PROPERTY REPORT - Issue 86

The Housing Conundrum: A 12 Month Battle

We’ve been closely monitoring the economic landscape of late as it changes dynamically, and here’s an honest outlook of where we go from here. For Vendors, the market is volatile and returns are inconsistent. For Purchasers, the road to homeownership is looking increasingly challenging. Let’s break it down.

The Economic Growth Forecast is mixed. Yarra Capital’s chief economist, Tim Toohey, has revised down the economic growth forecast for 2024-25 from 2.25% to 1.75%. The slowdown in non- migrant job growth is a significant concern. Fewer job opportunities mean less financial stability for aspiring homebuyers.

This in turn can affect unemployment. The unemployment rate could rise faster than expected due to declining workforce participation among non-migrant workers. A weaker job market directly impacts the ability to save. Despite declining retail figures, the economy is still spending.

The Reserve Bank of Australia (RBA) is walking a tightrope and no one knows which way they’ll fall. Further increases in official interest rates are considered “unwarranted” by some economists and could lead to a hard landing and a rise in unemployment. However, if inflation persists, the RBA may have no choice but to increase rates. They are juggling full employment and inflation at the same time.

This makes it really hard for everyone to make plans for the near future. The market is divided on whether the RBA will raise rates, although there is a chance they may follow the Federal Reserve’s lead in the US, where a rate cut is likely. Some advocate for stability, while others expect an increase. This uncertainty affects buyer confidence overall.

Higher interest rates have affected indebted households for some time. Stable rates risk falling behind in controlling inflation. Either way, it’s a tough balancing act. Recent sales data shows 2-3 bedroom houses in Sydney selling above reserve, however this is not the case for Melbourne, which is now geared toward a buyer’s market. Buyers are becoming more cautious, fearing further rate hikes which is more prevalent in the news of late. This caution affects demand and affordability.

However we won’t have an answer until August. With that in mind, Sydney’s preliminary auction clearance rate rose to 72%, while Melbourne’s dropped to 68.2%. This is mainly due to market confidence and volume. Melbourne is a buyer’s market, with higher auction volumes and more stock available. But still, prospective purchasers budgets haven’t necessarily increased, particularly first home buyers. The Melbourne metro average house price is $929,000, whereas the regional average is $605,000. The interesting fact is the majority of sales for the last financial year have floated within 10% of these averages.

On the other end of the spectrum, wage growth lags behind rent inflation, creating significant challenges for policymakers. This also means young buyers struggle to keep up their savings rates despite the rental yield sitting at 3.9%, which is far from matching what they would need to pay on a mortgaged home.

However there are proposals for increased federal rent assistance and state-level adjustment solutions. But will they be enough? One small win for the economy is the changes to income tax. As of the 1st July 2024, the proposed tax cuts will reduce the 19% tax rate to 16%, reduce the 32.5% tax rate to 30%, and increased thresholds for the 37% and 45% tax rate.

To continue housing supply in keeping with migration, a surge in home-building is expected, although it won’t fully meet the national target of 1.2 million new homes by 2029. Apart from migration, this will also be fuelled primarily by changeover buyers already in the market, and the return of investors. These groups are anticipated to drive demand, favouring detached homes in the coming years. This may increase competition as younger generations and low income earners may be forced to continue renting.

Underlying inflation won’t return to the RBA’s target range until mid-2025, which is when the majority of economists expect to see a reduction in interest rates. This affects affordability and borrowing costs across the board for the next 12 months.

Economists are almost on the fence with a 50/50 chance that the RBA may plan to raise rates to 4.85% by December 2024, if inflation increases further beyond the monthly indicator of 4%. This means higher inflation and interest rates squeeze household budgets, despite the government assistance for this financial year. The government’s energy bill rebate offers only a temporary relief, and may have little bearing on the RBA’s decisions.

If the RBA does indeed raise interest rates, this could be the red rag to bull when it comes to recession risk. Economists estimate a 50% chance of recession in this case, and if so, job security and full employment becomes the number 1 priority.

As the economy continues to slow below 2% growth, tighter lending restrictions will continue to make it hard for Australians to get home loans. Stricter lending criteria disproportionately affects low-income earners and first home buyers primarily. In contrast to that, older generations and investors with positive geared portfolios will benefit from high savings rates and prioritise holding cash and taking advantage of healthy super balances.

In summary, there is an uphill battle ahead, although it may only be short lived for 12 months. Stay informed, explore all options, and seek professional advice. Don’t expect the best decision is to do nothing either. To our young buyers, while these challenges exist, determination and smart financial planning can still open doors to homeownership. It won’t be easy, but it will be worth it in the long run.