Reasons the housing market gains may not be as strong for the remainder of 2021
The housing market has been booming recently, with a 5.6% gain in the March quarter across major capital cities. The March month alone had the biggest gain in 32 years. Forecasts from Westpac now expect a 15% gain for the year.
However, there are several reasons this may not continue.
Reason number 1 – Sellers return
There is expected to be a certain amount of rebalancing in supply and demand in the short-term. This will occur as the prices get too high and more people are inclined to sell. This will allow the supply to increase and help ease upward pressure on housing prices.
Reason number 2 – Reducing affordability
The sharp increase in prices lately will begin to discourage buyers. This is understandable as dwelling prices have been increasing by as much as $1,000 a day recently. The ‘time to buy a dwelling’ index has decreased by 20% from its high in November last year. As more people begin to be priced out of the market, or decide to wait to buy a home, demand will begin to decrease.
This is inevitable as house prices increase not only due to people’s choices or income, but lending serviceability assessments too. If incomes do not rise as fast as house prices, less and less people will be able to meet the banks strict serviceability requirements. This will result in borrowers not reaching the borrowing capacity they need from a lender to be able to buy a house.
Reason number 3 – Macro prudential policy tightening
It is almost expected at some point in the next year or so, the Reserve Bank will have to increase the cash rate. As investors begin/continue to jump into the booming market, the market will continue to go up in price. The reason the bank reduced the cash rate to a record low of 0.1% in November 2020, was due to fears the housing as well as the equity markets would collapse, as well as trying to spur investment to create jobs and keep the economy afloat. As the economy has mostly recovered and house prices have boomed and will continue to increase, the RBA will need to intervene. They intervene for three main reasons:
- To reduce the volatility in the housing market i.e. large downturns
- If credit is increasing too fast and the population is becoming overleveraged
- To control inflation
Reason number 4 – potential oversupply
The final reason is not a huge factor at the moment; however, it may be becoming increasingly important. Our population has grown extremely slowly compared with previous years, as a result of COVID restrictions. In addition to this, the governments HomeBuilder scheme has substantially increased new dwelling completions to over 180,000 this year. Unless migration is allowed to continue in the next year or so, we will likely continue to build more houses to support a stagnant population.
Conclusion
The recent boom can likely be attributed to a bounce back after COVID hit last year. However, strong periods of growth are usually followed by an extended period of flattening. It is likely that house prices will be most affected in the short-term by interest rate changes.
Source: Westpac