Key takeaways
CoreLogic’s national Home Value Index rose 0.6% in November, the smallest monthly gain since the growth cycle commenced in February. However, Melbourne, Hobart and Darwin recorded declines in values over the month, and Sydney home values slipped into negative growth over the last week of the month.
These three cities continue to show low levels of advertised supply while purchasing activity is holding above-average levels, keeping strong upward pressure on housing values despite weaker housing market conditions across the lower eastern seaboard.
Slower growth conditions across the upper quartile of the market in Sydney and Melbourne have become increasingly prominent, with the broad middle of the market now recording the strongest rate of growth.
The gap between regional and capital city growth rates has converged, with both regions recording a 0.6% rise in values in November. Regional Australia’s housing values remain -1.8% below the historic high recorded in May 2022.
The rise in vendor activity since June has coincided with slower growth in home values. Total stock levels have been rising since July, indicating purchasing demand isn’t quite keeping pace with the rise in vendor activity.
The housing market is moving through a new inflection point, with the rate of growth in home values becoming more diverse, but generally weakening. The factors that have supported value growth are losing their potency, with advertised stock levels rising to above-average levels in some cities.
CoreLogic’s national Home Value Index (HVI) rose 0.6% in November, the smallest monthly gain since the growth cycle commenced in February.
Despite the slowdown, the national HVI reached a new record high in November.
After falling -7.5% from a peak in April 2022 to a trough in January 2023, housing values have bounced 8.3% higher over the past 10 months, demonstrating a clear ‘V’ shaped recovery.
While the headline trends have slowed, multi-speed conditions have become increasingly evident across the capitals, with three cities recording a decline in values over the month.
These were Melbourne and Hobart, both down -0.1%, and Darwin, down -0.3%.
Growth in Sydney home values also slowed sharply, reducing to 0.3%, the smallest monthly gain through the recovery cycle to date.
With Sydney home values slipping into negative growth over the last week of the month, we could see Sydney following Melbourne’s lead, with home values stabilising or dipping lower in December.
On the flip side, Perth housing values accelerated in November, posting the largest monthly gain since March 2021 at 1.9%.
Brisbane (1.3%) and Adelaide (1.2%) also stand out with a resilient and rapid pace of growth.
These three cities continue to show remarkably low levels of advertised supply while purchasing activity is holding above-average levels.
This imbalance between available supply and demonstrated demand is keeping strong upward pressure on housing values across these markets, despite the downside factors leading to weaker housing market conditions across the lower eastern seaboard.
The Melbourne Cup day rate hike has clearly taken some heat out of the market, but other factors like rising advertised stock levels, worsening affordability and persistently low consumer sentiment are also acting as a drag on value growth in some markets.
Slower growth conditions across the upper quartile of Sydney and Melbourne have become increasingly prominent
The most expensive quarter of the market across both cities now recording the lowest rate of growth on a monthly and rolling quarterly basis.
The more expensive end of the market tends to lead the cycles in these cities.
As borrowing capacity reduces, we may be seeing more demand deflected towards lower housing price points, with the broad middle of the market now recording the strongest rate of growth in Sydney and Melbourne.
The gap between regional and capital city growth rates has converged
Both the combined capitals and combined regionals index recorded a 0.6% rise in values in November.
The convergence comes after regional markets have lagged their capital city counterparts through the recovery phase to date.
While housing values across both of these broad regions found a floor in January, the combined capitals index has since increased by more than double the combined regionals index, up 9.6% and 4.3% respectively to the end of November.
Regional Australia’s housing values remain -1.8% below the historic high recorded in May 2022, with Regional Victoria (-6.7%) and Regional NSW (-5.5%) recording the largest shortfall from record levels.
A rise in vendor activity has played a key role in the housing slowdown
Vendor activity started to rise through early winter, which is seasonally unusual, following an extended period where new listings consistently tracked at below-average levels.
The persistent lift in selling activity since June has coincided with slower growth in home values.
Total stock levels have been rising since July, indicating purchasing demand isn’t quite keeping pace with the rise in vendor activity.
Over the four weeks ending November 26th, advertised stock levels were above the previous five-year average in Hobart, Canberra, Melbourne and Sydney.
