Through the course of last year, officials continually raised concerns about the potential for house price inflation. As recently as August last year, RBA Governor Stevens stated “a very real challenge in the near term is …to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices…[and] if we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing.”
While the various house price measures have produced different outcomes for the December quarter, the overall message is the same – house price inflation in 2009 exceeded 10%. Clearly, the increase in supply has been insufficient to compensate for the strength of demand.
Among the capital cities, during the December quarter, prices grew the fastest in Melbourne, rising 6.8% during the quarter; an annual rate of 19.7%. Sydney house prices grew 5% over the same time period, an increase of 12.8% on the previous year, while Brisbane prices improved 3.8% in the December quarter and 10.9% over the year. Perth prices rose 5.7%, up 11.5% on a year earlier. Only in Adelaide is annual price inflation less the 10%, up only 5.1% annually.
With property prices rising and interest rates doing likewise, housing affordability is continuing to erase the improvement it achieved through to the first half of 2009. This much is inevitable.
Looking forward, first home buyer demand is set to ease back further which, on the face of it, should lead to a reduction in price pressures. However, despite this and the increase in housing supply which has taken place, a significant and growing under-supply of dwellings exists among the states.
Placed in perspective, it would take three years of current housing production simply to eradicate the current shortfall in NSW, one year of production to remove the shortfall in Victoria and slightly under a year’s production to do the same in WA. In light of this, and with the population continuing to grow at a rapid pace and the labour market strengthening, the demand pressures for dwellings look set to remain acute.
This suggests single income first home buyers will increasingly be priced out of the housing market and, as a consequence, more offspring will remain living at home with parents for longer. This may result in the move towards smaller and smaller (more affordable) housing which has its limitations, as household size looks set to reverse the long-run trend and increase. The deterioration in housing affordability and significant under-supply of new housing also points to greater demand for rental accommodation.
Prepared by Property Insights