The local residential property market has held strong into the New Year, with solid gains eventuating through January across all capital cities. The best performing were Sydney and Melbourne, which appear to be recovering well following losses experienced from 2017 to the middle of 2019.
With Sydney approximately 4 or 5% below all-time market highs and Melbourne even closer, we should reach record prices in both cities at some stage over the next five months.
These gains are expected to remain solid for the first half of this year with the Reserve Bank keeping interest rates on hold at 0.75% and pent-up demand continuing to have strong influence on the property market. As we’ve seen before, in a rising market there are always a certain number of buyers who are driven by fear of missing out on the market’s upsurge and will jump on the opportunity to purchase.
As the year progresses, it is likely the gains will gradually dwindle for several reasons.
The first is affordability, which will start to become a significant issue again with the record prices expected in Sydney and Melbourne. This will be compounded by the continued slowing of the economy, which will hold some buyers back, particularly as the pent-up demand from previous years begins to taper off. And finally, regulators may step in and attempt to put the brakes on mortgage lending, which will become more of a concern once credit growth starts to pick-up.
Towards the end of 2020, the property market is likely to achieve price gains of around 8-10% on average around the country and leadership will probably shift from Sydney and Melbourne to Brisbane and Adelaide, as value seems to be prominent in these cities. The Perth market is also one to watch, as the mining investment cycle starts to kick in again and spur on the Western Australian economy.
In evaluating property market movements, keep a close eye on interest rate movements and other monetary easing from the Reserve Bank, as well as on the regulators and any potential interventions around lending. More imminently, the impact of the bushfires and coronavirus should also be monitored, as the aftermath may have an adverse effect on people’s purchase decisions.
The bottom line is to expect another year of solid gains out of the Australian property market but potentially some slowing as we move through the second half of the year.
Shane Oliver, Head of Investment Strategy & Economics and Chief Economist