Three reasons the housing market is slowing

The prospect of a double-dip slowdown has increased as momentum drops across prices, rentals and even construction costs in the residential market.

Key housing market signals softened over the last month, improving the outlook for renters and adding weight to suggestions this year’s house price rebound may soon come to a halt.

House prices, which surprised the market with an upturn in the first half, are now barely moving. According to the most recent data, Sydney prices, which had bounded ahead by 5.9 per cent over the year to date, lifted only 0.3 per cent over the last week, while the combined capital average limped along by just 0.2 per cent.

National Australia Bank’s markets research team noted the market is “losing momentum”, while real estate industry analysts pointed to an unseasonal lift in the amount of houses coming up for sale – a move that is likely to reduce the healthy level of clearance rates being produced at auctions in recent months.

A new report says increases in construction costs are beginning to slow.

Until very recently, a steady decline in the monthly price rise across the national capitals was the outstanding signal that the wider housing sector may be about to flatten or reverse course in the months ahead.

Now three key related factors are working together to push prices lower.

Rentals

Rental vacancy rates are starting to lift from extraordinary lows. Even with rising immigration numbers, property research group SQM’s latest report says the national vacancy rates are now at 1.3 per cent, with higher rates seen in the key markets of Sydney and Melbourne. According to SQM’s Louis Christopher: “There is now more evidence that we are past the worst of our national rental crisis.”

Christopher suggests the market is finally seeing a steadying of market rents after an extended period of rapid growth when capital city asking rents for units rose by 22 per cent over the last 12 months.

Christopher has suggested that the “market is at a significant risk of a double-dip downturn in our capital cities in the second half of 2023 – house prices across the nation fell 9 per cent in the last downturn before climbing by more than 3 per cent earlier this year and then appearing to stall in recent weeks”.

For sale

The number of people putting their homes up for sale is rising at an unusual rate for the winter season.

CoreLogic reports this week that a scheduled 1850 auctions across the capitals could push the clearance rate at auctions below the key 70 per cent mark for the first time in 12 weeks.

Moreover, there are early indications that investors rather than homeowners are a key factor behind the lift in homes for sale.

Construction

The deepest problem for the housing sector has been a lack of housing supply – an issue greatly worsened by soaring inflation inside the construction sector.

But a new report on Monday from Ray White suggests that “construction costs increases are beginning to slow”.

After jumping 13 per cent over the past 12 months, construction costs saw a quarterly increase in the three months to June of just 1.2 per cent – the lowest increase in almost two years.

The easing pressure on home building costs was based on improved post-Covid supply chains and a reduction in the price of key raw building materials – especially steel.

“Nonetheless, building approvals are currently at a decade low and it will take some time for the pipeline to build,” Nerida Conisbee, chief economist at Ray White Group, says.

In short, the immediate pipeline for the housing market – stock for sale, is finally improving. The longer-term pipeline – new homes being built – remains well below desired levels but at least new commencements should cost a little less than current forecasts.