Behind the 4 forces that move Aussie house prices

Sep 2020Karen Millers

New predictions are made every other day about whether the Australian property market will skyrocket or slide.

Less than a week ago, Westpac predicted house prices were set to spike by 15 per cent in the next 2-3 years, while Fitch Ratings on Monday forecasted property price drops of up to 10 per cent in the next 12 to 18 months.

Meanwhile, the Commonwealth Bank has revised their predictions about the property market, anticipating a drop of 6 per cent rather than 10 per cent drop in every capital city bar Melbourne.

But what actually causes property prices to move? What are the invisible forces operating behind the scenes of the Australian housing market?

According to seven property experts and economists, these are the four largest driving factors behind dwelling value changes.

Interest rates

A significant determining factor of the property market is the official cash rate, which is set every month by the Reserve Bank of Australia (RBA).

“The cash rate influences whether debt is cheap or expensive. Australians have what is known as a ‘high elasticity of demand’ for housing, where reductions in the price of debt often lead to more demand for housing,” said CoreLogic head of research Eliza Owens.

RBA modelling suggests that a 1 per cent cut in the cash rate can lead to an 8 per cent rise in property prices over the subsequent two years, she added.

“The price of debt and access to housing credit has arguably been more important in increasing property prices than labour force conditions.”

House prices can actually tend to rise in periods of high unemployment, because an environment of mass joblessness is precisely when the RBA lowers the cash rate, she added.

“The fact that the cash rate target is at a record low of 0.25 per cent, and the actual cash rate has been lower than this still, means that price falls through the pandemic are not as steep as they otherwise may have been.”

CBA head of Australian economics Gareth Aird also described interest rates as the “single most important driver of real property prices over the long run”.

“Lower interest rates don’t just have an impact on housing prices because households can borrow more for a given level of income,” he said. “They also increase the attractiveness of property from an investment perspective because the yield on property is compared to the risk free rate.”


In a note from August, AMP Capital Shane Oliver pointed out that travel restrictions have choked Australia’s immigration levels, with net immigration to fall to 35,000 this financial year from 240,000 the previous financial year.

It means underlying demand for homes could fall from 200,000 to 120,000, he added.

“This could result in a significant oversupply of dwellings, and in turn could reverse the years of undersupply that has maintained very high house prices since mid-last decade.”

Credit ratings and research agency Fitch Ratings also flagged that immigration will drop to its lowest levels since June 1993.

“The decline will lead to a significant drop in household formation,” said a note from Fitch Ratings, adding that demand for homes will fall by around 76,000 homes between the 2019 and 2021 financial year that would have otherwise been there if immigration levels were normal.

“Assuming the natural population increase remains similar to previous years, Fitch estimates the population growth for Australia will reach just 0.7 per cent in 2020, a level not seen in the past 40 years, and down from 1.4% in 2019.”

“The exceptional uncertainty related to the current recession, and its disproportionate impact on young people, is likely to reduce household formation and property demand even more.”

Supply and demand

Going back to basics, house prices fluctuate according to this simple economic principle.

“It is basic economics; price is a function of demand and supply,” said Property Investment Professionals of Australia (PIPA) chairman Peter Koulizos.

“For example, if there is increased demand for property through initiatives such as major assistance for first-home buyers and decreasing tax rates for investors, property prices will go up.

“However, if there are too many apartments being built in an area which causes an oversupply, property prices will go down.”

Though Australia is in a recession, property prices have held up as “relatively stable” since people aren’t very interested in buying or selling their properties at the moment, he added.

But Laing + Simmons managing director Leanne Pilkington said there was currently low supply “in almost every market” yet “still a reasonable number of buyers looking to purchase in most areas”.

“Units have been more impacted than houses, as there are higher numbers available and less demand, and some areas are performing better than others as a result of issues like lack of foreign students,” she said.

Propertyology head of research Simon Pressley noted that immigration and interest rates are just two of many factors that can influence supply and demand.

“The property market of an individual town or city is like one very big jigsaw puzzle. It’s the sum of all pieces, not one piece, which completes the picture,” he said.

“Property is shelter. Immediately before the arrival of Covid-19, Propertyology publicly declared that most of Australia had a significant undersupply of shelter. A virus doesn’t diminish a nation’s need for shelter, but it does have the ability to trigger a transference of housing demand.”

Bank stability

REA Group chief economist Nerida Conisbee said bank stability also played a significant part in determining house prices.

The biggest factor supporting house prices right now is stability in the banking sector. We are seeing very few distressed sales on and the six-month mortgage payment freezes were the key to this,” she told Yahoo Finance.

“Banks are no longer providing these but are continuing to work with customers. If we see a withdrawal of support then this will lead to house price falls.”

Jessica Yun, Yahoo Finance, 24 September 2020

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