Regional home prices outpacing the capital cities in 2021: Shane Oliver

EXPERT INSIGHT

The combination of reopening unleashing pent up demand, an avalanche of government incentives (including stamp duty concessions, various state support measures, HomeBuilder and an expansion of the First Home Loan Deposit Scheme), a further easing in lending standards on the way for early this year (with the removal of responsible lending obligations), record low mortgage rates, the desire to "escape from the city" helped along by ongoing bank payment holidays and Government income support measures averted a sharp fall in prices that would otherwise have followed from higher unemployment and underemployment, weak inner city rental markets and the hit to immigration and brought forward demand from first home buyers and owner occupiers. As a result property prices have turned up far earlier than I had been expecting and there appears to be a bit of FOMO (or the “fear of missing out”) creeping into some markets and pushing them higher.

At the current rate of increase average capital city dwelling prices will surpass their September 2017 record high by March, although this masks a wide divergence with: record highs already in Brisbane, Adelaide, Hobart and Canberra and in average regional home prices; Perth and Darwin remaining well down on their 2014 highs; and Sydney and Melbourne prices having been range bound since 2017.  

Outlook

Australian home prices are likely to continue to rise through 2021 being boosted by record low mortgage rates, government home buyer incentives and with the recovery in the economy expected to offset the phasing down of income support measures and bank payment holidays and some incentives. As a result average capital city home prices are expected to rise by around 5% through the year. While first home buyer incentives are likely to be reduced seeing a decline in first home buyer demand later in the year, investor interest is expected to pick up.

However, the outlook is widely divergent across cities, within cities and across units versus houses.

The downside risks relate to: renewed coronavirus related lockdowns with the latest being in Perth although so far new case numbers seem to be getting kept down and vaccines should help head off this risk entirely later in the year; higher unemployment and underemployment and distressed sales as government income and bank support measures wind down although the risk on this front are rapidly diminishing; falling rents and high vacancy rates in inner city Melbourne and Sydney weighing on investors; a 100,000 per annum reduction in underlying dwelling demand flowing from the hit to immigration; and a pandemic/work from home driven “escape to the suburbs and regions” that is weighing on inner city/unit prices but pushing up outer suburban/house and regional prices.

It remains hard to see that the reversal in net immigration from around 240,000 people per annum to an expected net outflow of people this financial year (of -70,000) and next (of -20,000) won’t have a significant impact. The surge in population growth of around 150,000 people per annum taking it to around 375,000 people per annum due to higher immigration from the middle of the 2000s was the main factor explaining very expensive Australian housing over the last 15 years as the property market became chronically undersupplied. The collapse in population growth which is likely to result in a halving in underlying demand for housing this financial year and next at the same time that governments are intent on supporting housing construction via various initiatives including HomeBuilder is likely to weigh on prices at some point as chronic undersupply gives way to oversupply in some areas. Particularly with rate cuts and incentives pulling demand forward and mortgage rate reductions reaching the end of the road. This is particularly likely to weigh on unit rents and prices along with investor demand in Sydney and Melbourne.

Inner city Melbourne and Sydney are the most vulnerable to the hit to immigration, but this may not become fully apparent for another six months or so. Outer suburban areas and houses in these cities are likely to continue seeing solid price gains reflecting the “escape from the city” phenomenon against a backdrop of very low mortgage rates. On average Sydney and Melbourne price gains are likely to be modest at around 2 to 3% through 2021.

Other cities and regional areas are likely to perform well reflecting lower levels of debt and less exposure to immigration and as such as likely to see rising average prices with record low mortgage rates dominating. Adelaide and Brisbane are playing catch up after years of underperformance compared to Sydney and Melbourne, Canberra is benefitting from strength in public sector employment and Perth and Darwin are starting to recover after bear markets ever since 2014 helped by the recovery in mining investment in WA. Expect average price gains of close to 10% in Adelaide, Brisbane, Perth, Darwin and regional areas and around 5 to 7% in Canberra and Hobart.

Basically, Sydney and Melbourne lead the longer term cycle and the other cities and regional prices follow. Right now, Brisbane, Adelaide, Hobart, Canberra and average regional dwelling prices are playing catch up after underperforming Sydney and Melbourne into 2017 and Perth and Darwin home prices are finally recovering from a multi-year bear market that went bust with the end of the mining investment boom. The surge in immigration played a big role in the outperformance of Sydney and Melbourne into 2017 and this is now going into reverse.

Outer suburban houses and dwellings in regional centres are likely to perform better than inner city units in most capital cities as a continuing trend to working from home and a greater focus on lifestyle dominates.

SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital