Stock levels drop to new lows!
Perth property prices continue to demonstrate strong growth leading into Christmas. This week, prices increased by just less than 0.5% and are now up nearly 14.5% for the year, as illustrated in the chart below. We can see the rate of growth increasing over the past three months.
We have been harping on all year that the simple reason for the accelerating price increases in the face of rapidly rising interest rates is the increasing disequilibrium between supply and demand. We have discussed several factors this year as to why we have such heightened demand accompanied by decreasing supply, including migration, an anemic rental vacancy rate, employment, and a lack of new homes being constructed.
Over the past few weeks, the supply of established dwellings listed for sale has been diminishing, but demand in the form of weekly sales has been steadily rising. Listings have fallen from approximately 4,900 to 4,730, while sales have regularly peaked above 1,000. The growing disequilibrium between supply and demand is driving Perth’s nation-leading price rises. We can see an illustration of this expanding disequilibrium in the following chart, with the gap between listings and sales increasing.
Listings for sale in Perth are significantly lower than in the past four years, and we expect listings to decline further as we approach Christmas and the New Year. The next chart reveals the common trend of falling listings leading up to the holiday period as potential sellers wait till the new year before putting their dwellings on the market. If listings this year follow the same trend as the previous four years, 2024 will kick off with lower supply levels than we have seen for decades.
We expect two main drivers of property demand in WA, employment and migration, to remain robust in 2024. Although there is talk about cutting overseas migration, economic growth will drive jobs and interstate migration, with WA posting the most substantial economic growth amongst all states and territories by a significant margin. This is one of the primary reasons for the optimistic property price growth forecast in 2024. As always, however, we are mindful of potential global shocks impacting our resource export-dominated economy.
Nationally, the Gross Domestic Product (GDP) fell to 0.2%, and the positive figure was primarily due to government consumption (Energy Bill Relief and Child Care Subsidy) and private investment. Household consumption is falling due to pressures on the cost of living and rising interest rates, which is what the Reserve Bank of Australia (RBA) hopes for. If GDP goes into negative territory yet inflation remains above the target range of 2-3%, the RBA will be in a quandary.
A subscriber recently asked what the cash rate should be if the RBA were trying to maintain inflation in the 2-3% target range. It was an excellent question. The long answer is complex, with so many variables in play. However, for a short answer, if the RBA were trying to hold household consumption so there was no effect on inflation, they would look at interest rates that used a reasonable amount of household income, allowing for enough consumption to support economic growth and jobs.
A common measure of housing affordability is that 35% of household income is spent on the mortgage. The ABS reports that the average Australian mortgage is $610,000, and the 2021 Census average household income is approximately $1,750 per week. If we use the RBA’s cash rate of 4.35% plus 2% to estimate a standard bank variable home loan interest rate of 6.35% for a 30-year loan, we find that the weekly repayments are $876, or 50% of weekly household income. To achieve a mortgage repayment equivalent to 35% of weekly income, i.e. $610, we need the variable rate to be approximately 3.5%. Therefore, we need the RBA to drop the cash rate to 1.5%. It is no coincidence that from August 2016 to May 2019, a period of nearly three years, the RBA held the cash rate at 1.5%, and inflation hovered around the 1.5-2% mark.
Reproduced with permission from:
Ryan Brierty,
in house economist from Michael Keil @ michaelkeil.com
