More than meets the eye!

As the race that stops the nation was preparing to run on Tuesday, the RBA board met and to no-one’s surprise, it raised the cash rate another .25%.

With consumer sentiment diminishing and housing affordability being further stretched, why are house prices not suffering?

Higher than expected inflation figures for the September quarter prompted the RBA to respond with another rate hike. Alongside a tight labour market and an increase in retail spending, the bank cited concerns that higher housing prices could be contributing to a mild ‘wealth effect’ where home owners feel more willing to spend. However, global conflicts and cost of living pressures are likely to have a negative impact on consumer sentiment which could act to dampen housing activity.

Well, that’s the theory anyway. But it hasn’t seemed to be the case through COVID or the now 13 interest rate increases over 18 months. Property prices are a hair’s breadth away from reaching their all-time peak and market resilience has defied all expectations.

Migration has been referred to as being a major cause of housing and rental shortages and hence higher property prices but it shouldn’t be singled out. Here are 4 reasons why.

1. Housing tenure of migrants skew to rentals in the short term – the rental market is more immediately affected by migration fluctuations

2. Part of the reason migration is so high right now is because it was temporarily restricted – The high level of net overseas migration in the past year is partly a temporary result of the travel ban during the COVID pandemic. It has been pushed higher by a concentrated number of overseas arrivals in a short space of time.

3. The COVID migration ban created volatility in rental markets - Because housing demand (the movement of people) is more liquid than housing supply (the construction or acquisition of new housing), the re-opening of international borders created a demand shock, which quickly pushed up rents and worsened an already tight rental market. The demand shock also came amid constraints to new available supply, as sellers were put off by rising interest rates, and new home completions were delayed by increased material costs and labour shortages.

4. Migration is not the only demand-side factor pushing up housing costs - A sharp reduction in the number of people per household early in the pandemic added to dwelling demand by around 120,000 households. Longer term, other factors have contributed to smaller household size on average, such as the ageing population and falling marriage rates. Private rental market demand has also increased over the decades with decreasing rates of home ownership and a declining portion of social housing within the housing stock. 

5. Reducing the migration intake would have trade-offs - a temporary cap on migration is not a good solution to easing demand-side pressures, because it introduces more volatility to the market. A consistent, longer-term target for migration could enable better planning of housing supply, but will have trade-offs for economic growth.

Although house prices have risen, the rate of growth has slowed and it is thought that with another rate increase they could slow further as savings and cost-cutting measures are no longer an option. However, a shortage in housing supply, record low vacancy rates and an eventual demand from record levels of overseas migration should help to keep some upwards pressure on home values.