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<p>As inflation moves past its peak, the RBA is getting closer to the end of rate hikes.</p><p>This could be good news for renters because growth in rent values usually tracks roughly with movements in the cash rate.</p><p>Not only is the cash rate expected to peak this year but each of the major banks is now forecasting a reduction in the cash rate through 2024.</p><p>Annual rent growth, while still high, has gradually been trending lower since a peak in December 2022.</p><h2>How are rents and interest rates related?</h2><p><br>Rents and interest rates move together over time, so a peak in the cash rate may indicate that growth in rent values is also at (or near) a peak. Figure 1 illustrates this correlation, showing Australia’s cash rate against annual changes in imputed rent values.</p><p><strong>Growth in Rent Value Index (national, homes) v cash rate</strong></p><div id="44LkWPsB6DiYaXSmjhO4I3"><picture><img src="//images.ctfassets.net/8pr762qjocl3/7KQolD0C1LUSPja5nfun76/1f1ee88bc01cedad8b02579231223cdf/new_graphic_1_corelogic_rent_v_cash_rate.jpg" alt="null" data-mce-src="//images.ctfassets.net/8pr762qjocl3/7KQolD0C1LUSPja5nfun76/1f1ee88bc01cedad8b02579231223cdf/new_graphic_1_corelogic_rent_v_cash_rate.jpg"></picture><div><span style="opacity: 0.8;" data-mce-style="opacity: 0.8;">▲ Source: CoreLogic<br><br> </span></div></div><p>There are multiple reasons these two series might move together. For one, rents are an input in measuring inflation. When rents rise, inflation can rise and this prompts the RBA to lift interest rates.</p><p>Secondly, interest rates can impact rent. Higher interest rates mean investment property becomes less attractive, which could slow the delivery of new rental stock coming to market and this could push rents higher.</p><p>Other factors affecting investment activity can have an impact on the rental market. For example, the uptick in rents over the year to September 2017 may be the result of temporary restrictions on investment lending from APRA in late 2015.</p><p>Rental supply dropped off in 2019 as housing markets went through a broad-based decline, and investor interest in property waned.</p><h2>Have higher rates forced rent increases?</h2><p><br>Investors may have increased rents to help fund higher mortgage costs but it’s unlikely rents have been increased to the full extent of interest cost increases.</p><p>ATO tax data from the 2020-21 financial year indicated close to half (47.1 per cent) of Australian property investors were negatively geared, meaning rents were not covering interest payments on many investments even&nbsp;before&nbsp;interest rates started to rise.</p><p>To put recent rate hikes in perspective, CoreLogic monthly median rent values are estimated to have increased $225 a month over the year to June.</p><p>However, mortgage costs of a new investment loan are estimated to have increased by $948 a month on the median Australian home value.</p><p>Investors who have no mortgage or a small mortgage may have also taken advantage of tight rental market conditions to increase the return on their investment properties.</p><p>Irrespective of mortgage costs, rents can generally only rise substantially if the rental market is competitive and tenants cannot find alternative accommodation to bargain with; in other words, rents rise when demand for rental accommodation is outweighing supply.</p><p>Looking at rental supply in the context of rate movements (second graph), it’s clear that a tightening in the rental market occurred well before interest rates started to rise.</p><p>The rental market started to tighten in mid-2020, while the cash rate wouldn’t go up for another two years.</p><p>The rental market tightened from a number of factors besides interest rates, including investor uncertainty, less share-housing and higher income growth. Higher interest rates have slowed investment activity through 2022 and the first few months of this year but they haven’t been the sole cause of rental increases.</p><p><strong>Total monthly rent listings versus cash rate</strong></p><div id="5dYQObYuNcme531HGBuZpk"><picture><img src="//images.ctfassets.net/8pr762qjocl3/mTD06KMK4YvQHdoI9BMGd/145aa98f13617ab4369a8fb908664e97/Screen_Shot_2023-07-24_at_1.08.03_pm.png" alt="null" data-mce-src="//images.ctfassets.net/8pr762qjocl3/mTD06KMK4YvQHdoI9BMGd/145aa98f13617ab4369a8fb908664e97/Screen_Shot_2023-07-24_at_1.08.03_pm.png"></picture><div><span style="opacity: 0.8;" data-mce-style="opacity: 0.8;"><sub>▲ Source: CoreLogic</sub><br><br></span></div></div><p>Rent growth is expected to slow in 2024 for a number of reasons:</p><ul type="disc"><li><p>As renting becomes less affordable, tenants may turn to re-forming share-houses, which will reduce rental demand.</p></li><li><p>Construction cost increases are easing and fewer approvals means the construction space may also unwind next year. As the elevated pipeline of residential homes under construction are completed, renters who may have been waiting for new homes to be completed can exit the rental market.</p></li><li><p>2024 may see a lift in rental supply from government initiatives around social and community housing provision and build-to-rent projects will gradually flow into the market.</p></li><li><p>Housing finance data shows investors are already returning to the housing market and this bounce-back is likely to be stronger in 2024 if interest rates decline and home values continue to rise. Figure 3 shows the monthly volume of housing finance lent for investment property purchases, which shows investor activity ramping up, coinciding with the start of a recovery in the CoreLogic national Home Value Index through March.</p></li></ul><p><strong>Monthly investment lending secured for residential<br>purchases ($ billion)</strong></p><div id="6nUfqwcMld9MCW0Uxf40O6"><picture><img src="//images.ctfassets.net/8pr762qjocl3/XLlCBezohcpPAnMN8VDRA/575775973cb0d1fabde472ab9d87a20c/Screen_Shot_2023-07-24_at_1.08.14_pm.png" alt="null" data-mce-src="//images.ctfassets.net/8pr762qjocl3/XLlCBezohcpPAnMN8VDRA/575775973cb0d1fabde472ab9d87a20c/Screen_Shot_2023-07-24_at_1.08.14_pm.png"></picture><div><span style="opacity: 0.8;" data-mce-style="opacity: 0.8;"><sub>▲ Source: CoreLogic</sub><br><br></span></div></div><p>While national rent values have never recorded an annual decline in the CoreLogic series, rent growth is likely to continue moderating. Canberra rent values are down 2.8 per cent in the year to June (albeit off the back of a 17 per cent uplift through Covid), and annual growth in regional rents has slowed to 4.9 per cent in the year to June, down from a peak of 12.5 pet cent in the year to November 2021.</p><p>While conditions will vary at a granular level, the rental market as a whole is likely to loosen in 2024.<br><br></p><hr><p><br><strong>Author</strong></p><p>Eliza Owen<br>Head of CoreLogic Residential Research Australia</p>

CoreLogic’s Eliza Owen explores the correlation between the cash rate and rents, as well as investor activity more broadly…

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<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>Three major housing-related measures were highlighted in Treasurer Frydenberg’s budget address on 6 October: an extension of the First Home Loan Deposit Scheme, additional low-cost financing for affordable housing through National Housing Finance and Investment Corporation and additional funding for the Indigenous Home Ownership Program.</p><p>Other measures detailed in the budget papers included a proposed capital gains exemption for granny flats for eligible persons from July next year, and a continuation of funding for state social housing services. </p><p>The papers also note that the expansion of the first home loan deposit scheme will be complemented by announced changes to ease credit regulations, which would boost credit availability.</p><h2><strong>Funnelling new demand into new property</strong></h2><p>First home owners have previously been a target of demand-side housing stimulus during economic downturns. Currently, Australia may be in a demographic “sweet spot” for first home buyer demand. </p><p>The relatively large millennial generation is now estimated to be aged around 26 to 37 years old, and according to ABS data, this puts millennials into the most common first home buyer age groups.  </p><p>Alongside the typical barriers to entry for hopeful first home buyers, this may be one of the reasons the first home loan deposit scheme has been so well-subscribed since its introduction in January this year.</p><p>The extension to the First Home Loan Deposit Scheme will see an additional 10,000 places available between 6 October and 30 June 2021, adding to the 20,000 places made available since the scheme started in January 2020.</p><p>However, these additional places are for construction or purchase of newly-built homes, and the price thresholds have also been increased for newly built homes, which would potentially further incentivise a pivot away from the established housing market. </p><p>The change in purchasing thresholds by region are summarised below.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/8382ddbd-1462-4d3b-b200-9af0295f2216.jpg" width="1032"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>It will be interesting to see if these conditions create as rapid an uptake as the places for established housing. </p><p>In 2008, the temporary boost to the first home owner grant provided added incentives for new builds, yet 85 per cent of its uptake was directed at established housing.</p><p>However, incentives limited to new home builds could still help soften the blow to dwelling construction through Covid-19. </p><p>Since the introduction of the HomeBuilder scheme, new home sales have been boosted across Western Australia, South Australia and Queensland. </p><p>CoreLogic data shows valuations ordered for the purpose of construction loans have seen a boost above pre-Covid levels since the introduction of the HomeBuilder scheme.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Valuations ordered for construction loans: 7-day rolling count</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/cb350b4c-3c30-4855-b501-4f53b22f1ad3.jpg" width="1002"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>In terms of the impact these schemes would have on the established market, the increased incentive for new home builds could reduce established home prices if demand is diverted from this sector. </p><p>However, the price of newly built homes may rise up to the threshold cut-off.</p><p>It is worth noting that despite the rhetoric employed around the extension of the scheme supporting the construction sector, the budget papers highlight that this will not be enough to offset a decline in new dwelling investment. </p><p>At August, dwelling approvals for units had fallen -18.4 per cent year-on-year. The budget papers forecast an 11 per cent decline in dwelling investment over 2020-21, before rising 7 per cent in 2021-22.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><h2><strong>Indirect Impacts on Housing</strong></h2></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>With much of this year’s budget focused on the labour market, infrastructure construction and tax cuts, one could be forgiven for</p><p>thinking housing reform and stimulus took a back seat in this year’s budget.</p><p>However, some of the budget highlights will also have implications for housing. These include:</p><p><strong>The JobMaker hiring credit and JobTrainer fund</strong></p><p>These initiatives may help re-absorption of young people into the labour force following the initial pandemic-induced shock.</p><p>This reflects the disproportionate job loss of young people throughout Covid-19, where around 40 per cent of job losses between March and August were among those aged 24 and under.</p><p>Job loss among younger Australians may present less direct risk to the housing market due to their lower likelihood of holding mortgage debt. However, support for youth employment may create more buoyancy in the rental market, where inner-city markets in particular have seen rental income declines since the onset of Covid-19.</p><p><strong>A boost to infrastructure spending </strong></p><p>Depending on the nature of infrastructure projects, surrounding housing markets could see a rise or fall in demand. </p><p>Much of this year’s infrastructure allocation is in roadworks, which can have positive impacts on nearby housing by increasing accessibility to an area, but devalue properties with exposure to high traffic intensity, construction and noise pollution.</p><p><strong>Support for regional Australia </strong></p><p>The budget outlines $350 million in support for regional tourism to attract domestic visitation, and seeks to strengthen regional industry through concessional loans to farmers and access for exporters to global supply chains. </p><p>This may further generate interest in regional dwelling markets, beyond what has resulted from Covid-19 and the normalisation of remote work. </p><p>However, it worth noting this budget allocated little to fossil fuel alternatives, with climate</p><p>change presenting on ongoing challenge to the liveability of some regional markets.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><h2><strong>Beyond the Budget</strong></h2></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>Further to the budget, there have been many institutional interventions which have likely played a role in stabilising housing market conditions since Covid-19. These include, but are not limited to:</p><ul> <li><p>A comprehensive monetary easing package from the RBA, which saw a reduction of the cash rate to 0.25 per cent, bond yield targeting and the establishment of a term funding facility which has been extended to June next year;</p></li><li><p>Early access to $10,000 of superannuation in 2019/20 and 2020/21;</p></li><li><p>The Australian Prudential Regulation Authority (APRA) changed capital ratio expectations for the banking sector in March, facilitated home loan deferrals and later extended the availability of deferrals to March 2021;</p></li><li><p>The availability of JobKeeper and a boost to JobSeeker, which were made available from March, and extended to March 2021, albeit in a tapered form; and</p></li><li><p>A mix of state-based incentives for home buyers, such as the Building Bonus grant in WA, the Home Improvement Scheme in the NT, and temporary stamp duty discounts in NSW.</p></li></ul><p>These events remind us that housing does not operate in a vacuum. Many different factors are currently supporting housing demand. </p><p>This has created a turn in housing market sentiment, which is seeing prices rise across the small capital cities, and a softening of price declines across Sydney and Melbourne.</p><p>Looking forward, there may still be more tailwinds to come. </p><p>The RBA left the cash rate on hold in October ahead of the budget, but hinted in the final sentence of the statement on the decision that “additional monetary easing” was possible, and a recent address by Deputy Governor Guy Debelle carried the same messaging. </p><p>Lower interest rates, together with easier access to housing credit could create further housing market demand, given prices have historically increased against a lower cost of debt and greater availability of housing finance options.</p></div></div></div></div></div>

