In August, American demographer and economist Harry S Dent told 60 Minutes that the Australian property market could fall “as much as 50% in the coming years”.
So, will the property market crash? It seems unlikely, according to AMP’s head of investment strategy and chief economist Dr Shane Oliver.
Why would a market crash?
Talks of a property market crash are not new but have intensified over the last year as home values have climbed considerably with CoreLogic’s home value index rising 7.1% nationally between August 2023 and 2024. This marks the 19th consecutive month of growth.
As prices have soared, there have been concerns that the market is becoming overvalued and at risk of a correction. Additionally, all this has happened during a high-interest-rate environment. This, in theory, also makes a property market crash more likely as high interest rates might mean that new buyers can’t afford loans and existing homeowners could default on their monthly repayments.
So, why hasn’t our market crashed?
Well, Dr Oliver believes several intertwined factors are holding up our property market. Let’s have a look:
The supply of housing has struggled to keep pace with demand, particularly in capital cities.
Listings of existing homes have been slow to increase, as sellers hold onto their homes in an attempt to benefit from the current capital appreciation.
Meanwhile, the supply of new builds has been hampered as the construction industry has battled against labour shortages, high cost of building materials and low building approvals. Some capitals, like Sydney and Melbourne, have also been up against strict regulations and new tax obligations that have made building new dwellings expensive and difficult.
However, at the same time, the country’s population continues to grow, up 2.5% in 2023, according to the Australian Bureau of Statistics (ABS). The biggest contributor to this increase has been overseas migration, which grew by 26.3% in 2023. All these new people need a place to live, placing further demand on the property sector.
The federal government’s aim to facilitate the building of 1.2 million new homes over the next five years, while positive, is also ambitious. In fact, at the current rate of approvals, it seems more likely we will see just over 800,0000 new homes in that period, according to Master Builders Australia.
This shortage of supply explains why prices have not crashed, despite their significant increase over the last two years.
The number of Australians in mortgage arrears remains low, despite high interest rates. This could be due to several reasons:
The housing market in Australia is not homogenous. Dwelling values have risen at varying speeds across the capital cities. Perth, for example, has seen a 24.4% year-on-year increase compared to Melbourne’s 1.0% decline, CoreLogic data shows.
This diversity helps balance out the overall market, preventing the circumstances that may lead to a property market crash.
Key driving factors for a property market crash would be high interest rates and very high unemployment. So if there were a risk, it would be in these numbers.
But while Australia does have relatively high interest rates, the unemployment rate remains low.
Moreover, on the first point, the current economic conditions are pointing towards an interest rate cut as the next move from the Reserve Bank of Australia (RBA). In July, the ABS’s data showed inflation had decreased, from a 3.8% increase in June to 3.5% in July. This trend is heading in the right direction as the RBA remains resolute in its efforts to get inflation back to within the 2-3% target range.
As for the second factor, the country’s unemployment rate is low, at 4.2% in July. This is within the RBA’s forecast that unemployment will reach 4.3% by December 2024.
Final thoughts
The imbalance between supply and demand continues to put upward pressure on property prices. Mortgage holders are managing their finances adequately enough that default numbers are low. Location-specific factors have kept the country’s market diverse and the economy is poised for an interest rate cut, which would improve affordability for buyers.
Overall, the factors influencing the housing market suggest a property market crash seems unlikely.
Interested in buying a property? Speak to Shore Financial about your financing options. To discuss your needs, call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.
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