Even though steeply higher interest rates have slashed how much a prospective buyer can borrow, and there’s a risk of more rate rises to come, these negatives seem to have been overshadowed by an imbalance between demand and supply. The result has been climbing prices, but many believe the market rebound is still fragile because it’s built on shaky foundations.
Commonwealth Bank economist Gareth Aird on Thursday, for example, said the imbalance between supply and demand was “concerning,” and pointed out that housing inventory levels today were 24.4 per cent lower than the average of the last five years.
Sydney house prices rose another 1.3 per cent in April and gained 3 per cent since bottoming out in January, according to CoreLogic.Credit: Peter Rae
Investors, meanwhile, are cautious about the fragile rebound in house prices because there are many things that could derail it. Affordability is one big obvious risk: prices can only rise if people can keep affording to pay them.
However, some sceptics point out the recent rebound in house prices is being driven by wealthier buyers, who are cashed up and are therefore less constrained by the much tighter borrowing limits being set by banks.
CoreLogic’s figures on Thursday showed higher-priced parts Sydney are leading the recovery trend: it said the most expensive quarter of the city’s market had posted price growth of 5.6 per cent in the last three months, compared with 2.6 in less expensive quartiles.
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Citi’s banking analyst Brendan Sproules argued in a recent research that these wealthier households appeared to be driving the housing recovery, but overall demand for new homes was still “extremely low,” with new lending down sharply over the last few months. He argued this weakness in new lending is partly because many hopeful buyers simply can’t afford today’s prices.
When so many people can’t afford to buy a home, a mortgage boom looks unlikely, and that’s why Sproules and many other analysts don’t expect the recovery in house prices to fuel stronger loan growth for banks.
But perhaps the biggest reason many investors remain cautious about the housing rebound is the risk that rising house prices drive interest rates even higher.
This week’s high inflation data showed the Reserve Bank’s inflation battle could still have a way to go, and it’s also likely the RBA would be deeply uncomfortable if a property rebound started to lift consumers’ spirits too much.
After all, the whole point of lifting interest rates is to make people gloomy enough to pull in their spending plans, thereby deterring businesses from jacking up prices. But the higher house prices go, the more these effects could get overshadowed by homeowners feeling wealthier – which risks sparking more rate rises from the RBA.
Arguably, a house price resurgence would make it even harder for Australia’s economy to pull off a “soft landing” – and that’s hardly the sort of news that brings cheer to investors.
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