Three major housing-related measures were highlighted in Treasurer Frydenberg’s budget address on 6 October... 

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<p>The Reserve Bank of Australia is under increasing pressure to raise the cash rate after headline and underlying inflation posted a stronger than expected result in the first quarter of 2022.</p><p>Concerns about the impact of inflation and potentially rapidly rising interest rates on the property market abound, but a myriad of micro and macro factors should be considered when weighing up the risk to housing values and possible mortgage stress. </p><p>What does this mean for the housing market?</p><p>“The strong inflation result puts additional pressure on the RBA to move on rates, particularly now that the underlying inflation rate is beyond the 2-3 per cent target,” CoreLogic’s head of research Eliza Owen said.</p><p>“While there are some potentially more transitory drivers of these high inflation numbers, such as fuel prices, other factors such as the high cost of new dwellings, rising rents and education costs take longer to have an impact. </p><p>“Considering the underlying inflation reading is likely to remain above the lower threshold of the 2-3 per cent target range, the RBA is facing mounting pressure to lift rates in the coming months. </p><p>“As we’ve noted in previous research, looking at the data historically suggests an inverse relationship between cash rate movements and property price movements. New demand for mortgages are expected to decline against a lift in the cash rate, adding further downwards pressure on the rate of housing price growth and prices later this year.”</p><p><strong>Impact of early and rapid rate hikes on house prices</strong></p><p>Even before the official cash rate target has been increased, a lift in average fixed mortgage rates, affordability constraints, lower consumer sentiment and higher levels of supply have started to put downward pressure on property prices, which have already<a href="https://www.corelogic.com.au/news-research/news/2022/Australias-smallest-cities-drive-growth-in-national-housing-values-as-Sydney-and-Melbourne-decline" data-mce-href="https://www.corelogic.com.au/news-research/news/2022/Australias-smallest-cities-drive-growth-in-national-housing-values-as-Sydney-and-Melbourne-decline"> </a>started to slip across Sydney and Melbourne, down -0.2 per cent and 0.1 per cent respectively in March.</p><p> Preliminary readings from CoreLogic’s daily HVI point to another monthly fall in housing values across these two cities in April.</p><p>A rate hike may trigger an earlier than expected decline in prices outside of Sydney and Melbourne, which can have a flow on effect for other cities to follow. </p><p><strong>Real house price falls</strong></p><p>The RBA noted in its financial stability review that a 2 percentage point rise in interest rates could see real housing prices fall by 15 per cent.</p><p> CoreLogic’s research director Tim Lawless says under this scenario, based on where national housing values were at the end of March, a 15 per cent drop in values would take housing values back to levels similar as March 2021. </p><p>A larger fall of 20 per cent could take national housing values back to similar levels as June 2017, while a smaller 10 per cent drop would see values at levels similar to June 2021 and a 5 per cent drop back to September 2021 levels.</p><p>However, the scenarios play out very differently across the capital cities, Lawless said.</p><p>“In markets where housing values have been rising faster, such as Brisbane and Adelaide, a 15 per cent decline would take housing values back to July and August 2021 levels respectively,” he says. </p><p>“In Melbourne, a 15 per cent drop could see values at a similar level as May 2017, or in the case of Perth, back to June 2009 levels.”<a href="//images.ctfassets.net/8pr762qjocl3/2Vxi4rPQwDgBtAGM2Pwjjt/b80939cb8775cd5a686c4d05fef52b85/RBA_governor_Philip_Lowe_has_warned_lenders_to_play_by_the_rules_as_the_housing_market_heats_up." target="_blank" rel="noopener" data-mce-href="//images.ctfassets.net/8pr762qjocl3/2Vxi4rPQwDgBtAGM2Pwjjt/b80939cb8775cd5a686c4d05fef52b85/RBA_governor_Philip_Lowe_has_warned_lenders_to_play_by_the_rules_as_the_housing_market_heats_up."></a></p><div id="5JAkPmWWf4CPAUj5MPv3xc"><picture><img src="//images.ctfassets.net/8pr762qjocl3/2Vxi4rPQwDgBtAGM2Pwjjt/b80939cb8775cd5a686c4d05fef52b85/RBA_governor_Philip_Lowe_has_warned_lenders_to_play_by_the_rules_as_the_housing_market_heats_up." alt="RBA governor Philip Lowe has warned lenders to play by the rules as the housing market heats up." data-mce-src="//images.ctfassets.net/8pr762qjocl3/2Vxi4rPQwDgBtAGM2Pwjjt/b80939cb8775cd5a686c4d05fef52b85/RBA_governor_Philip_Lowe_has_warned_lenders_to_play_by_the_rules_as_the_housing_market_heats_up."></picture><div><span style="opacity: 0.8;" data-mce-style="opacity: 0.8;">▲ RBA governor Philip Lowe: the official rate could rise as early as next week. <br><br></span></div></div><p><strong>How quickly and sharply can prices fall?</strong></p><p>The extent of any housing downturn will be dependent on where rising interest rates land, but also on a variety of other factors, Owen says.</p><p>Helping to offset the downside risk of higher interest rates are extremely tight labour markets, improving economic conditions and recovering migration rates which will progressively add to housing demand. </p><p>“Since the late 1980s, Australia has experienced national downturns that have ranged in severity from a 1.0 per cent peak to trough decline in 2015-16, a temporary correction following the first round of credit tightening via APRA’s 10 per cent speed limit on investment lending, to an 8.4% drop in national values between late 2017 and mid-2019,” she says.</p><p><strong>Mortgage repayment buffers</strong></p><p>Despite the expected increase in mortgage rates there is no expectation of a material rise in distressed listings being added to the market due to unemployment set to trend below 4 per cent, Lawless says.</p><p>“The RBA has recently noted in their latest financial stability review the median repayment buffer for owner occupiers with a variable mortgage rate had grown to 21 months of scheduled repayments in February 2022, up from 10 months at the start of the pandemic,” he says.</p><p>“With a two-percentage point rise in interest rates, the median repayment buffer would reduce back to 19 months, which is still substantial. With the median household well ahead of their mortgage repayments, the risk of households falling behind on their mortgage repayments is reduced.”</p><div id="1uqJQh1WPoPlKqNKgymJpX"><picture><img src="//images.ctfassets.net/8pr762qjocl3/3pSS0BBpcr3EPF8GM7myTQ/f3253643a57ae95824650607b6eabe7e/land_market_story_hero.jpg" alt="Aerial view of Geelong where average land size and price have both increased. " data-mce-src="//images.ctfassets.net/8pr762qjocl3/3pSS0BBpcr3EPF8GM7myTQ/f3253643a57ae95824650607b6eabe7e/land_market_story_hero.jpg"></picture><div><span style="opacity: 0.8;" data-mce-style="opacity: 0.8;">▲ Despite the predicted rate increase, there has been no expectation of a rise in distressed listings.&nbsp;<br></span><span style="opacity: 0.8;" data-mce-style="opacity: 0.8;"><br></span></div></div><p><strong>Fixed-rate insulation</strong></p><p>Another factor helping to offset the downside risk is the rise in borrowers who have taken on fixed rate mortgages. </p><p>Fixed rate borrowing peaked last year at around 45 per cent of new housing credit. </p><p>A larger portion of borrowers on fixed rate mortgage terms should provide some insulation to rising variable mortgage rates, at least until their fixed term expires, at which time there could be a refinance shock. &nbsp;</p><p><strong>Mortgage stress levels</strong></p><p>The RBA has also pointed out that non-performing housing loans comprised only 0.9 per cent of the mortgage portfolio at the end of last year, which is below pre-Covid levels.&nbsp; </p><p>Additionally, almost all the borrowers who took advantage of lender forbearance provisions during the pandemic are back in line with their repayment schedule.&nbsp;</p><p>Furthermore, APRA data on quarterly residential property exposures also highlights that the portion of outstanding loans 30-89 days past due was sitting at a recent low of 0.4 per cent through the end of 2021, half of the portion reported in March 2020.</p><p>“Such low numbers imply borrowers are entering a period of rising interest rates from a relatively strong foundation,” Lawless says.</p><p><strong>Vulnerable households</strong></p><p>Households that have smaller or no savings buffers built up could be more vulnerable to mortgage distress as interest rates move higher, however a trend towards materially higher mortgage arrears or default would need a catalyst of worsening labourmarket conditions and higher rates of unemployment. &nbsp;</p><p>“With labourmarkets so tight, and likely to tighten further, the risk of higher unemployment remains low,” Lawless says.</p><p>“Additionally, a more substantial rise in wages growth amid such low unemployment should also allow higher risk borrowers to maintain their repayments.”</p><p><strong>Serviceability assessments</strong></p><p>Mortgage distress should also be minimised to some extent by mortgage serviceability assessments at the time of the loan origination. </p><p>All borrowers would have been assessed to repay their mortgage under a scenario of mortgage rates being 2.5 percentage points higher than the origination rate, and since October last year, borrowers were being assessed at mortgage rates of 3 percentage points higher.</p><p>Under these serviceability scenarios, borrowers should be able to accommodate higher mortgage repayments costs, although such as rapid rate of inflation could create some challenges for borrowers with thinly stretched budgets.</p>

