Increased Housing Stresses Could Pressure Rates

Housing costs continue to be elevated with June CoreLogic capital city house prices rising 0.7% m/m and 8.6% y/y and May rents up 7.4% y/y. The housing market in Australia remains very tight with a supply shortage and working-age population growth just under 3%y/y and little immediate prospect of an improvement in fundamentals. The RBA noted in June that there has “been an increase in wealth, driven by housing prices”. While it doesn’t target housing, it is worth monitoring indicators as it has become an issue for the central bank.

Housing costs y/y%

Source: MNI - Market News/Refinitiv

• We have a policy reaction function that includes house prices. While the OCR output is broadly in line with the one without housing if price increases continue as they did in Q2, a pickup to around 3% q/q, in line with Q2-Q4 2023 average, over the forecast horizon implies an OCR 12bp higher than the estimates excluding house prices by end 2025.

Source: MNI - Market News/Refinitiv

• Home price increases have slowed in 2024 with Q1 up 1.5% q/q down from 3.4% q/q in Q3 2023 but have begun to pickup again rising 1.9% q/q in Q2.
• Even though mortgage rates have been stable, rising home prices are putting pressure on already extremely low affordability. If Q2 disposable income grows in line with Q1 (+1.1% q/q), then Q2 affordability would deteriorate further to almost 45% below trend, a new record since 1980. Q3 disposable income should rise strongly with July tax cuts and wage rises, which may help moderately.
• Q2 housing overvaluation may ease slightly if Q2 rents follow the trend in monthly CPI rents at around 9% overvalued down from 24.7% in Q1 2022.
• On the supply side, there are tentative signs of a turn in building approvals with the total number rising for the fourth straight month in May, but they are still around 12% below end-2019 levels and well below population growth rates.