In these cities, market conditions are now in favour of buyers as higher stock levels provide more choice, less urgency and greater opportunities to negotiate.
The same can’t be said for Perth, Brisbane and Adelaide, where advertised stock levels remain remarkably low.
Perth listings are nearly -40% below their five-year average for this time of the year, while listings are more than -30% below average in Brisbane and Adelaide.
Unsurprisingly, these cities are continuing to show a consistently high rate of growth amid strong selling conditions.
The spring selling season is now concluding, with the flow of new listings coming onto the market moving through a seasonal peak.
Selling activity typically slows through the first two months of summer, which will give vendors an opportunity to assess market conditions and their pricing expectations.
On the demand side, despite the high cost of debt and deeply pessimistic consumer sentiment, purchasing activity has held reasonably firm.
Across the combined capitals, quarterly sales activity is holding roughly in line with the previous five-year average, while regional demand is trending modestly higher from below-average levels.
It is looking increasingly clear the housing market is moving through a new inflection point
The rate of growth in home values becoming more diverse, but generally weakening.
The upswing in housing values since February has been relatively thinly traded and occurred against a backdrop of low inventory.
The factors that have supported value growth are losing their potency, with advertised stock levels rising to above-average levels in some cities.
Downside risk factors have become more pronounced, including an expectation that interest rates could remain higher for longer, worsening affordability challenges and deeply pessimistic levels of consumer sentiment look to be entrenched.
The lower-than-expected monthly inflation outcome for October may help to allay fears of further rate hikes and lift consumer spirits a little, but the risk of another increase in the cash rate remains.
We don’t expect to see a material lift in housing activity until interest rates are reduced, and that isn’t likely until the second half of next year.
Adding further downside risk to housing activity is a worsening in housing affordability
The latest Housing Affordability Report from ANZ and CoreLogic showed a worsening across every affordability metric through 2023 to date.
The median dwelling value to income ratio rose to 7.5, the portion of household income required to service a new mortgage is close to record highs at 46.2%, it now takes an average of 10 years to save a 20% deposit and the portion of household income dedicated to rental payments has risen to 31.0%.
2024 is shaping up to be a very different housing market
Expectations that value growth will be lower and more diverse from region to region and across housing types.
A few trends to watch for next year:
#1 A focused effort on delivering more supply to the Australian housing market.
A burgeoning housing undersupply is widely acknowledged by the government, policymakers and industry as a critical issue.
With dwelling approvals holding well below average levels in 2023, it’s likely new housing starts will also remain low, despite the national objective of delivering 1.2 million well-located homes by 2029.
While capacity constraints across the residential construction sector are starting to ease, profit margins remain compressed.
Delivering a material lift in housing supply next year is going to be a challenge.
#2 Rental conditions set to loosen
It’s likely we are moving through a peak in net overseas migration, but other factors should see vacancy rates rise and rental growth slow further including a gradual normalisation in household size, and reduced rental demand as ‘HomeBuilder’ completions flow through.
Build-to-rent developments should also help to gradually add to rental supply, however, we aren’t likely to see a material increase in build-to-rent supply until at least 2025.
#3 Growth in housing values is likely to show greater diversity, both geographically and across housing types.
We are already seeing a trend towards a stabilisation or even softening in capital growth in some cities.
Overall, housing value performance is likely to be softer next year relative to 2023.
WA and Queensland look well placed to outperform the rest of the country given solid interstate migration rates, low supply and fewer affordability challenges relative to Sydney and Melbourne.
Unit values also are positioned to outperform relative to houses, given the cheaper price points and burgeoning undersupply across the medium to high-density sector.
#4 Climate change to be high on the housing policy agenda
With residential dwellings accounting for around 23% of Australia’s energy usage and 11% of carbon emissions, policies aimed at reducing or improving the energy efficiency of Australian homes are likely to be a key area of focus for politicians, policymakers and the residential construction sector more broadly.
Additionally, El Nino conditions are expected for 2024, which implies drier conditions and warmer temperatures.
The risk of fire danger and drought is likely to be heightened in susceptible regions.