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<p>Home ownership in Australia is embedded in <a data-mce-href="https://www.rba.gov.au/publications/bulletin/2019/mar/wealth-and-consumption.html" href="https://www.rba.gov.au/publications/bulletin/2019/mar/wealth-and-consumption.html" target="_blank" rel="noopener">wealth accumulation, security</a> of tenure and <a data-mce-href="https://www.researchgate.net/profile/Bruce-Bradbury/publication/227320846_Home_Ownership_as_a_Crumbling_Fourth_Pillar_of_Social_Insurance_in_Australia/links/577c646608aec3b743367262/Home-Ownership-as-a-Crumbling-Fourth-Pillar-of-Social-Insurance-in-Australia.pdf" href="https://www.researchgate.net/profile/Bruce-Bradbury/publication/227320846_Home_Ownership_as_a_Crumbling_Fourth_Pillar_of_Social_Insurance_in_Australia/links/577c646608aec3b743367262/Home-Ownership-as-a-Crumbling-Fourth-Pillar-of-Social-Insurance-in-Australia.pdf" target="_blank" rel="noopener">security in retirement</a>.</p><p>In other words, home ownership in Australia makes life a lot easier in the long run than renting.</p><p>While <a data-mce-href="https://www.genworth.com.au/media/ie0bizm1/media-release.pdf" href="https://www.genworth.com.au/media/ie0bizm1/media-release.pdf" target="_blank" rel="noopener">surveys</a> indicate most Australians want to own their own home, the latest available data shows only <a data-mce-href="https://www.abs.gov.au/statistics/people/housing/housing-occupancy-and-costs/latest-release" href="https://www.abs.gov.au/statistics/people/housing/housing-occupancy-and-costs/latest-release" target="_blank" rel="noopener">66 per cent of households do</a>.</p><p>As we head into the next election, both the ALP and the Coalition have included some expansion of the First Home Loan Deposit Scheme (FHLDS) in their policy platforms.</p><p>Labor has proposed a First Home Buyer Support Scheme, which will review price caps on a six-monthly basis, and extend 10,000 government guarantees to regional Australian applicants.</p><p>The Coalition would also reserve 10,000 home loan guarantees for regional Australians, but would expand eligibility in the regions to non-first homebuyers, and limit purchases to new homes.</p><div title="Page 1"><p>The Coalition would also increase the current 10,000 regular FHLDS places to 35,000 per year.</p><p>The family home guarantee would also be increased to 5,000 places per year, creating a total of 50,000 new low-deposit guarantees in 2022 alone.</p><div title="Page 1"><p>In its current form, the FHLDS allows eligible borrowers to take out a mortgage with a deposit as small as 5 per cent, without paying lenders mortgage insurance. This is done by the government guaranteeing up to 15 per cent of the loan.</p><p>Applications are limited to singles on an income of up to $125,000, or couples on $200,000.</p><p><a href="https://www.nhfic.gov.au/what-we-do/property-price-caps/" target="_blank" rel="noopener" data-mce-href="https://www.nhfic.gov.au/what-we-do/property-price-caps/">Purchases</a> under the scheme are limited to between $350,000 in some regions, to up to $950,000 in Sydney for new homes.</p><p>But whether the scheme is ‘good’ or ‘bad’ is a really complex question. Some of the pros and cons of the scheme are outlined below.</p><h2><strong>Pro: It roughly quarters the time it would take to save a deposit<br><br></strong></h2><p><strong>Figure 1.0. Months of savings required for a 5% versus a 20% deposit</strong></p><div><div id="4BU3DeWizSVmmLLj6ToHLQ"><picture><img src="//images.ctfassets.net/8pr762qjocl3/2LEohcrdSx5P6LzFPavtK3/219749ddf46208c60caa9a8133f705b4/Screen_Shot_2022-03-31_at_3.08.32_pm.png" alt="Figure 1.0. Months of savings required for a 5% versus a 20% deposit" data-mce-src="//images.ctfassets.net/8pr762qjocl3/2LEohcrdSx5P6LzFPavtK3/219749ddf46208c60caa9a8133f705b4/Screen_Shot_2022-03-31_at_3.08.32_pm.png"></picture><div><sup><sub>^Source: Corelogic&nbsp;</sub></sup></div><div><br></div><div><sup><sup><sub> </sub></sup></sup><div title="Page 2"><div><div><div><p>Based on the median dwelling value across Australia at the end of February ($728,034), Corelogic estimates it would take around 2.3 years for the median household to save a 5 per cent deposit on a home.</p><p>A 20 per cent deposit, which is the level allowing borrowers to <span style="font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;" data-mce-style="font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;">avoid lenders mortgage insurance (LMI), would take around 8.8 years.</span></p></div></div></div><div><p>This could cut 6.5 years in the rental market, which at current weekly rent values on the median dwelling in Australia, equates to almost $160,000.</p><p>The savings on LMI could be upwards of $30,000 on the median Australian dwelling value with a 5 per cent deposit.<br></p><div title="Page 2"><h2><strong>Con: Interest costs would be higher</strong></h2><div title="Page 2"><div><div><div><p><br>Understanding the concept of interest is crucial to do a thorough cost-benefit analysis of the scheme.</p><p>Taking the median dwelling value and the current average mortgage rate for principal and interest owner-occupier borrowers (2.44 per cent), the difference in interest costs between a 5 per cent deposit and a 20 per cent deposit is about $37,000 over the life of the loan.</p><p>With the cash rate likely to rise sometime in the next 12 months, this will exacerbate interest between those on a 5 per cent and 20 per cent deposit loan.</p><p>Understanding interest is extremely important when taking on large mortgages, especially when targeting these schemes to younger Australians and women, where rates of financial literacy among these groups tend to be lower.</p><p>While the interest costs on a 5 per cent deposit home loan may be larger, it is important to weight them against the cost of not being in the market.</p><p>These costs include any increase (or decrease) in purchase prices and the cost of renting</p></div></div></div></div><p><strong>Principal and interest repayments on a 5 per cent vs 20 per cent deposit&nbsp;</strong></p><div id="7gVONXhLFf1Q2eaeYJHlyb"><picture><img src="//images.ctfassets.net/8pr762qjocl3/4tgvSZzbSaDtKAztYivDPH/24a4a38d59c7a74c90d2b1a80794734f/Screen_Shot_2022-03-31_at_3.12.35_pm.png" alt="Principal and interest repayments on a 5% vs 20% deposit" data-mce-src="//images.ctfassets.net/8pr762qjocl3/4tgvSZzbSaDtKAztYivDPH/24a4a38d59c7a74c90d2b1a80794734f/Screen_Shot_2022-03-31_at_3.12.35_pm.png"></picture></div><p><sup><sub>^Source: Corelogic&nbsp;</sub></sup>&nbsp;</p><p><sup><sub> </sub></sup></p><div title="Page 2"><h2><strong>Pro: More than one in three establish properties qualify</strong></h2><p><br></p><div title="Page 2"><p>Based on the scheme’s current price caps for established properties, CoreLogic estimates around 35.4 per cent of Australian dwellings qualify.</p><p>If prices decline, this could free up more dwellings for applicants, while the reverse is true if prices continue to rise.</p><div title="Page 2"><h2><strong>Con: Price thresholds are hard to determine</strong></h2><p><br>A decline in home values would increase the number of properties available under the FHLDS, however Australia’s rapidly changing and diverse housing market means stock availability varies widely by region.</p><strong>Portion of properties valued under the current FHLDS thresholds by region<span style="font-family: -apple-system, BlinkMacSystemFont, &quot;Segoe UI&quot;, Roboto, Oxygen, Ubuntu, Cantarell, &quot;Open Sans&quot;, &quot;Helvetica Neue&quot;, sans-serif;" data-mce-style="font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;"><br></span></strong><div id="2Dg1Fhg0FCDvDeB9SIW2YE"><picture><img src="//images.ctfassets.net/8pr762qjocl3/2fkHRRV0uZRVoEACMFWIYS/dd6e4339326dde137f27156e68bcadff/Screen_Shot_2022-03-31_at_3.14.16_pm.png" alt="Portion of properties valued under the current FHLDS thresholds by region" data-mce-src="//images.ctfassets.net/8pr762qjocl3/2fkHRRV0uZRVoEACMFWIYS/dd6e4339326dde137f27156e68bcadff/Screen_Shot_2022-03-31_at_3.14.16_pm.png"></picture><div><sup><sub>^Source: Corelogic&nbsp;</sub></sup></div><div><br></div><div><sup><sup><sub> </sub></sup></sup><div title="Page 3"><div><div><div><p>The current portion of valuations that sit under the established purchase price thresholds for the scheme in each region, as at the end of March.