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Media Release

What’s driving home prices across Australia?

What’s driving home prices?

There are four indicators to focus on to determine home price trends over the next six months, according to CBA analysis.

Housing finance demand, auction clearance rates, foreign residential demand and consumer sentiment about price expectations will be key considerations across the market as CBA Global Markets Research forecasts prices are likely to continue to deflate from record highs.

“The evidence suggests that dwelling prices will continue to deflate in the very near term,” said CBA Senior Economist Gareth Aird. “There will be significant variations between capital cities and indeed suburbs within the same cities, but the broader trend should be one of continuing mild price declines.”

What about interest rates?

As long as the downturn in the housing market remains divorced from the broader economy, which continues to perform relatively well, the Reserve Bank of Australia (RBA) will continue to signal that that cash rate is “more likely to go up than down”, Aird said.

Changes in mortgage rates impact the demand for credit, which is captured in the flow of new lending.

New lending is driven by the supply and demand for credit, Aird explained, and the latest Australian Bureau of Statistics (ABS) data indicated the flow of housing credit continues to fall and the pace of the decline has accelerated.

“Credit to investors has been trending down for the past one-and-a-half years, but it’s the shift downwards in lending to owner-occupiers that’s behind the recent acceleration,” he said.

Tighter lending standards have played a part, but they “are not the primary driver of the acceleration in the downward trend of housing finance”.

“Rather, the demand for credit has declined because momentum in the market has come off and household expectations of property price appreciation have declined.”

Auction clearance rates

After strong gains in home sale prices in many parts of Australia over the past five years, the country’s auction clearance rate has been on a downward trend throughout 2018, dipping recently to between 40-45 per cent.

“The latest auction clearance rates imply that dwelling prices in Sydney and Melbourne will weaken further over the very near term,” Aird said.

Foreign demand

Foreign investment in Australian property has waned over the past two years, after a lift in state government-levied stamp duty to foreign investors and tighter capital controls out of China.

“The decline in foreign investor demand is consistent with a further easing in dwelling prices over the near term,” Aird said, and currently there’s “no evidence to suggest a rebound in foreign investor demand”.

Great expectations

Consumer sentiment surveys have proved to be a “useful near-term indicator of the annual change in dwelling prices”.

However, Aird explained the self-fulfilling aspect: “If households expect prices to weaken, then demand for credit will fall and prices will correct lower. The reverse is also true when households expect price growth to accelerate.”

Currently, house price expectation indicators point to dwelling prices continuing to deflate over the near term, he said.

Read the full report