The Australian housing market is currently witnessing a promising outlook as it rebounds from a significant downturn. Recent data from CoreLogic's national home value index reveals consecutive months of growth, indicating a potential end to the market's decline. With a 0.6% gain in March followed by a further 0.5% increase in April, the three-month total increase in property values has reached a noteworthy 1%. This upward trend, coupled with a range of positive indicators such as stable home sales, improved consumer sentiment, and rising auction clearance rates, suggests that the housing market has reached an inflection point. Additionally, factors like increased net migration, a dearth of available housing, and a potential easing of interest rates contribute to the optimism surrounding the Australian housing market's future. This promising outlook offers renewed opportunities for homeowners, investors, and buyers, marking a significant turning point in the market's trajectory.

Home sales are in line with the prior five-year average, mood has improved, and option clearance rates are marginally higher than the long-term average. With a 1.3% increase in April and a continuous improvement in values since February, Sydney has been setting the pace in the good turnaround. Furthermore, over the previous quarter, home values increased in each of the four biggest capital cities. This increased trend in property values is accompanied by a widening gap between supply and demand as a major rise in net migration from abroad collides with a dearth of available housing. With vacancy rates maintaining at about 1% in most cities, it is logical to believe that more people are preferring to buy even though international migration normally correlates with rental demand.

On the supply side, a large number of prospective sellers have been sitting tight during the recession, which has led to below-average inventory levels. Due to this, sellers now have some negotiating power. In addition, following a swift and significant increase in interest rates, there is a rising assumption that the cycle of interest rate increases is either over or close to coming to an end. In light of the significant decrease in property values, the prevailing assumption is that interest rates have peaked. This impression reinforces the notion that the housing market has bottomed out. There is a strong possibility that consumer confidence will increase if interest rates stabilise going forward, boosting both buying and selling activity in the housing market. It is important to note that while interest rates are still much above average, a favourable trend in housing values has arisen. The last time home values trended upward in an environment with rising interest rates was in the middle to late 2000s, when the mining boom and an increase in net international migration, which boosted housing demand, were in full swing.

There are numerous trends in different regional markets. Regional Victoria and New South Wales were the only regions outside of large cities to have a decrease in house values last month, despite the fact that values are typically stabilising or rising in most locations. However, the pattern over the past three months indicates that these regions are likewise heading towards stabilisation. Low advertised supply levels have been a major element in maintaining property values. Since September 2022, there have been fewer newly listed homes than the five-year average, and by the end of April, the flow of new listings had fallen by over 22% from the usual level for this time of the year. Except for Hobart, where listing numbers have been rising while coming from a low starting position, advertised supply has been well below average across all capital cities. The volume of new listings often follows a regular trend, with winter months typically seeing a decrease and spring and early summer months seeing an increase. Currently, it appears that this cyclical pattern is still present, with a decline in new listings as winter draws near. As market conditions improve, it will be important to keep an eye on this trend because more potential vendors might start testing the market to prevent the springtime competitive surge.

While the number of listings has been dropping, the expected number of home sales suggests that demand has stabilised during the past rolling six-month period. There are about 28 home sales in the capital city.

6% lower than its most recent peak but have not changed this year. Estimated capital city house sales for the quarter are now 2.4% below the five-year average for this time of the year. There is a good likelihood that housing activity will rise if consumer mood keeps rising. Measures of consumer mood and the volume of home purchases have historically exhibited a high link.

Brisbane's property prices have been gradually increasing over the last two months, with a gain of 0.3% in April following a 0.1% increase in March. The rolling quarterly rate of change has now returned to positive territory for the first time since July of last year thanks to this rising trend. At the end of April, Brisbane's advertised supply levels were 39% below the five-year average, which is still very low. Due in part to this lack of supply, median selling times have decreased to 28 days, and discounting rates have decreased to 3.9%. With a vacancy rate of only 1.1%, Brisbane's rental markets are still incredibly competitive and barely budge from the record-low 1% observed in July of the previous year.

Overall, it seems as though the property market in Australia saw a brief but severe downturn. Between the high in April 2022 and the low point in February 2023, there was a notable 9.7% reduction in combined capital city dwelling prices. This was the second-largest decline on record and the most significant relative decline when compared to other downturns. The value fall between 2017 and 2019 was 10.2%, which was the biggest decline since CoreLogic started keeping statistics in 1980. When monetary policy is relaxed, lending restrictions are loosened, or some type of government support is introduced, home values typically begin a new growth cycle. The change towards better circumstances, nonetheless, has happened without these elements. The unexpectedly strong nett overseas migration, which has raised housing demand amid a period of tight rental circumstances and below-average levels of advertised supply, appears to be the primary force behind this upward inflection.

Even if it seems like the crisis is at its end, we do not expect house values to significantly increase unless interest rates drop, credit restrictions loosen, or housing-focused stimulus is implemented, maybe a combination of these events. After the federal election and a consequent decline in interest rates, this scenario—where interest rates fall and credit policies loosen—occurred in mid-2019. This was followed by the relaxation of APRA's serviceability assessment standards. Before the global pandemic halted the rise in housing values, it had already begun. Despite the improved housing outlook, it's critical to recognise the obstacles that could prevent this upswing from gaining considerable speed. Despite the fact that interest rates may have reached their peak or are almost at their peak, the cost of debt is still 130 basis points more than it was during the pre-COVID decade. This is in contrast to the near-record levels of household debt. This will certainly maintain mood below average until interest rates start to decline, along with the pressures brought on by rising costs of living. Housing remains out of reach for many despite recent price drops; the median value of a capital city residence is still 12% higher than it was prior to COVID. With the ratio of housing value to income rising from 7.2 to just under 8, affordability has diminished. Affordability issues are further exacerbated by rising serviceability costs, which need 42% of the median capital city household income to service a new mortgage on a home with a median value.

Additionally, the full effects of the quick rate hike cycle on household balance sheets have not yet been fully seen. Due to a higher percentage of fixed-rate borrowers who have so far been protected from rate increases, the lag effect on the household sector may last longer than typical. We may observe signs of concern as more borrowers begin to experience the effects of increased interest rates, such as a probable rise in mortgage defaults (albeit from historic lows) and an increase in motivated listings. However, the danger of distressed selling should be limited given that it is anticipated that tight labour markets would persist. Compared to the 5.5% pre-COVID decade average, unemployment is still near generational lows, hovering around the mid-3% range since June of the previous year. Forecasts from the public and private sectors both predict that while unemployment will increase, the benchmark rate will still be substantially below the decade average.

The future of housing markets will be primarily influenced by interest rate trends. However, it's still unclear when rates will be slashed. Once interest rates begin to fall, the housing market may experience prolonged growth. It is advised to frequently read the research sections of the CoreLogic website to be informed about the ups and downs in the housing market.

Disclaimer: The facts in this blog article are based on CoreLogic's May 2023 housing market update. The information's correctness and completeness are not guaranteed, and we are not liable for any mistakes or omissions. Before making any investing decisions, we recommend that you do your own research and consult a specialist.