Housing booms rolls on with 2.2 per cent value lift in May

The market surge remains strong but a dip in growth from March’s peak may signal affordability concerns.

Prospective buyers attend an auction in Sydney. Picture: Getty Images

The barrelling housing market has hit new heights, driven by the strong performance of Sydney houses which are running at their hottest pace in three decades.

A series of high-priced sales has seen the harbourside capital city take the lead role in home price rises as regulators take a hands-off stance towards the credit-fulled market.

The boom is being driven by ultra low interest rates, with lenders undercutting each other in a drive for market share that has taken variable interest rates below the 2 per cent mark, although there is now some caution creeping into lending.

Sydney’s average house prices are up 14.3 per cent in just four months, the fastest four-month increase since 1988, when a debt surge drove a jump in asset prices ahead of the economy cratering into recession.

Now, a gradual slowing in the pace of capital city home price growth is expected but the market is not expected to substantially drop and appears likely to forge past hurdles like Melbourne’s recent coronavirus outbreak.

The Reserve Bank of Australia has committed to keep the official cash rate on hold until at least 2024 and is keeping a close watch on housing, saying on Tuesday that “given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained”.

Home prices rose nationally by 2.2 per cent in May as markets around the country saw the benefits of low rates and easy credit, with May’s rise even stronger than in April when home prices lifted by 1.8 per cent, according to CoreLogic’s national Home Value Index.

The May rise was weaker than the 32-year high recorded in March, when values surged 2.8 per cent, as affordability concerns start to put a brake on some markets.

Dwelling values were split with Sydney up 3 per cent in May and Melbourne rising 1.8 per cent. Brisbane was up 2 per cent and Adelaide rose by 1.9 per cent.

Perth homes increased in value by 1.1 per cent, while Hobart leapt 3.2 per cent and Darwin was up 2.7 per cent. Canberra rose 1.7 per cent.

CoreLogic’s research director Tim Lawless said growth conditions remained broadbased both across the country and for different home price levels.

“Values were up by more than 1 per cent across every capital city over the month, with both house and unit values lifting across the board,” he said.

A swing back to the cities appears to be on as, for the second time in three months, growth conditions in capital city home values outpaced regional markets.

Mr Lawless said Sydney stood out for its strong conditions as it was already quite an expensive market.

“I would have thought by now that affordability constraints would have been a larger barrier to such strong price growth and I think it’s reasonable to expect, with affordability for housing becoming quite a big challenge, it makes sense [that] we start to see demand diverting back to the unit sector,” he said.

Mr Lawless is not concerned about a runaway market, saying the rate of growth appeared to have peaked in March and the research house expects a gradual tapering in the pace of capital gains. Gradual affordability constraints “were starting to impact on participation in the market, with first home buyers winding down a little bit”.

“I don’t really think we will see a more abrupt slowdown until we see a more significant catalyst, like a credit tightening intervention like we saw back in the macroprudential periods, or we see imminent expectations that interest rates could move higher. I think both of those scenarios are some way off,” he said.

AMP Capital’s head of investment strategy and chief economist, Shane Oliver also expects a gradual slowing in the hot property market.

“Despite some pick-up in new listings and a bottoming in fixed mortgage rates home price gains remain very strong, with rising sales activity matching the increase in new listings,” he said.

He also cited housing finance commitments at record highs and auction clearance rates in Sydney and Melbourne remaining up, in line with strong home price growth.

Dr Oliver pointed to still ultra-low mortgage rates, ongoing government incentives with HomeBuilder ended but first home loan deposit schemes expanded, the economic recovery and strong jobs market, as indicators of further price rises.

AMP Capital sees average home prices rising another 10-15 per cent out to the end of 2022, but this will mask a slowing from 18 per cent growth this year to 5 per cent next year, with 2023 potentially marking another cyclical downturn as the interest rate cycle starts to move up more decisively.

Price gains would also slow due to poor affordability, some likely macroprudential moves in the next six months, rising fixed mortgage rates, the unwinding of government housing incentives and pandemic related issues like the hit to immigration from closed international borders and a slowing of working from home.

Westpac senior economist Matthew Hassan expects home price gains to moderate from the current position, with a 15 per cent gain forecast for the full 2021 year. “Affordability will become more of a restraint as the year progresses with macroprudential tightening expected to see a further slowing in momentum next year,” he said.

Lenders are starting to push up some rates, with the country’s last ultra-low four-year fixed home loan rate under 2 per cent lifted by BankVic, as financiers rush to cut variable rates amid lending boom.

The mutual bank on Tuesday increased its four-year fixed home loan rate to 2.29 per cent, from 1.95 per cent, a potential signal that rates for home borrowers could start to trend higher.

At the start of the year there were 32 four-year fixed rates under 2 per cent, including from three of the big four banks: the Commonwealth Bank, Westpac and National Australia Bank.

BankVic’s move could mark a shift as it comes after 30 lenders have cut at least one variable rate over the last two months. It is understood that banking giant HSBC was also planning to cut its variable rate on Tuesday, but is now holding off for a few weeks.

RateCity.com.au research director Sally Tindall said home lending was going through the roof and banks had to stay competitive if they want a slice of the pie.

“While four and five-year rates have been on the rise, many banks are still trimming down their variable rates in order to attract new business, particularly on rates where there’s a bit of fat to cut,” Ms Tindall said.

Financial comparison site Mozo noted that “the knives are out and busy slashing variable rates for home loans” as lenders increase longer-term fixed rates.

Additional reporting: David Rogers.