Housing stabilisation points to a 5% growth in 2024: Westpac

There are convincing signs that the worst is truly over for Australia’s housing markets, with several factors laying the foundation for a potential upswing starting 2024.

Based on Westpac’s latest forecast, dwelling prices in Australia will grow by 5% in 2024 after the stabilisation this year.

Housing markets have already shown signs of stabilisation — after experiencing a material correction for the majority in 2022, prices nationally have held flat in February, posted a small gain in March, and are on track to post a similar growth in April.

Westpac senior economist Matthew Hassan said all major capital city markets have now seen prices stabilise or post small rises over the last three months.

“Other indicators also look firmer — auction markets show clearance rates have lifted to be back around long- term averages in April with pre-auction withdrawals also back near long run averages,” he said.

“Turnover also appears to have stabilised, and housing finance approvals figures to February show a clear moderation in the pace of decline.”

What factors are at play?

In the past, housing recoveries usually depend on the movement of cash rates, especially when the Reserve Bank of Australia was actively easing the monetary policy or was about to do so.

The signs of recovery in the current conditions, however, seemed to be happening amid the uptrend in rate hikes.

“Survey measures suggest most consumers are still bracing for further rate rises near term,” Mr Hassan said.

In fact, the Westpac Consumer Sentiment survey showed that while views on mortgage interest rate expectations are shifting, few consumers see rate cuts as imminent.

In the current conditions, factors other than interest rates are at play and are driving the current firming in the housing markets.

Migration is first — the reopening of borders has resulted in a larger-than-expected growth in immigration, with net inflows now expected to be around 400,00 for 2022 and forecast to remain elevated at 350,000 this year.

“There are clear links between population growth and demand for housing, both directly, through new buyers, and indirectly, through the impact on available rental property and the wider physical supply-demand balance,” Mr Hassan said.

“The latest surge has contributed to a significant tightening in rental markets with vacancy rates falling to historical lows and rents rising sharply in all major capital cities.”

However, it is important to note that the flow-through from shifts in population growth to prices is typically quite slow.

Another factor driving up the stabilisation in the market is the sharp increase in construction costs.

Across Australia, the cost of a newly built dwelling rose 18% in 2022.

“With prices for existing dwellings declining, this has significantly shifted the relativity between existing and newly built houses. In effect, the ‘replacement cost’ of the non-land component of a dwelling has increased dramatically,” Mr Hassan said.

Similar to migration trends, however, the flow-through of the shifts in construction costs to dwelling prices may not always be evident.

“The more granular price detail suggests there may be some effects showing through in the suburban fringes of major cities, where newly built dwellings are more prevalent and more likely to affect the price of existing dwellings,” Mr Hassan said.

“However, building cost increases are unlikely to account for shifts in well-established markets.”

The third factor is the low supply of dwellings — despite the low turnover, listings are even lower.

“More generally, ‘thin’ market conditions mean small shifts in demand can have a bigger than usual impact on prices. It may be that a small demand lift — related, say, to population or construction cost drivers — is seeing an exaggerated price impact due to the scarcity of properties available for sale,” Mr Hassan said.

Headwinds still exist

Despite the growing signs of stabilisation, the existing risks must not be overlooked.

With interest rates bound to still rise as the central bank tries to achieve its inflation targets, affordability might continue to deteriorate.

“The large increase in interest rates over the last year will also see a significant rise in stress across the mortgage belt pushing some borrowers into ‘urgent sale’ situations, although this is not expected to be a material factor for wider markets, partly because the labour market is expected to remain supportive,” Mr Hassan said.

At the same time, income growth is relatively subdued and would remain under pressure throughout 2023.

Overall, the “mini-rally” in prices may still be quite fragile.

Nevertheless, Mr Hassan said conditions are likely to remain mixed near term with prices holding flat over 2023.

“Another major slide seems unlikely although gains will be hard to sustain given interest rates and wider economic headwinds,” he said.

Based on Westpac’s latest forecast, Australian dwelling prices are expected to increase 5% in 2024, with Perth and Brisbane leading the increase.

Mr Hassan said the interest rate cycle is still a key catalyst for sustained recovery.

“The recovery is expected to move onto a firmer footing in 2024, with interest rate cuts providing clearer support,” he said.

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