Will Australian house prices rise in 2024?

Housing is one of Australia's most prolific barbecue topics, right up there with cricket and what you're doing next weekend. 

At the start of 2023, the consensus was expecting a 10% fall in national house prices due in large part to the lagged impact of Reserve Bank rate hikes. But most people were shocked to see that house prices actually increased by nearly 10%, driven by increased migration and a sharp fall in building approvals (which in turn affects activity). 

And now, as 2024 beckons, there are calls once again that trends in the national housing market are turning. 

In this wire, we'll take a look at two notes - one from Morgan Stanley and one from Citi - which use different data points and arguments to reach similar conclusions. Things are different this time.

The key quotes

"We expect this slowing momentum will continue and forecast nominal house prices to be flat for 2024. Existing supply should improve with purchase and rental inventories rising, while demand is likely to be capped by record poor affordability levels and population growth starting to slow from elevated levels," Chris Nicol, Equity Strategist and Australia Economist at Morgan Stanley wrote.

"To date, the backlog has exceeded our expectations as builder productivity has not recovered to pre-pandemic levels. Looking forward, this is positive and supports elevated residential activity levels for longer. However, we estimate it won’t make Australia immune from the cycle, and we are cautious about housing construction in 2HCY24 given soft lead indicators," Samuel Seow, Vice President and Analyst at Citi wrote.

Inflation is (still) a thorn in the housing market's side

As any good Australian economist can tell you, housing is approximately 20% of the composition for inflation data. Within the housing sub-sector, economists have been keeping a very close eye on reported rents. During one of the tightest rental markets of all time, rents soared - keeping inflation elevated and making the RBA's job harder than it already is. While that tightness is likely to ease at some point this year, Morgan Stanley points out it's going to be a long time before we see this loosening crop up in the data:

"Rental tightness is expected to ease somewhat through the year, which should see asking rent growth fall - but this is unlikely to flow through to CPI rents until 2025 given lags. And given house price resilience and trough in building approvals, new house purchase inflation has also started to inflect modestly higher," Nicol wrote to clients recently. 

Who's doing the building? 

Naturally, to build homes, you need builders. Construction jobs have increased by 18% in the past two years but if there is a loosening in the Australian jobs market, as is widely expected, that may mean some of those builders are left out of work. 

It's trends like this that Morgan Stanley says will be more important to the housing cycle this year - even more so than prices and even the Reserve Bank itself.

Who's approving the building?

One of the biggest problems with Australia's housing market is not just who is doing the building but whether enough projects are being approved to keep up with supply.

While the backlog has declined since COVID (shown through the completions-to-starts ratio): 

Citi points out there are several other data points that suggest a fresh cycle of new home building may still be far away - putting even more pressure on prices.

• Housing approvals declined ~2% M/M, and on a trailing 12-month basis these are now only about 100,000.  
• Additionally, new home sales are below pre-pandemic levels/declining 30-40% Y/Y
• And... vacant land sales at large REITs appear underwhelming.

Citi's best estimate is that the backlog of projects will be cleared up and the market's demand-supply equilibrium will only balance out by mid-2024. Combined with a mixed outlook for house prices across different cities and their own expectations of a potential extra rate hike in February, Citi's equity analysts argue now is not the time to be bullish on housing:

"We continue to take a cautious stance on construction activity in calendar 2024, and our best estimate is the data points to a potential “air pocket” at least in the second half of calendar 2024. Subsequently, we have a relatively neutral/cautious outlook for Australian housing construction exposure in calendar 2024," Seow wrote.

For its part, Citi expects no rate cuts from the RBA until at least Q4 this year - although that call has less to do with the housing cycle and more to do with the RBA's new monetary policy initiative which requires the RBA to get inflation back down to a 2.5% anchor (or mid-point) rather than the existing 2-3% range.

And speaking of rate cuts...

As Chris Bedingfield of Quay Global Investors put it in the Signal or Noise property show last year, if you want builders to start building again, the RBA should "drop rates to zero". 

Well, before you get to zero, you must first start cutting from the peak, and rate cuts remain the key single force in pushing up house prices, sales, and loan approvals.

So when will house prices tick up? Not for a while, argues Nicol.

"Our analysis of prior tightening cycles suggests a shift on hold from the RBA should see less negative trends emerge in building and loan approvals as well as housing sales. In contrast, the worst house price performance has historically occurred after the last rate hike," he wrote.

Nicol and his team's base case is that the RBA won't be cutting until February 2025.

Rate cuts have typically been needed for a broader housing rebound

To read more about the Australian housing market, I highly recommend you check out this piece from Koda Capital's Sebastian Ferrando:

Property

Residential investment property is a sub-par way to grow your wealth – Part 1/2

View