</p><p>CoreLogic’s analysis shows the proportion of qualifying properties ranged from from up to 66.3 per cent of dwellings in Perth, to just 10.7 per cent in the ACT.</p><p>Purchasing thresholds <a href="https://www.nhfic.gov.au/what-we-do/property-price-caps/" target="_blank" rel="noopener" data-mce-href="https://www.nhfic.gov.au/what-we-do/property-price-caps/">have been adjusted higher</a> through the 2021-22 FY, and Labor has noted it intends to r<a href="https://alp.org.au/policies/regional-first-home-buyer-support-scheme" target="_blank" rel="noopener" data-mce-href="https://alp.org.au/policies/regional-first-home-buyer-support-scheme">eview purchasing caps on the scheme on a six-monthly basis</a>, so this policy can be adapted to changing market conditions.</p></div></div></div></div></div></div><div title="Page 3"><h2><strong>Pro: It's not a revolution, but its pragmatic</strong></h2><p><br></p><p>The FHLDS is not revolutionary. Where the 2016 and 2019 Federal elections saw Labor campaign on changes to negative gearing and capital gains concessions, both parties are trying to assist first homebuyers in getting over the deposit hurdle, “<a href="https://www.liberal.org.au/latest-news/2019/05/12/helping-australians-buy-their-first-home" target="_blank" rel="noopener" data-mce-href="https://www.liberal.org.au/latest-news/2019/05/12/helping-australians-buy-their-first-home">while protecting the value of homes</a>”.</p><p>To-date, the scheme has seen very high demand. Within four months of commencement, <a href="https://treasury.gov.au/sites/default/files/2021-10/p2021-217760.pdf" target="_blank" rel="noopener" data-mce-href="https://treasury.gov.au/sites/default/files/2021-10/p2021-217760.pdf">more than 8,000 places in the scheme had</a><br><a href="https://treasury.gov.au/sites/default/files/2021-10/p2021-217760.pdf" target="_blank" rel="noopener" data-mce-href="https://treasury.gov.au/sites/default/files/2021-10/p2021-217760.pdf">been taken up</a>. ABS data also shows first homebuyer loans surged from the start of 2020, coinciding with the start of the scheme</p><div title="Page 3"><p><strong>Number of FHB owner occupier loans secured, nationally</strong></p><div id="3SL9K4vsi79fb9Bg24u1Pr"><picture><img src="//images.ctfassets.net/8pr762qjocl3/14RI7jehZMnI8rDEmRyZtw/4b4a964f2be00a9a7829af8afb8d4fec/Screen_Shot_2022-03-31_at_3.18.17_pm.png" alt="Number of FHB owner occupier loans secured, nationally" data-mce-src="//images.ctfassets.net/8pr762qjocl3/14RI7jehZMnI8rDEmRyZtw/4b4a964f2be00a9a7829af8afb8d4fec/Screen_Shot_2022-03-31_at_3.18.17_pm.png"></picture><div><sup><sub>^Source: ABS&nbsp;</sub></sup></div><div><sup><sup><sub> </sub></sup></sup><div title="Page 4"><h2><strong>Con: It could to better on the equity front</strong></h2><p><br>Australia’s rate of home ownership has declined from around 71 per cent in 1995, to 66 per cent in 2016. But as noted in Grattan research, <a href="https://www.afr.com/policy/economy/shared-equity-scheme-will-solve-affordability-crisis-grattan-20220218-p59xq6#:~:text=Struggling%20home%20buyers%20could%20get,prices%20and%20falling%20home%20ownership." target="_blank" rel="noopener" data-mce-href="https://www.afr.com/policy/economy/shared-equity-scheme-will-solve-affordability-crisis-grattan-20220218-p59xq6#:~:text=Struggling%20home%20buyers%20could%20get,prices%20and%20falling%20home%20ownership.">lower rates of home ownership are associated with lower income</a>.</p><p>This means addressing low rates of home ownership should target lower income&nbsp;households.</p><p>The income thresholds for the FHLDS are relatively high. For example, <a href="https://www.abs.gov.au/statistics/economy/finance/household-income-and-wealth-australia/2017-18#data-downloads-fact-sheets" target="_blank" rel="noopener" data-mce-href="https://www.abs.gov.au/statistics/economy/finance/household-income-and-wealth-australia/2017-18#data-downloads-fact-sheets">ABS Household Income and Wealth data</a> showed that in 2017-18, a gross household income of $200,000 per year placed households in the top 20 per cent of incomes, and that median household incomes were closer to $88,000.</p><p>Couples earning up to $200,000 can qualify for the FHLDS, though figures would suggest their risk of missing out on home ownership without it is lower.</p><p>According to <a href="https://www.nhfic.gov.au/media/1473/20200826-nhfic-fhlds-research-report.pdf" target="_blank" rel="noopener" data-mce-href="https://www.nhfic.gov.au/media/1473/20200826-nhfic-fhlds-research-report.pdf">NHFIC</a> however, the highest concentrations of guarantees have been below the income thresholds through 2019-20, at $60- $80,000 for singles and $100-$125,000 for couples.</p><p>The purchase price caps may also have a self-selecting effect, with those on higher incomes seeking more expensive homes.</p><h2><strong>Pro and Con: It will increase housing demand at a time when the housing market is cooling</strong></h2><div title="Page 4"><p><span style="font-family: -apple-system, BlinkMacSystemFont, &quot;Segoe UI&quot;, Roboto, Oxygen, Ubuntu, Cantarell, &quot;Open Sans&quot;, &quot;Helvetica Neue&quot;, sans-serif;"><br>Historically, targeted first homebuyer grants have incentivised buyers. The temporary boost to the first home owner grant increased housing activity around the time of the global financial crisis in 2008, when a lift in real estate transactions positively impacted the economy.</span><br></p><div title="Page 4"><p>Expanding the FHLDS could increase first homebuyer numbers at a time when the housing market outlook is uncertain. Alternatively this could increase demand for more affordable properties, increasing prices in this segment.</p><div title="Page 4"><h2><strong>A final word on first home buyers</strong></h2><p><br></p><p>Should first homebuyers be worried about the prospect of a falling market? Probably not.</p><p>The risk of negative equity is mitigated by the fact that owner-occupiers hold their properties for long periods of time, and Australia’s labour market is at its strongest level in 50 years. Corelogic’s resale analysis shows owner-occupiers have a median hold period of around nine years.<br></p><p>Historic performance in the Australian housing market has shown peak-to-trough declines last an average of 12 months nationally.</p><p>The RBA also recently produced <a href="https://www.rba.gov.au/publications/bulletin/2022/mar/are-first-home-buyer-loans-more-risky.html" target="_blank" rel="noopener" data-mce-href="https://www.rba.gov.au/publications/bulletin/2022/mar/are-first-home-buyer-loans-more-risky.html">analysis showing first home buyers were at no greater risk of mortgage arrears than other borrowers</a>. Negative equity becomes a greater risk when mortgage serviceability deteriorates. This is why a thorough assessment of borrowers is so important in an environment where rates are set to rise.<br></p><p>If there is a limitation to expanding the FHLDS, it is probably in the details of refining income and price thresholds, rather than major&nbsp;default risks for first home buyers.</p><p>Regardless of which political party wins the 2022 election, an objective of housing policy should also focus on more equitable housing outcomes across income brackets, including adequate provision of affordable housing for thosewho are unlikely to achieve home ownership.</p></div></div></div></div></div></div></div></div></div></div></div></div></div></div></div></div></div></div></div>

