One unexpected side effect of the COVID-19 pandemic has been the boom in global residential prices, including in Australia.
The value of homes has soared across the world, including New Zealand (+27.6 per cent), the United States (+19.1 per cent to October), the UK (+10.0 per cent) and even places like Turkey (+40.0 per cent to October). And for those who believe interest rates drive property prices, the average key interest rate in Turkey during 2021 was 18 per cent (up from 11 per cent in 2020).
In Australia, house prices increased +22.1 per cent in 2021, led by Australia’s largest city of Sydney (+25.3 per cent).
Generally, the Australian housing market has defied most gloomy predictions. However, it would be dangerous to dismiss concerns in the current environment. That’s not to say that we are expecting a collapse in prices, but rather there are some key indicators that suggest there are some differences to the past. However, Australian residential property and US apartments have a less positive outlook. For the first time in decades, there is a real risk these markets are facing a headwind of persistent oversupply, exacerbated by pandemic-induced immigration declines.
As we head into 2022, there is an expectation that interest rates are likely to rise around the world in response to recent inflation data. However, we do not believe this will be enough to stop the gains – in fact, rising rates may indeed add to further gains (as per Turkey). The biggest risk for investing in residential property is, as always, excess supply.
As prices increase above the “cost to build”, there is almost always a supply response as developers try to cash in on the margin. Ultimately, increasing supply dampens prices back to a level where supply is restricted – and the cycle starts all over again.
So, is the surge in residential property prices causing a supply response? In Australia, the answer is an emphatic yes.
Completions have yet to increase as the lag starts by around a year, so we have yet to see any heat come out of the Australian market. However, completions will inevitably surge this year.
A surge in supply is not always a bad sign. The critical question is whether there is more total housing stock relative to overall housing occupier demand. To answer this, we will need to quantify the magnitude of the potential oversupply, if there is any. This is always a difficult task, as it not only relies on supply data but also household formation data, which can be notoriously fickle.
For Australia, population growth has generally provided Aussie housing the ultimate “get out of jail free card” just as the market begins to cool.
However, with COVID, population growth effectively halted right at the time supply was accelerating. We don’t believe it is time to call for a market correction just yet, but it seems unlikely recent national residential price growth will be repeated in 2022.
Source: What does 2022 hold for Australian residential property? Chris Bedingfield for Investor Daily