Consumer confidence in housing market reduced from ‘persistent’ inflation

Key Concepts

• Auction Clearance Rate: The percentage of properties sold at auction compared to the total number of properties listed for auction.
• Borrowing Capacity: The maximum amount a lender is willing to loan a borrower based on their income, expenses, and current interest rates.
• Housing Affordability: A measure of how easily a typical household can afford to purchase a home, currently at a three-decade low.
• Sticky Inflation: An economic term describing inflation that is slow to decline despite monetary policy interventions.
• Premium Market Segment: The top tier of the property market, which often acts as a leading indicator for broader market trends.

1. State of the Australian Property Market

The national auction market is currently experiencing a cooling phase, characterized by a national clearance rate of 51.5% across 1,590 auctions. Regional performance varies significantly:

• Sydney: 583 auctions with a 44.6% clearance rate.
• Melbourne: 635 auctions with a 55.3% clearance rate.
• Brisbane: 57 auctions with a 54% clearance rate.
• Adelaide: 74 auctions with a 73% clearance rate.
• Canberra: 54 auctions with a 76% clearance rate.

2. Economic Drivers and Market Cooling

Angus Moore, Senior Economist at REA, attributes the cooling market to several macroeconomic factors:

• Interest Rate Hikes: The Reserve Bank of Australia (RBA) has implemented rate increases that were both steeper and earlier than market expectations.
• Persistent Inflation: Higher-than-expected inflation has negatively impacted consumer confidence.
• Cost of Living Squeeze: Rising fuel prices and general inflation are reducing disposable income, further dampening market sentiment.

3. Housing Supply and Affordability

A critical tension exists between high migration levels (increasing demand) and the current inability to build sufficient housing.

• Affordability Crisis: Housing affordability is at its lowest point in 30 years. This is driven by significant price growth over the last 5–6 years in cities like Brisbane, Perth, and Adelaide, combined with reduced borrowing capacities due to higher mortgage costs.
• Future Risks: There is a concern that current market conditions may act as a warning that future housing supply will fail to meet government targets.

4. Market Dynamics: Premium vs. Broad Market

Moore explains the "trickle-down" effect of market corrections:

• The Premium Segment: Historically, the most expensive homes are the first to see price declines when interest rates rise. This was observed in Sydney and Melbourne toward the end of last year.
• The Broad Market: As borrowing capacities shrink, buyers shift toward more affordable segments, which helps support prices in those areas temporarily.
• Growth Projections: While price growth is slowing, prices have not yet seen widespread declines. Moore expects the pace of growth for the remainder of the year to be "below average" compared to the solid performance seen last year.

5. Expert Outlook and Forecasts

• Rate Forecasts: Moore anticipates at least two, potentially three, more rate increases this year.
• RBA Strategy: The RBA remains "laser-focused" on inflation. Moore expresses hope that inflation will prove less "sticky" than the RBA fears, which would allow for a sooner stabilization of rates.
• Significant Statement: Regarding the current state of affordability, Moore noted: "In terms of the share of homes that a typical home buyer could afford the mortgage on, it's as low as we've seen in three decades at the moment."

Synthesis and Conclusion

The Australian property market is currently in a state of transition, moving from a period of growth to a cooling phase driven by aggressive monetary policy and cost-of-living pressures. While the premium end of the market is already showing signs of weakness, the broader market is experiencing a deceleration in price growth rather than an outright collapse. The fundamental challenge remains a structural supply-demand imbalance, where high migration and low affordability create a difficult environment for prospective buyers, despite the cooling auction clearance rates.