As we head toward a federal election, both the ALP and the Coalition have included expansion of the First Home Loan Deposit Scheme in their policy platforms. Here are the pros and cons of their proposals...

corelogic 6 things from covid hero.jpg

<p>The global pandemic has catalysed remarkable shifts in the Australian housing market.</p><p>From the temporary shutdown of cities to an unprecedented monetary policy strategy, a new-found popularity of regional and low-density housing preferences and the introduction of various government home buying incentives, the Covid period has had distinct impacts on the composition of buyers and the dynamics of the housing market.</p><p>Here are six of the major impacts on the Australian housing market two years on.</p><p><strong>1. Australian home values rose 25 per cent to record highs</strong></p><p>Despite an initial dip, housing values rose 24.6 per cent between the end of March 2020 and February 2022.</p><p>The table below shows the cumulative change in the national CoreLogic Home Value Index since the onset of Covid.</p><p>The index had a relatively small decline at the onset of Covid, with sales and listings volumes being far more impacted than prices.</p><p>National home values declined -2.1 per cent between April 2020 and September 2020, before soaring amid low interest rates, high household savings, government grants and a sharp reduction in the supply of housing.</p><p>By February 2022, CoreLogic estimated the total value of residential real estate to be $9.8 trillion, up from $7.2 trillion at the onset of the pandemic. The median Australian dwelling value increased $173,805, to $728,034.</p><p><strong>Cumulative change in home value index</strong></p><div id="1T04OZaixKa10LOpckDLbU"><picture><img src="//images.ctfassets.net/8pr762qjocl3/1OS1nQaSdokIVz3LPeSP56/87f729ed33d1db51f864ecd31ccbb994/Screen_Shot_2022-03-17_at_11.17.32_am.png" alt="Corelogic Covid 6 ways: Cumulative change in home value index " data-mce-src="//images.ctfassets.net/8pr762qjocl3/1OS1nQaSdokIVz3LPeSP56/87f729ed33d1db51f864ecd31ccbb994/Screen_Shot_2022-03-17_at_11.17.32_am.png"><br><br></picture><p><strong>2. First homebuyer activity spiked</strong></p></div><p>First homebuyers were a sizable part of housing demand at the start of the pandemic.&nbsp;</p><p>This cohort took advantage of more affordable housing options following the earlier downturn, along with record low mortgage rates and government incentives.</p><p>ABS data shows the number of new loans to first homebuyers increasing during the housing market downswing from 2017 to 2019 (graph below).</p><p>From June 2020, first home buyer activity surged amid the introduction of the HomeBuilder scheme, used alongside the First Home Loan Deposit Scheme, as well as other state-based grants and stamp duty concessions for first homebuyers.</p><p>The result was a spike in first homebuyer activity, which peaked in January 2021. The spike mirrors first homebuyer participation in 2009-10, which marked a temporary boost to the First Homeowner Grant.</p><p>Since the January 2021 peak, first home buyer activity has diminished, reflecting higher barriers to entry as housing values substantially outpace incomes.</p><p>As of January 2022, loans to first homebuyers numbered 10,964, above the decade average of 8682.</p><p>Proportionally, first homebuyer lending comprised 24 per cent of owner-occupier mortgage demand in January, which is in-line with the decade average.</p><p>This may have implications for rates of home ownership, which may see an increase on ABS 2016 census numbers.</p><p>While the rise in home values has created a greater deposit hurdle for those looking to enter the market, various government schemes introduced throughout 2020 helped to incentivise first homebuyer participation.</p><p><strong> Number of FHB Owner-Occupier Loans, Australia<br></strong></p><div id="EuDoupVLfUGtRvrB2XDLb"><picture><img src="//images.ctfassets.net/8pr762qjocl3/4HSo9rmSZWgwn3ogUfi1ED/5b6a8e9bda8f9e46e9b21027dd54813f/Screen_Shot_2022-03-17_at_11.17.43_am.png" alt="Corelogic Covid 6 ways: Figure 2.0 Number of FHB Owner-Occupier Loans, Australia" data-mce-src="//images.ctfassets.net/8pr762qjocl3/4HSo9rmSZWgwn3ogUfi1ED/5b6a8e9bda8f9e46e9b21027dd54813f/Screen_Shot_2022-03-17_at_11.17.43_am.png"></picture><div><br></div></div><p><strong>3. Rents rose 11.8pc to record highs, gross yields fell to record lows</strong></p><p>The CoreLogic Rent Value Index, which tracks changes in rental valuations over time, has also surged to new record highs.</p><p>The graph below shows the change in the national rent index since the end of March 2020. While rents saw a mild decline of -0.8 per cent between March and August 2020, there was a swift recovery in these values, followed by a surge through 2021.</p><p>There are multiple reasons rents have risen. Investor activity had been relatively subdued between 2017 and mid-2020, contributing to rental supply constraints.</p><p>Rental supply may also have been eroded through the rise of rental services like Airbnb, which have enabled property owners to pivot to the short-term rental accommodation market.</p><p>This latter trend may have been particularly prevalent in tourism destinations across Australia, some of which have flourished amid a rise in domestic tourism in the past two years.</p><p>For investors who have recently purchased long-term rental accommodation, rents may have increased due to higher purchasing prices.</p><p>Over the course of 2021, annual rent value growth was at its highest levels since 2008.</p><p>Across Australia, median advertised rents since March 2020 have increased $30 per week to $470 per week.&nbsp;</p><p>The headline numbers hide the diversity of rental conditions.&nbsp; Through the pandemic, there has been a clear shift in rental preferences towards lower density housing options, where the upwards pressure on rents has been more substantial.&nbsp;</p><p>This trend has evolved over the past year, with rental affordability gradually deflecting more demand towards higher density rental options where the cost of renting is more affordable.&nbsp;</p><p>However, gross rental yields have declined. This is because gross rental yields are a portion of the purchase price of a property, and purchase prices of properties have grown 24.6 per cent since March 2020, outpacing the 11.8 per cent rise in rents.</p><p>Nationally, gross rental yields have fallen from 3.8 per cent at March 2020 to a record low 3.21 per cent as of February 2022. As housing growth has started to slow, this record-low gross rent yield figure appears to have begun stabilising.</p><p><strong>Cumulative change in home value index</strong></p><div id="7nteo6ojBXTadutBJr72IH"><picture><img src="//images.ctfassets.net/8pr762qjocl3/byzU2Gtd0WWIazTfT1M36/f4fa2533e9202a09edc90e021c8f2546/Screen_Shot_2022-03-17_at_11.18.31_am.png" alt="Corelogic Covid 6 ways: Cumulative change in home value index" data-mce-src="//images.ctfassets.net/8pr762qjocl3/byzU2Gtd0WWIazTfT1M36/f4fa2533e9202a09edc90e021c8f2546/Screen_Shot_2022-03-17_at_11.18.31_am.png"></picture><div><br></div></div><p><a href="//images.ctfassets.net/8pr762qjocl3/byzU2Gtd0WWIazTfT1M36/f4fa2533e9202a09edc90e021c8f2546/Screen_Shot_2022-03-17_at_11.18.31_am.png" target="_blank" rel="noopener" data-mce-href="//images.ctfassets.net/8pr762qjocl3/byzU2Gtd0WWIazTfT1M36/f4fa2533e9202a09edc90e021c8f2546/Screen_Shot_2022-03-17_at_11.18.31_am.png"></a><strong>4. Housing debt levels hit record highs</strong></p><p>Rapid increases in housing and rent values in the past two years was largely the result of a sizable reduction in the official cash rate.</p><p>With the RBA setting the official cash rate target at 0.1 per cent since November 2020, lower debt costs enabled borrowers to access more credit.</p><p>As of January, total outstanding housing credit sat at a record high of over $2 trillion, according to the RBA, while the ratio of housing debt to household income was at a record high 140.5 per cent through the third quarter of (graph below).</p><p>This is up from 139.2 per cent in March 2020.While total outstanding credit reached over $2 trillion in January, ABS data shows monthly new finance borrowed for the purchase of property continued to hit fresh record highs through January 2022, at $33.7 billion.</p><p>High levels of housing debt, particularly where it has grown faster than incomes, creates a vulnerability in the Australian economy.</p><p>However, it is important to frame debt levels in the context of high asset values, and relatively low interest costs. RBA data shows housing interest payments to income have fallen to their lowest levels since 1999, and household debt has trended lower as a portion of housing values.</p><p><strong>Ratio of housing debt to annualised household disposable income</strong></p><div id="6Ce49EyQJfVrIdfCJOMQsR"><picture><img src="//images.ctfassets.net/8pr762qjocl3/21B1yGEwT83k2RHWghyo5E/2375910cfc5dcd7c365156ed4c7c8c34/Screen_Shot_2022-03-17_at_11.19.07_am.png" alt="Corleogic Covid 6 ways: Ratio of housing debt to annualised household disposable income" data-mce-src="//images.ctfassets.net/8pr762qjocl3/21B1yGEwT83k2RHWghyo5E/2375910cfc5dcd7c365156ed4c7c8c34/Screen_Shot_2022-03-17_at_11.19.07_am.png"></picture><div><br></div></div><p><strong>5. The premium of house prices compared to units hit record highs</strong></p><p>Both the composition of the buyer pool and the impacts of Covid may have contributed to a record gap between house and unit values.</p><p>&nbsp;Investors, who may have a preference for units, have been a relatively small part of demand through the upswing.</p><p>Additionally, detached houses may have been in higher demand as Australians spent more time at home through the pandemic.</p><p>Government policies such as the HomeBuilder grant may have also contributed to increased detached housing demand, due to tight construction timelines to qualify.</p><p>The result is a record high gap between house and unit values. The graph below shows the median house value across Australia was at a record high 29.8 per cent above the median Australian unit value, with a dollar value premium of around $182,000.</p><p>This is up from just 8.5 per cent in March 2020, or a dollar value premium of around $44,000 for houses.</p><p>Also below, the second graph shows the dollar-value premium of median house values over median unit values in each of the capital cities, with most cities seeing a substantial increase in this value since March 2020.. </p><p><strong>How much more expensive are houses than units?</strong></p><div id="1TpDAaaEeGK1ksfmvvtEkf"><picture><img src="//images.ctfassets.net/8pr762qjocl3/1575mPeicfVTiaJ3y2L4xW/7e8ec4693cfd822886bb12a5eee188db/Screen_Shot_2022-03-17_at_11.19.18_am.png" alt="Corelogic covid 6 ways: How much more expensive are houses than units?" data-mce-src="//images.ctfassets.net/8pr762qjocl3/1575mPeicfVTiaJ3y2L4xW/7e8ec4693cfd822886bb12a5eee188db/Screen_Shot_2022-03-17_at_11.19.18_am.png"></picture><div><br></div></div><p><strong>How much more expensive are houses than units?</strong></p><div id="29Iu3F1IhE0FEbOX0ohjWk"><picture><img src="//images.ctfassets.net/8pr762qjocl3/5fhDSlGLMOa5psvJcSVgTe/e7105ae803682b1f329d5085c3d32393/Screen_Shot_2022-03-17_at_11.19.25_am.png" alt="Corelogic covids 6 ways: How much more expensive are houses than units? " data-mce-src="//images.ctfassets.net/8pr762qjocl3/5fhDSlGLMOa5psvJcSVgTe/e7105ae803682b1f329d5085c3d32393/Screen_Shot_2022-03-17_at_11.19.25_am.png"></picture><div><br></div></div><p><strong>6. The rise of the regions</strong></p><p>Migration trends over 2020 and 2021 revealed an uptick in the volume of people leaving cities for regions outside of lockdown periods, and a decline in people leaving regions for cities.</p><p>The result has been higher than normal housing demand against unusually low levels of listings across regional Australia, in both the sales and rental market. Value gains across regional Australian dwelling values has been almost 40 per cent since March 2020, while capital city home values have increased around 21% (Figure 7.0).</p><p>In lifestyle regions, which have become intensely popular in the past two years, new million-dollar markets have been created across areas such as the Sunshine Coast, the Illawarra and the Gold Coast, where median house values now sit above the million-dollar mark. </p><p><strong>Cumulative change in home value index—capital cities vs regions</strong></p><div id="2LZSp42SNCtYp9HADYBy1m"><picture><img src="//images.ctfassets.net/8pr762qjocl3/41TE6I824NmcKN01fdDF8y/eba0f8496885ac304b7b770f320acee3/Screen_Shot_2022-03-17_at_11.22.01_am.png" alt="Corelogic covid 6 ways: Cumulative change in home value index—capital cities vs regions" data-mce-src="//images.ctfassets.net/8pr762qjocl3/41TE6I824NmcKN01fdDF8y/eba0f8496885ac304b7b770f320acee3/Screen_Shot_2022-03-17_at_11.22.01_am.png"></picture><div><br></div></div><p><strong>Where to from here? </strong></p><p>The current housing market upswing has delivered extraordinary value gains, providing a significant wealth boost for home owners, but larger hurdles to enter the market for non-home owners.</p><p>But since April of 2021, monthly gains in national home values have softened. Arguably, there are more headwinds than tailwinds now stacked against continued growth in the property market, with the potential for sooner-than expected cash rate increases, affordability constraints, and weakening consumer sentiment slowing demand.</p><p>While some structural shifts through the pandemic, such as remote work, may sustain demand in regional Australia long term, it is likely that housing values will start to decline on a fairly broad basis later this year.</p>

