A tale of supply and demand
in Victoria’s housing market

With the market showing signs of recovery following a range of stimulus, RPM continues its Industry Leaders Q&A with Daniel Gradwell, Associate Director, Property at ANZ to find out what effect these measures are having on the economy, the property market and buyers.

RPM: Since the last quarter, what have been the key developments in Victoria’s residential property market?

DG: There are two key developments worth highlighting, and that is the differences in supply and demand. On the demand side, house prices in the established market are rising at a pretty solid rate, up about 3% in Melbourne and Sydney. So it’s a fairly material turnaround, with a further increase on the cards for October also.

The opposite of that strength is weakness on the construction side. Building approvals have been falling for the last three quarters and are at the lowest level since 2012, with further declines likely.

So prices are rising on one hand but it’s hard to get building approvals off the ground – especially medium to high density sales. Pre-sales are really hard to come by. It reflects people’s concerns over building quality and cladding issues, especially in Sydney.

RPM: Has the market actually bottomed/are we in recovery?

DG: I think we’ve passed the bottom now. There’s no sign of prices slowing down. In fact, price increases are broadening. Initially it was higher-end product, but price increases are starting to flow through at the lower end of the market and regional markets too.

RPM: What are the key economic indicators telling us?

DG: Again I think it’s a couple of things.

Firstly, the labour market. There’s still a lot of spare capacity. If you add in a bunch of forward-looking indicators including capital expenditure plans and hiring intentions (based on ANZ Research’s series of job ads) it suggests the labour market is going to be weak for a while.

Secondly, regarding the international outlook, global risks haven’t translated in Australia yet. If you look at Australia’s relationship with the rest of the world – particularly our external sector – there are still plenty of international tourists visiting our shores, commodity prices are still quite high, and with a weak Australian dollar we’re running a trade surplus. The international exposures directly relevant to Australia are still looking good.

RPM: How much of an effect has regulatory easing actually had – ie: is it starting to show up in approval numbers?

DG: The number of loans being approved has really stepped up in the last few months. In August, nationally the growth in new investment mortgage loans was the highest in three years (increasing 5.7%), coming off a pretty strong July result. So it looks like investors are really starting to come back into the market.

Overall finance approvals in Victoria were up more than 10% over the last two months, with each of the investor, owner occupiers and first home buyer segments increasing.

But if I’m looking at approval numbers, one of the downsides is that  this growth is limited to purchases of existing dwellings, not new dwellings. Finance for construction of new homes remains weak. In terms of lending to developers – and ANZ is strong in this market – there is appetite to lend, especially in Victoria, but the problem is we need pre-sales coverage.

It can be tricky to find the equilibrium between responsible lending and making sure that we build enough housing to absorb our population growth.

RPM: What’s the outlook for the remainder of the year?

DG: I think prices will keep rising through the remainder of the year. The key reason is there’s fairly solid sentiment in the market. ANZ Research’s latest Housing Update report forecasts annual price growth in Melbourne peaking in mid-2020 in the low double digits.

A key issue is there is still a real shortage of supply. While the number of listings is picking up, it’s still really low for this time of year, which adds to price pressures. I do think we will eventually start to see new listings and turnover get back to historical normal numbers.

On the construction side, in the next six months we should start to see approvals tick up again. Historically-speaking, every time we’ve seen access to finance improve it filters through to a pick-up in approvals.

While there is still a lot of dwellings under construction, there will be a gap unless approvals start to improve. If it does that now, there will be a more seamless transition when they are completed.

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