a grain of salt, the current risk assessment would seem tilted towards continued price rises, at least until other unexpected developments negatively impact consumer sentiment and financial wellbeing.