The global pandemic caused remarkable shifts in the Australian housing market. Two years on, here are six ways Covid has altered the sector…

The House Always Wins: Why House Sales Outstripped Unit Sales Last Year

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>In the year to January, Corelogic estimates that there were 459,308 properties transacted across Australia—most of these sales were houses, rather than units.</p><p>It is not unusual for house sales to make up the majority of transactions, with houses making up an average 70.2 per cent of annual sales volumes over the past decade. </p><p>However, the share of houses as a portion of sales increased to 74.2 per cent in the year to January 2021, up from 73.2 per cent a year ago and 66.7 per cent five years ago. </p><p>Another way of thinking about it, is that for every 1 unit sold over the year, there were 2.9 house sales.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Portion of total national sales (houses)</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/d450c9b6-5b45-4220-9fc9-4f7f7bd62577.png" width="704"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sup><sub>^Source: Corelogic</sub></sup></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>The table shows the portion of sales over the year that were houses, compared with the decade average, for various regions. </p><p>Most capital city and rest of state regions saw the portion of house sales elevated in the year to January, compared with the decade average. </p><p>The general uplift in the share of sales that were houses through the year to January may be attributed to a few of factors.</p><p>The introduction of HomeBuilder may have skewed demand toward houses. </p><p>Since the announcement of HomeBuilder in June, new home sales have increased significantly. </p><p>According to the HIA, new home sales in the December 2020 quarter were <a href="https://hia.com.au/-/media/HIA-Website/Files/IndustryBusiness/Economic/publications/new-home-sales-extract-jan21.ashx?la=en&amp;hash=92C2F1470209659E147EF07D07737688A0E329F1">almost 100 per cent higher than in December 2019.</a></p><p>However, the design of the scheme largely lent itself to new houses, as opposed to units. </p><p>An example of this was the tight timelines for eligibility, where the commencement of a new property initially had to take place <a href="https://www.google.com/url?sa=D&amp;q=https://www.corelogic.com.au/news/vacuum-effect-and-its-implications-homebuilder-scheme&amp;ust=1613103180000000&amp;usg=AOvVaw3r9014uvnv9y5QgGk0cbMR&amp;hl=en&amp;source=gmail">within three months of the contract date.</a></p><p>This meant the take up of the scheme was largely utilised for detached houses, rather than off the plan unit sales, with the latter requiring a number of purchaser commitments before the project commences.</p><p>This trend was reaffirmed in ABS dwelling approval data, where approvals for house builds were up 13.9% in the year to December 2020, compared with an -8.6% decline in units approvals.  </p><p>Corelogic sales volumes only count new properties as sold upon settlement, so the portion of new home sales over 2020 may continue to trend even higher once new house builds are completed.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Portion of total sales (houses) </strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><table><thead><tr><th>Greater capital city / rest of state region</th><th>Portion of annual sales that are houses -  January 2021</th><th>Portion of annual sales that are houses - decade average</th></tr></thead><tbody><tr><th>Sydney</th><th>58.3%</th><th>53.5%</th></tr><tr><th>Melbourne</th><th>67.9%</th><th>65.8%</th></tr><tr><th>Brisbane</th><th>77.0%</th><th>71.0%</th></tr><tr><th>Adelaide</th><th>78.7%</th><th>79.5%</th></tr><tr><th>Perth</th><th>82.1%</th><th>79.4%</th></tr><tr><th>Hobart</th><th>74.1%</th><th>74.5%</th></tr><tr><th>Darwin</th><th>67.1%</th><th>66.3%</th></tr><tr><th>Canberra</th><th>63.5%</th><th>63.0%</th></tr><tr><th>Regional NSW</th><th>83.4%</th><th>82.2%</th></tr><tr><th>Regional Vic</th><th>88.2%</th><th>87.2%</th></tr><tr><th>Regional Qld</th><th>74.1%</th><th>68.3%</th></tr><tr><th>Regional SA</th><th>93.9%</th><th>94.3%</th></tr><tr><th>Regional WA</th><th>92.8%</th><th>90.7%</th></tr><tr><th>Regional Tas</th><th>87.6%</th><th>86.4%</th></tr><tr><th>Regional NT</th><th>78.0%</th><th>73.2%</th></tr></tbody></table></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sup><sub>^Source: CoreLogic. Note these calculations are based on modelled estimates of settled sales, and final sales numbers may revise over time. The estimated do not properties sold off the plan that are yet to settle.</sub></sup></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><h2><strong>Investor lending was low, and investors may prefer units </strong></h2><p>The value of finance commitments for the purchase of investment property, as reported by the ABS, has a stronger positive correlation with unit sales than houses. </p><p>Comparing a decade of sales volumes with investor finance commitment values produced a correlation coefficient of 0.74 with units, and 0.48 with houses.</p><p>This could be because investors have historically outweighed owner occupiers across the unit sector. </p><p>Over 2020, the average value lent to investors for the purchase of property was $5.1 billion per month. This is 22.7 per cent below the monthly average in the past decade. </p><p>The relatively low levels of investment activity may have been compounded by weak rental markets, particularly in highly- concentrated investment markets like inner-city Sydney and Melbourne, which are largely comprised of unit stock.</p><h2><strong>House sales rise as a percentage of total sales when prices fall</strong></h2><p>Continued falls in investment financing does not entirely explain the fall of units as a share of total sales. </p><p>After all, April to June 2019 marked the period where house sales had reached the highest concentration of sales over the decade, at 75.1 per cent.</p><p>During this time, the value of investor lending was low, but not at its lowest.</p><p>What did happen during that time however, was a bottoming out in housing values nationally. </p><p>When houses become more affordable, they may become increasingly preferable to units. </p><p>Similarly, an increase in house prices, such as has been observed in recent months, may pivot demand back to units, where purchase prices are generally lower and housing affordability less challenging.</p><p>Based on this reasoning, there are headwinds for house sales in the year ahead; the end of the HomeBuilder scheme, a recovery in investor lending levels and rising house prices could challenge the popularity of detached dwellings over the year.</p><p>But there are arguments for desirability of detached dwellings in 2021. </p><p>Anecdotally, houses have offered reprieve from density during a pandemic, and remote working arrangements have allowed people to seek relatively affordable houses in regional Australia.</p><p>Another consideration is that unit rents have seen weaker performance than houses over the year, which may see investor demand gravitate toward houses. </p><p>First home buyers may also continue to drive house sales, as Sydney and Melbourne house values sat -2.7 per cent and -6.5 per cent below the respective peaks as of January.</p></div></div></div></div></div>

  The share of houses as a portion of sales increased in the year to January 202...

Low mortgage rates, a swift economic recovery—which has spurred consumer sentiment—and low listing volumes have catapulted national housing values to record highs.

