House Prices rise when Buyer Demand exceeds Vendors’ Supply of properties for sale.
Intense competition between multiple buyers for a specific property typically leads a higher sale price. Think of a crazy auction, where bidding just keeps going up and up and up, and the ultimate purchase price ends up being far about the reserve price (which is effectively the vendor’s price expectation). Now think of that type of auction replicated across a suburb over several weeks and months…
A higher-than-expected sale price for one property lifts price expectations for another, then another… In little time, the Median $ House Price of the area rises. This graph below shows the historic relationship between Auction Clearance Rates and Median $ House Price Changes in Brunswick (a typical suburb in Melbourne’s north).
When Auction Clearance Rates are below average or declining, Year-on-Year (YoY) Median $ Price Growth is below average or trending downwards. A simple way of explaining the stats: auctions and prices typically move in the same direction. So, strong buyer demand for properties tends to spur house prices upwards. This is pretty commonsense stuff. It’s important to then ask:
What stimulates increased buyer demand?
Interest Rates play an obvious role. Purchasers tend to increase their budgets when debt finance becomes cheaper, and, Property Investors and Developers become more active in the market as well. I don’t think we need a graph to illustrate this historic relationship between rates and prices.
Another important macro-economic condition that tends to contribute to increased house prices is the Australian Dollar. Our housing market is reasonably open to overseas buyers, and the value of the Australian Dollar affects how international investors view Melbourne real estate. The below graph illustrates the inverse relationship between Melbourne House Prices and the Australian Dollar over the last 20 years. When the AUD is low, foreign purchasers get more for their dollar, and Melbourne House Prices tend to rise.
The open nature of our housing market and our immigration programs has led to some interesting localised trends in buyer demographics and associated house price growth (I’ll cover this in another email, which will be more about location-based growth drivers).
Confidence plays a bit part in market trends. If, collectively, we as consumers are confident of our current circumstances and future prospects, then we’re more likely to extend ourselves with big purchases. A feedback loop affects all markets – if prices are increasing, then the general assumption is that prices will continue to increase, and we purchase according to that assumption. And, the opposite is true. Westpac has conducted a Consumer Sentiment survey each month for nearly 50 years. The below graph shows how tightly correlated Consumer Confidence is with people’s intention to buy major household items.
When you’re confident, you’re more likely to be a purchaser.
So broad-based rises in House Prices are fuelled by heightened competition between buyers, cheap debt, a low Australian Dollar (and associated overseas demand) and a general confidence in the market.
Finally, let’s look at the Supply side of the equation, and how that affects House Prices.
Victoria has been growing in population faster than any other state, and Melbourne is predicted to become Australia’s largest capital city within a decade or so. As one of the world’s most liveable cities, Melbourne is very popular with migrants and overseas investors, but the city is also growing through high levels of interstate migration. Not enough dwellings are being built in Melbourne to support our growing population, as shown below.
The rise in the Resident Population in Victoria has been much steeper than the rise in new Dwellings. Notice how flat the growth of new Houses has been, in particular? This significant undersupply of new Housing stock has been a major contributor to rising House Prices.
A Planning Permit for a straightforward multi-townhouse project in middle Melbourne takes about 12 months to attain. With so many public infrastructure projects in plan and in progress across the city, more and more experienced builders and trades are choosing large government jobs over domestic ones. The cost of development has been rising for years, as it takes more time to move applications through myriad government bureaucracies, and it becomes harder to find good, experienced builders to complete construction.
