The current situation
“Borrowing costs were not going to rise anytime soon” source HSBC chief economist says in mid-2019 and the Reserve Bank governor repeatedly saying that interest rates are going to stay lower for a considerable period of time.
Meanwhile dwelling values in Sydney and Melbourne finished the year up with 6.2% in Sydney and 6.1% and Melbourne in the final three months of 2019. HSBC forecasts dwelling prices to rise nationally by five – 9% in 2020 Sydney eight – 12% and Melbourne 10 – 14%. Commercial assets could rise even faster.
The ANZ/Property Council quarterly survey showed that industry professionals expect the rate, or yield, of prime assets to contract by a further 2.7% point over the next 12 months. “We see rates of 4% are unprecedented and, in some respects unsustainable. We are going to see a lot of global capital flow into our market pursuing core assets this year” said non-bank lender MaxCap.
The value of lending for owner-occupied dwellings increased by 2.0% over November nationally and was 12.6% higher than recorded over November 2018. Although investor lending increased the monthly total remained 3.2% lower than recorded over November 2018. “However, investor lending remains 20.3% lower on the same year to date comparisons”, says Metropole’s Michael Yardney.
ABS shows a drop of 10.8% for dwelling approvals in the year up to November 2019.
This means that the pent-up demand for dwellings increased significantly during 2019.
What does this mean for dwelling approvals and for the requirement for more housing in Australia?
We believe that this means that the current backlog of dwelling numbers will only be improved by several years of significant dwelling construction increase. This means more townhouses and apartments in the capital cities and single dwellings on city fringes and country areas.
What does this mean for house prices?
This will mean a significant increase of house prices in the short term which will be borne by the individual owner occupier. The credit squeeze imposed by the reserve bank over the past few years has had its effect, and decreased demand, especially for investors. But it has had its toll. Owner occupiers will purchase existing dwellings and probably pay more than it’s worth.
Those same people may choose to build on greenfield sites, which will be a boon for land developers and for housing builders. The developer of apartments and townhouses in built-up suburban areas is still finding it hard to obtain money. Eventually, this will ease and there will be a boom of townhouse and apartment construction in the next few years.
What are the risks of this having a crash?