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>Low mortgage rates, a swift economic recovery—which has spurred consumer sentiment—and low listing volumes have catapulted national housing values to record highs.</p><p>At the end of March, the Corelogic national home value index increased a further 2.8 per cent, placing values 5.6 per cent above the previous market peak in October, 2017.</p><p>The combined value of Australian dwellings hit $7.9 trillion during the month, according to Corelogic. </p><p>This cements residential property as an extremely large and important asset class.  </p><p>Comparing current capital city values with previous peaks adds some perspective to the current upswing, particularly in Perth and Darwin, where values remain substantially below their record highs from 2014. </p><p>It also highlights the different dynamics across capital cities, such as in the ACT, where dwelling values have hit a new high every month for 19 months. </p><p><strong>Sydney</strong> </p><p>Sydney house and unit values took 44 months to reach a new high value. </p><p>While values have lifted a relatively high 8.1 per cent since the Covid-induced decline (which bottomed out in September, 2020), the total value of the dwelling market is actually only 2.6 per cent higher than the previous peak, which was in July, 2017.  </p><p>In 2017, a property price downturn was likely catalysed by changes to lending conditions.</p><p>Cash rate reductions, along with a relaxation in borrower serviceability assessment rules, spurred the start of a recovery trend through 2019. </p><p>Covid-19 interrupted this upswing, but a recovery in economic conditions, and increased consumer confidence, has pushed values above the previous peak.  </p><p></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/49be387c-a2f7-4694-8480-73e89662ca40.jpg" width="920"/></picture><div><span style="align-content:center;opacity:0.8">The Melbourne housing market was the most affected of any capital city by Covid-19.</span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p></p><p><strong>Melbourne</strong> </p><p>Melbourne values reached a peak in March, 2020 after staging a recovery from the earlier 11.1 per cent drop in values between late 2017 and mid-2019. </p><p>The Melbourne housing market was the most affected of any capital city by Covid-19, due to extended social distancing restrictions through 2020 and a high exposure to overseas migration as a source of housing demand. </p><p>Closed borders created a negative shock, with a more significant and direct impact on inner city rental demand. </p><p>Since bottoming out in October, 2020, as stage 4 lockdowns began to ease, Melbourne dwelling values have climbed 0.7 per cent above the pre-Covid high.  </p><p>As the value of Melbourne housing nudges above its previous peak, it is worth noting the market has not recovered evenly.  </p><p>House values remain -1.8 per cent below the previous November, 2017 high due to a larger correction through the recent downturns. Within different price segments, there is also variation.  </p><p>As of March, the “high” end of the market (measured as the top 25 per cent of values in Melbourne) was still -4.0 per cent below its record high, which was in October, 2017.</p><p>Meanwhile, low- and middle-tier values have increased beyond their pre-Covid highs by 4.9 per cent and 2.2 per cent respectively, reflecting a smaller decline turn recent downturns, as well as strong demand from first home buyers who typically target properties around the middle-to-lower end of the market.  </p><p></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/16081cf4-2923-4650-ad9d-3709529f89c6.jpg" width="920"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p></p><p><strong>Brisbane </strong></p><p>Brisbane house and unit values are 6.5 per cent above the previous peak, which was in April, 2020. </p><p>Market values saw a peak-to-trough decline of -0.9 per cent through Covid-19. </p><p>The decline lasted just four months when Brisbane dwelling values recovered to a new high by October, 2020. </p><p>As with Melbourne, the recovery in the Brisbane market has been varied. </p><p>While house values climbed 7.6 per cent above the previous peak through March, which was reached in May, 2020, unit values remain -9.4 per cent below the record high value, which was in March, 2010. </p><p>Brisbane unit values are currently at similar levels to October, 2007, reflecting an affordable entry point to the market. </p><p>The weaker conditions across the unit sector are likely due to previously high levels of unit completions keeping values subdued, particularly in the later part of the 2010s. </p><p>ABS dwelling completion data saw unit completions across Queensland rise 50.4 per cent in the five years to September, 2020, compared to a 17.4 per cent lift in house completions. However, strong internal migration flows to south-east Queensland, as well as other tailwinds for housing demand more broadly, has supported five consecutive months of growth in Brisbane unit values since November, 2020. </p><p><strong>Adelaide</strong> </p><p>The Adelaide market was one of the least affected through Covid-19 in terms of values.</p><p>Following a -0.2 per cent dip from the previous high in May, 2020, values had surpassed the previous peak by September last year. </p><p>The rate of change in dwelling values jumped to a monthly increase of 1.5 per cent during March, 2021, which is the highest monthly growth rate seen  across the city since December, 2007. </p><p>House and unit values in Adelaide are currently sitting at a record high.  </p><p>Although housing values are reaching new highs each month, relative to the larger capital cities, Adelaide housing values remain low.  </p><p></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/0dd6b3df-7e71-455a-8488-bbee73f4f1dd.jpg" width="920"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p></p><p><strong>Perth</strong> </p><p>The Corelogic home value index for Perth shows values -15.9 per cent below the record high, which was in June, 2014. </p><p>The peak-to-trough decline, which was induced by the rapid withdrawal of  mining investment, employment opportunity and migration, created an additional negative shock, which pushed values down a further -2.2 per cent between April and July, 2020.</p><p>However, the Perth dwelling market has seen consecutive increases in value for the past eight months. </p><p>For the past five months, value increases have exceeded 1 per cent a month, which is a strong growth rate and signals the start of what may be a sustained and rapid recovery. This co-incides with rising interstate migration levels to Western Australia and projected increases in  already rising mining investment.  </p><p><strong>Hobart</strong> </p><p>Hobart has seen the second-highest lift in housing values from the previous peak, at 12.3 per cent.</p><p>That previous peak was in February, 2020, before a brief Covid-induced decline in total dwelling values of just -0.3 per cent. </p><p>Hobart values have seen extraordinarily strong growth with the annualised capital growth return sitting at 9.4 per cent for a five-year period (+56.3% during the past five years).</p><p>ABS building activity data suggests house commencements were 32.8 per cent above the decade average through the September, 2020  quarter in Tasmania. </p><p>Combined with affordability constraints, additional stock should work to ease growth rates across the region in the coming months.  </p><p></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/39c1b49d-aa3a-4ff5-b334-35fc8f448028.jpg" width="920"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p></p><p><strong>Darwin</strong> </p><p>Darwin values are the furthest from the previous peak of the capital city markets. </p><p>A record high was reached across Darwin houses and units in May, 2014.  </p><p>Similar to Perth, a decline in the resources-related infrastructure sector saw a substantial decline in  housing values, with the peak-to-trough fall extending to February 2020, at -32.7 per cent.</p><p>Since February, 2020  however, Darwin values have increased 16.5 per cent through to March, 2021, which is the fastest growth rate among the capitals. </p><p>This leaves values -21.6 per cent below the record high, and shows the Darwin dwelling market firmly in a recovery trend.  </p><p><strong>ACT</strong> </p><p>ACT values at the end of March were 16.9 per cent higher than the previous peak, which was in April 2019.  </p><p>Following a -1.5% peak-to-trough decline, ACT dwelling values had recovered by September, 2019, and have hit a new record each month since. </p><p>Rapid dwelling value growth across the capital has largely been driven by house values, which are 19.7 per cent above the previous high in April, 2019, compared to a 7.2 per cent lift in unit values since the previous high. </p><p>Part of the strength in ACT value returns has been due to relatively high incomes across the territory, as well as resilient labour market performance through Covid-19.  </p><p>However, the fact that values have surged  almost 17 per cent in less than two years highlights an increasing barrier to ownership for future first home buyers.  </p></div></div></div></div></div>

National housing values have surged to record highs—but how do they compare to the previous best levels?

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<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>The onset of Covid-19 may be creating a two-speed rental market, with inner-city rents declining faster than those in the outer suburbs. </p><p>Corelogic data confirms that there is a positive correlation between changes in rent values and distance to the CBD. </p><p>This means that the closer a region is to the CBD, the more likely it is that rent values have fallen.</p><p>Rent values were analysed across statistical area regions of Brisbane, Sydney and Melbourne—for each region, the median property distance to the CBD was compared with the change in total rental market values from the end of March (which marked national, stage 2 restrictions) to the end of August.</p><p>For regions where the typical property is less than 10km from the CBD, the average decline in house rents was 2.3 per cent, and 3.6 per cent across units. </p><p>For rental markets 10km or further from the CBD, house rents had actually increased 0.1 per cent, while unit values declined a relatively mild 0.4 per cent.</p><p>When examining the capital cities and housing stock separately, the strongest relationship existed between rent changes in Sydney units and distance to the CBD. </p><p>These two variables have a correlation coefficient of 0.8, suggesting that the closer a property was to the CBD, the more likely, and steep, rental declines have been through the pandemic. </p><p>The average correlation coefficient was 0.6, and the weakest positive correlation was 0.4 across Brisbane houses.</p><p>Each graph shows the change in rent values for houses and units across the horizontal axis between March and August, and the distance to the CBD along the horizontal axis.</p><p>The scatter graphs show a positive relationship between distance to the CBD and growth in rents. </p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Change in rent values for Brisbane</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/71b27701-2574-489d-81e3-03de2e33ff72.jpg" width="800"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Change in rent values for Melbourne</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/dfe74dc2-8d11-46d2-bcde-e0a80762b593.jpg" width="800"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Change in rent values for Sydney</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/79c8a59b-b3a5-4b50-b75e-2aff52a8e235.jpg" width="800"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sup>^Source: Corelogic</sup></p><h2><strong>Why have inner city markets been more affected?</strong></h2><p>As has been noted in previous research from Corelogic, there are several distinct factors of the Covid-19 downturn that have made inner city rental markets particularly susceptible to a decline in rental values.</p><p>These include the relatively high exposure to overseas migration as a source of housing demand. </p><h2><strong>Where have rents increased?</strong></h2><p>Of the 125 rental markets analysed, there were 63 regions where house rents increased, and 35 regions where unit rents increased, since the end of March to August.</p><p>Rental increases were most common across Sydney and Brisbane, where employment has been less affected by the pandemic, and social distancing measures have eased. </p><p>The highest rental value increases were across Blue Mountains houses, rising 3.3 per cent.</p><p>The reason for rental value increases in outer-suburban areas are less clear. </p><p>On explanation may be that outer-city suburbs have been less exposed to the factors driving declines in demand, such as overseas migration.</p><p>Anecdotal reports assert that a draw card for outer-city suburbs are relatively cheap rents, and low density along with remote working lessening the hurdle of travel times from areas located further form the largest employment nodes. </p><p>This may have increased rental prices through higher demand. </p><p>The analysed data set also revealed that rental value increases have occurred in cheaper rental markets. </p><p>However, it is difficult to understand this trend without survey data, and internal migration data for the Covid period will likely not be available until April next year.</p><p>It may also be the case that added stimulus to low income households have added to rental demand in areas where rents are usually cheaper. </p><p>The tapering of this fiscal support may lead to a more broad-based decline in rents over the next six months.</p></div></div></div></div></div>

The onset of Covid-19 may be creating a two-speed rental market, with inner-city rents declining faster than those in the outer suburbs...

