Inspecting the 2021 housing market

The strength is largely being driven by owner-occupiers with low interest rates appealing to buyers in secure employment. This is the case for upgraders as well as first home buyers.

"[In 2021], ANZ Research expects housing price gains of around 9 per cent across the capital cities."

The decline in rates is more marked than the cut in the Reserve Bank of Australia’s (RBA) cash rate would imply.

Since May 2019, the cash rate has declined 140 basis points (bps). The advertised variable mortgage rate has declined only around 85bps but 3-year fixed owner-occupier rates have declined around 180bps. On ANZ Research’s estimates, the 3-year fixed rate has nearly halved over the past two years, from 4.1 per cent in late 2018 to around 2.1 per cent currently.

Mortgage holders are taking advantage of these lower rates, flocking into fixed mortgages.

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This drop in interest rates is dominating the house price cycle and has helped turn sentiment around sharply.

ANZ Research’s view house prices would decline around 10 per cent, peak to trough, has proven too pessimistic: low rates have trumped factors like elevated unemployment and low population growth. Government income support and the deferral of home loan repayments have also helped support the market.

The RBA’s recent rate cut, the further decline in fixed mortgage rates and the prospect of low rates for some years will all add to the momentum currently in the market. ANZ Research now expects house prices at the national level to rise modestly over the balance of this year. Next year, ANZ Research expects price gains of around 9 per cent across the capital cities.

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House prices are turning higher, helped by lower interest rates, substantial government stimulus and a bounce in confidence as the second wave of the pandemic comes under control. These factors seem to be offsetting weak fundamentals of high unemployment, very low population growth and a fractured rental market.

House prices turning higher

House prices were flat in October after falling a very modest 2.1 per cent over the previous six months. The weakness has been concentrated in Melbourne (-4.9 per cent) and Sydney (-2.5 per cent). Prices in Brisbane and Perth are already recovering after very modest declines while prices in Adelaide, Hobart, Darwin and Canberra have maintained their upward trend through the pandemic.

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Owner-occupiers, and particularly first home buyers, are driving the market. Clearly a significant cohort of buyers with stable employment are keen to take advantage of historically low interest rates.

Bolstered by government support, first home buyers have increased their new loan commitments sharply over the past few months, a story which is consistent across the states. In contrast, investor activity remains soft. Investor lending approvals picked up in the latest month but, at 14.8 per cent of new loans, it is close to the recent low and well off the 30 per cent-plus levels seen in 2015.

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The sharp turnaround in sentiment is putting upward pressure on prices and the peak-to-trough decline now looks to be limited to just over 2 per cent. Next year, ANZ Research expects price gains of around 9 per cent across the capital cities.

Perth looks set to be one of the strongest performers with gains of 12 per cent expected, followed by Brisbane (+9.5 per cent) and Hobart (+9.4 per cent). Sydney prices are expected to rise close to the national average (+8.8 per cent), while Melbourne prices are forecast to lag a little (+7.8 per cent).

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ANZ Research sees the risks to the outlook as evenly balanced. An early COVID-19 vaccine rollout and the resulting lift to sentiment could drive larger price gains than currently anticipated. That said, ANZ Research thinks regulators would be quick to step in with macro prudential measures if the market looked be overheating.

Felicity Emmett is Senior Economist and Adelaide Timbrell is Economist at ANZ