- House price growth moderated in the March quarter;
- The outperformance of houses v units and regions v cities largely continued;
- Housing is an imperfect hedge against inflation;
- Higher interest rates will see house price growth moderate further this year and next;
- I am expecting house prices across Australia to grow on average by 8% this year, and 1% in 2023.
What happened to house prices in the March quarter
As would be expected (and hoped) house price growth slowed across the country in the March quarter. This was particularly the case in Sydney and Melbourne. Price growth remained strong in Brisbane and Adelaide. Perth was somewhere in between. That price growth was slowest in the two most expensive cities suggests that affordability was an important factor.
Affordability is the main reason why regions continued to outperform cities in most states in the March quarter (particularly in NSW). The exceptions were Brisbane (the South East of Queensland has benefitted most from higher inter-state migration over the past year) and Perth (cheapest of the major cities). Despite affordability concerns houses outperformed units in all major cities (apart from Melbourne). That trend likely reflects the ongoing strong demand for houses in suburbs and regions in the WFH era. But affordability worries means that a stronger run for unit prices relative to standalone housing is probable at some stage in most major cities.
House prices and inflation
Over recent months there has been rising concern about inflation. Strong demand (notably for goods) and problems with supply has resulted in higher prices. In Australia, the Q1 CPI numbers are likely to show that inflation will be over 4%. In the US, CPI inflation is currently running at 8%. In Germany, producer price inflation (the increase in prices paid by many companies) is running at over 30%!
Financial markets and most forecasters believe that we are currently close to the peak of inflation. Falling real wages growth (wage growth after inflation) means households are able to buy less goods. Factories are (slowly) working their way through the mountain of backlog of orders. The hit to commodity prices from the Russia-Ukraine conflict appears to have peaked (although they don’t look like falling substantially at least in the near term).
Most likely inflation both domestically and globally will return to the 2-3% band that it has been within for much of the past twenty five years (as financial markets and economists are forecasting). But there must be some risk that inflation stays higher for longer than currently assumed.
It is often said that ‘real’ assets (assets used by households, firms and governments such as property and infrastructure) do better than financial assets (such as equities) during periods of rising inflation. This is particularly the case if inflation is taking place at the same time as strong economic growth (as it is currently). During these periods the unemployment rate is low, spending is strong and so there is plenty of demand in the economy for places to live and for use of infrastructure. Periods of strong economic growth and rising inflation are often associated with rising interest rates, a negative for financial assets.
Historically house prices do appear to move in line with inflation. Certainly housing appears to do better than equities during periods of high inflation (above 10%). But no-one is forecasting inflation to be sustainably in the double-digits in Australia. The outperformance of housing over equities is less obvious during periods when inflation was rising but still moderate (under 5%). And during those high inflation periods while housing did outperform equities it also underperformed inflation (ie, house prices rose by less than inflation). So historically housing has proved to be a better hedge against high inflation than financial assets but it is still not perfect.
To read my full update, click here.
We live in interesting times.
Peter Munckton - Chief Economist