Adjusting for a strong rise in inflation takes some shine off the recent value increases seen across smaller capital city housing markets in the September quarter.
 

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>Adjusting for a strong rise in inflation takes some shine off the recent value increases seen across smaller capital city housing markets in the September quarter. </p><p>This is because factoring inflation into the rate of capital gains of dwelling values provides an important perspective that is often overlooked. </p><p>Housing is an integral part of Australian household wealth, and has been identified as a key source of equity for funding aged care and health care later in life. </p><p>Therefore, inflation can affect the real value that be accessed through property over time.</p><p>The latest Consumer Price Index results from the Australian Bureau of Statistics showed a 1.6 per cent increase over the September quarter—the highest quarterly result since 2006.</p><p>When taking headline inflation numbers into account for the September quarter, real (inflation adjusted) changes in house prices showed declines across seven of the eight capital city markets, and the combined regional markets. </p><p>Darwin was the only capital city market to exhibit real dwelling value growth, at 0.7 per cent.</p><p><strong>Real v nominal change in dwelling market values </strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/dbbf5e51-5bf2-4ac9-b76d-5ad32c6c5087.jpg" width="800"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sup>^Source: Corelogic</sup></p><p>However, the 1.9 per cent decline in headline inflation through the June quarter, which was not fully recovered by the September result, has reduced the real decline in property values through the pandemic compared with the nominal result.</p><p>Nominal declines in national dwelling values were 1.9 per cent between the end of March (when stage 2 lockdowns were rolled out across Australia), and September. </p><p>However, adjusting for the deflationary period in June, real dwelling values fell only 1.5 per cent.</p><p>While annual inflation has been weighed down to 0.7 per cent, real growth in national dwelling values was 4.1 per cent in the year to September.</p><p>Cash rate reductions, which are anticipated through November, are prompted by a low inflationary environment, but simultaneously increase demand for property, and typically push prices higher. </p><p>Despite the initial correction in home values that came with high uncertainty and a slowdown in economic activity, residential real estate values show signs of stabilising, or even increasing.</p><p>A particular challenge through the current period may be for those trying to save for a deposit to buy property, particularly for first home buyers who do not have existing property to draw on for sale or equity.</p><p>On the one hand, low inflation erodes the value of savings at a more gradual pace. But with the cash rate potentially hitting new record lows in November in an attempt to lift inflation, deposit rates for savings accounts are likely to be further compressed. </p><p>This could see first home buyers trying to enter the market with increasingly low deposits, meaning more debt, which in a low inflationary environment, is harder to pay off over time.</p><h2><strong>What does inflation tell us about real returns in different areas over time?</strong></h2><p>Growth in housing across Australia at the macro level has broadly outpaced inflation, creating real returns for property owners across Australia. </p><p>In the June 2020 Pain and Gain report, it was noted the median return for resales on property held for 30 or more years had a nominal profit of $569,000. </p><p>On the median resale through the June quarter, this amounted to a real return of $230,000.</p><p>The table below summarises the nominal versus real returns on capital city dwelling values over a 10 and 20 year period. </p><p>The 10 year real return highlights the weakness in long term returns from mining-related markets like Perth and Darwin. </p><p>It also highlights that the growth in the Brisbane market over the past 10 years can be largely attributed to inflation.</p><p><strong>City dwelling markets nominal vs real returns</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><table><thead><tr><th>City</th><th>Nominal 10yrs</th><th>Nominal 20yrs</th><th>Real 10yrs</th><th>Real 20yrs</th></tr></thead><tbody><tr><th>Sydney</th><th>60.2%</th><th>181.%</th><th>33.0%</th><th>76.3%</th></tr><tr><th>Melbourne</th><th>38.1%</th><th>228.6%</th><th>14.7%</th><th>106.2%</th></tr><tr><th>Brisbane</th><th>11.7% </th><th>172.3%</th><th>-7.2%</th><th>70.8%</th></tr><tr><th>Adelaide </th><th>14.8%</th><th>169.2%</th><th>-4.7%</th><th>68.9%</th></tr><tr><th>Perth</th><th>-16.2%</th><th>109.7%</th><th>-30.4%</th><th>31.5%</th></tr><tr><th>Hobart </th><th>41.7%</th><th>240.4%</th><th>17.7%</th><th>113.5%</th></tr><tr><th>Darwin</th><th>-25.6%</th><th>61.5%</th><th>-38.2%</th><th>1.3%</th></tr><tr><th>Canberra</th><th>23.0%</th><th>199.6%</th><th>2.1%</th><th>88.0%</th></tr><tr><th>Combined Capitals</th><th>34.2%</th><th>186.0%</th><th>11.4%</th><th>79.4%</th></tr><tr><th>Combined Regionals</th><th>15.1%</th><th>145.8%</th><th>-4.4%</th><th>54.2%</th></tr><tr><th>Australia</th><th>29.7%</th><th>176.2%</th><th>7.7%</th><th>73.3%</th></tr></tbody></table></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sup>^Source: Corelogic</sup></p><p>Over a 20 year period however, each capital city dwelling market has returned growth higher than inflation. </p><p>Real returns for housing in Australia increased from the late 1980s, driven by deregulation in the financial system, increased globalisation and relatively low levels of supply to strong population growth.</p><p>Stubbornly low inflation against a low interest rate environment may continue to boost real returns for home owners, but could exacerbate the challenge for non-home owners to get on the property ladder.</p></div></div></div></div></div>

Adjusting for a strong rise in inflation takes some shine off the recent value  increases seen across smaller capital city housing markets...

foreign investment fell1

<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>The foreign acquisition of Australian assets is affected by a number regulatory, fiscal and monetary “push” and “pull” factors. </strong></p><p>Within different asset classes, sensitivity around issues such as security, nationalism and housing affordability have also shaped legislation and decision-making on foreign investment. </p><p>Capital directed towards different assets fluctuates as a result. </p><p>A recent factor “pushing” demand away from Australian residential property is the proposed removal of the capital gains tax main residence exemption for foreign residents. The measure eliminates a crucial incentive to owning a home in Australia as a foreign resident and could see temporary tax residents, such as expatriates, sell their properties before moving away. </p><p>“Pull” efforts include mandates from overseas governments that limit foreign investment. In China for example, capital outflow controls were implemented in reaction to depleted foreign currency reserves.</p><p>Last month’s Foreign Investment Review Board <a href="https://theurbandeveloper.com/articles/foreign-investors-australias-housing-market">report </a>outlined the value of assets that had been approved for foreign acquisition. </p><p>Related:<a href="https://theurbandeveloper.com/articles/foreign-investors-australias-housing-market"> Foreign Investment in Australian Property Tumbled in 2017: FIRB</a></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/c64b62fe-8326-4738-8475-b73186d1c382.jpg" width="1621"/></picture><div><span style="align-content:center;opacity:0.8"> Chinese property website Juwai.com’s overview of the current foreign investment restrictions currently in place globally. </span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><h2><br>Foreign investment in residential real estate </h2><p>In the 2015-16 financial year, residential real estate was the largest asset segment approved, at $72 billion. This fell to $25 billion the following year, representing a year on year decline of 69 per cent. <br><br>While the dramatic fall is attributable to an organic decline in foreign buyer activity, the drop is also attributable to changes in application fees, taxes and development marketing quotas.</p><p>However, this decline was not as drastic in the commercial real estate segment. Commercial real estate assets approved for acquisition fell from $50 billion in 2015-16, to $44 billion in 2016-17 – a decline of just 12 per cent. </p><p>This also made commercial stand out as the second highest value segment approved for foreign acquisition. Commercial made up 23 per cent of approved assets, behind the services segment which attracted $54 billion in approvals (28%).  </p><p>Amid continued policies limiting foreign acquisition of Australian residential real estate, simplification of the foreign investment framework was made for commercial assets over the 2017-18 financial year. </p><p>Related: <a href="https://theurbandeveloper.com/articles/chinese-investment-fell-60-last-year">Chinese Investment Fell 60% Last Year</a></p><h2>Foreign investment in commercial real estate </h2><p>Many assets are subject to a screening process by FIRB, and in commercial real estate, the subject to screening depends on the asset value. Recently, commercial properties treated as subject to a low $55 million assessment threshold were reduced. This was done partially by removing land that falls within “prescribed airspace”. </p><p>Previously, prescribed airspace applied to most commercial properties in the central business districts of Australia’s major cities. The change in the threshold makes it easier for foreign individuals to acquire commercial land up to $261 million, or in the case of an agreement investor country, the threshold is $1.1 billion. These countries include China, New Zealand and the United States.</p><p>Another feature of the commercial real estate approvals recorded in the FIRB report, is that the average value approved was far higher, at $94 million in 2016-17, as opposed to $82 million in the previous year. </p><p>This reflects one of the main differences between residential and commercial markets: the participation of institutional buyers with large pools of capital makes the segment more resilient, particularly at the high end of the market. </p><p>This is reflected in Corelogic transaction data, with an estimated 79 per cent of commercial properties transacted across Australian CBDs acquired by institutions, rather than individuals, in 2016-17. </p><p>This is up from an estimated 77.5 per cent in the previous financial year. </p><p>This is not to say that smaller, regional commercial assets are performing as well as the high-end market. </p><p>Corelogic commercial auction results suggest the average weekly clearance rate of commercial property over the June quarter is shaping up to be 60 per cent, down from 64 per cent in the previous quarter.</p><p>Average auction volumes have also generally been lower, with an average of 40 auction events each week, down from an average of 50 in the previous period. However, unlike the residential space, policy around foreign acquisitions are relatively accommodative.   </p></div></div></div></div></div>

The foreign acquisition of Australian assets is affected by a number regulatory, fiscal and monetary “push” and “pull” factors.  Within different ass