Price growth continues but short-term supply challenges remain
Green shoots emerge by way of building approvals
but supply-demand imbalance continues
RPM: What were the key takeouts regarding Victoria’s residential property market in Q4?
I think there were 2 pronounced developments: the first being there was a broad acceptance that an improvement in the market is here to stay in terms of price growth. Auction results have been strong and there are greater levels of stock on the market and rising transactions.
Secondly, the supply-demand imbalance continues. Over the final quarter last year we finally started to see some positive signs regarding the construction pipeline. We’re not talking about a sharp rebound, rather some green shoots emerging by way of building approvals starting to stabilise. Building approvals fell more than 25% from the peak, and have now recovered just 3%.
Housing finance also picked up for construction of new dwellings for both owner occupiers and investors, which is usually a good indicator of where building approvals will go.
RPM: What are the key economic and property indicators telling us?
It’s a little mixed. On the economic front, the recent bushfires and Coronavirus present some challenges. For people directly by the bushfires it’s catastrophic, but the impact on the broader economy is likely to be temporary. There will be some rebuilding stimulus which the federal government has already announced that will go directly to these communities.
Coronavirus will have a larger impact. A recent ANZ Research note forecast the bushfires to take 0.2% off GDP, while Coronavirus will shave off 0.5% due to the impact on tourism and foreign students. And, unlike the bushfires, there won’t be any stimulus measures.
In terms of economic indicators, we’ve seen an improvement in the labour market over the past month or 2 which is a real positive compared to mid-2019 when unemployment was trending higher. The challenge is will there be enough job creation over the next few months given the headwinds around the bushfires and Coronavirus.
ANZ Research is anticipating the economy will not create enough additional jobs to drive unemployment lower and wages higher, which is expected to result in 2 more interest rate cuts towards the middle of the year.
In terms of property indicators, we’ve seen some tentatively positive numbers coming through in building approvals. This is important given they were at very low levels throughout 2019 for both apartments and detached houses.
That said, it’s worth highlighting the large lead and lag times before getting product onto the market. Even if building approvals start to pick up today, there will still be a housing shortage in the short term.
RPM: What are your predictions for 2020?
Broadly it will be a good year from a housing standpoint. Anticipated rate cuts will further entrench growth in prices for existing and new dwellings across both detached housing and apartments. Prices are already above the previous peak for units and apartments in Melbourne.
We’ll continue to see a pretty solid presence of first home buyers in the market. But it gets complicated because price growth doesn’t help affordability which is already challenging. While the new home loan deposit scheme will help 10,000 first home buyers a year, it won’t affect a material change.
The demand and supply dynamic will put upward pressure on prices initially, but building approvals and construction should start to accelerate in the second half of the year. That’s the key challenge; supply can take 12-18 months to come through, and the delay could put further pressure on both housing prices and rents.