The property ‘crash’ has come to as halt, so what comes next?

The housing market hasn’t plumbed the depths that doomsayers last year predicted.

In the blink of an eye, house prices have moved from ongoing decline to actually moving higher in the major cities.

What’s more, the same people who warned us that house prices would plunge this year are now back at the drawing board revising their forecasts.

Importantly, this is not the real estate industry we’re talking about here. That sector will always predict higher prices and top real estate agents were saying the worst was over when the worst was actually occurring in 2022.

But now we have the banks changing their tone. NAB, for example, which was still suggesting peak to trough falls of 20 per cent at Christmas has updated its outlook. The bank now expects the peak to trough fall will be 12.5 per cent.

Hmm, well the market is already down 9 per cent – so another 3.5 to go? Or maybe less, or perhaps nothing at all?

Predictions on property, even from banks – which surely have the most up-to-date data – are not just unreliable, but often overly pessimistic. Let’s cut to the chase: Prices have stabilised but a property market is not going to reverse course overnight.

Still, the evidence of a turnaround is convincing. In the past quarter CoreLogic figures show that the decline in the combined major cities had slowed to a crawl of 0.4 per cent.

Then in March there were increases in Sydney, Melbourne, Brisbane and Perth. As widely expected, Sydney, which historically sets the pace for the national market, had fallen first – and fallen the most – among the major cities.

The peak to trough decline in Sydney is 12.3 per cent. Falling in line with a predictable pattern, it now leads the turnaround with a monthly lift of 1.4 per cent on the rolling 28 day cycle to April 6.

What just happened? As we said here in December last year: “The outstanding issue is that either a lot of bad news is going to come rolling down the track in the next few months or some leading forecasters have been too gloomy by far.”

As it turns out, the bad news remains elusive. The recent set of bank results offers one of the best windows into the mortgage market and hard evidence of serious stress or defaults across the nation were nowhere to be found.

There are obvious points of resilience in the market, especially the continuing ability of householders to pay their mortgage even if the mortgage rate has doubled. This week’s strong employment numbers suggest this won’t change anytime soon.

But there are two major swing factors which the wider market appears to have missed or at least underestimated dramatically

RENTAL growth: There is a school of thought that suggests rents rising do not make a big difference to house prices since investors will still be spooked by rising rates, not to mention constantly changing tenancy laws.

But a recent report from Quay Global Investors makes it clear that conditions very similar today have been behind some very rewarding periods for property investors. As Chris Bedingfield of Quay Global Investors puts it: “The market is much more complex. It’s not all about rates.”

According to Bedingfield some of the strongest periods for house price increases were when rates were unchanged and “the imbalance between supply and demand – as evidenced by the rental market – clearly helped underpin a rise in house prices”.

In other words, of course house prices are unlikely to tumble if asking rents are rising at up to 30 per cent a year!

If the financial impact of taking out a mortgage starts to level up with the price of renting then people who can manage it will buy homes even if rates have climbed. Existing investors will also see their income improve annually. They will be price makers not takers in a period where inflation is eroding returns in other areas.

IMMIGRATION: Even when our international borders were still effectively closed the rental shortage was emerging. We now have a big lift in inward numbers hitting the market where there are 1 per cent vacancy rates. You don’t have to be a bank economist to work this out; Where is everybody going to live?

We have just recorded the biggest quarterly inflow of migrants since 1979 at 106,000.

Economically, there is a paradox here. Immigrants are needed to fuel the economy and plug extensive skills gaps.

But what it does to housing is another matter altogether. At one end of the scale it puts pressure on the homeless, on the other end it explains why prices in the major cities are going up again.

A stalled segment

Hang on a second, surely it can’t all be plain sailing from here?

Certainly it would be naive to expect the market to just continue where it left off in early 2022. There are some serious headwinds which continue to loom over the market.

This week the IMF warned that Australia has one of the highest risks of mortgage repayments defaults in the world.

The Washington-based institute also suggests that Australian households are among the most indebted in the developed world, carrying the riskiest level of outstanding debt as a percentage of disposable income. All true no doubt.

The IMF, the OECD and any number of offshore institutions have been issuing similar warnings for many years – and nobody pays any attention to as they continue to have the capacity to bid for homes and apartments.

This week’s jobless rate, stuck on a 50-year low of 3.5 per cent, will keep that scenario in place.

What is more likely, is that a segment of the population will be stuck in a rut for a time while the rest of the market continues apace without them.

If you look at economies where there was a serious property downturn post GFC, the negative equity cohort remains a factor in the market for years but home prices recover nonetheless.

Our version of that might be the unfortunate segment that took out super low fixed-rate mortgages and then stretched to buy homes at the top of the last cycle. The RBA estimates that about 16 per cent of owner-occupier mortgage holders in Australia are unable to refinance just now because they do not meet the current serviceability rules. That is, they may have fixed a mortgage at, say, 3 per cent, and now find they must pay a variable of 6 per cent (which would be “assessed” at 9 per cent if they tried to change banks). This segment is stymied financially but there is little to suggest they will push prices much lower.

We are at a turning point. The market is stabilising and there is little in the tea leaves to suggest that price falls will suddenly accelerate again, even if there is another rate rise lift in the cycle.

More likely is a return to house prices rising annually – this time fuelled by immigration, rental increases and even the return of foreign investors who are reappearing in the official statistics.

Even if local investors are hesitant, foreign investors are now returning to the market. The share of foreign buyers in the NSW market in the first quarter went to 16 per cent which is the highest level since 2014.

As economist Chris Richardson suggested this week “another Houdini-like escape for Australian house prices looks increasingly on the cards”.

One last thing. The RBA and governor Philip Lowe got a lot of things wrong of late but the forecasters at Martin Place did suggest the peak to trough “base call” fall in property prices would be 11 per cent.

On that issue at least, hats off to you Phil.