Image: Bluestone's Chief Commercial Officer Tony MacRae (L) sat down with CoreLogic's Tim Lawless (R) for his thoughts on the market.
Hundreds of people gathered at The Calyx in Sydney's Botanical Gardens this week to mingle amongst tens of thousands of rainbow-colored plants, hors d'oeuvres and many of Sydney's property market players. The list included mortgage lenders, brokers, aggregators, business development managers and analysts. Non-bank lender Bluestone Home Loans hosted the event in honor of its 25th year anniversary, and invited CoreLogic economist Tim Lawless, who serves as head of research at CoreLogic Asia Pacific, to discuss the state of the market.
Bluestone chief commercial officer Tony MacRae sat down with Lawless to hear his thoughts on which capital cities will likely recover the most this year (and which ones likely won't), the long-standing debate between Sydney and Melbourne, what consumers are thinking, the rental market, geopolitical tensions, and his predictions the future.
The following interview has been edited for clarity and length.
"The national index has been down about 4% over the last three months. Then February came and we saw the market rise almost 2.3%," Lawless said. "These are national numbers. So it's pretty macro, and there's a lot of diversity behind these numbers, and it comes after an extreme rate of growth. I mean, look at the five year growth rates across into the capital cities and regional markets. You've got those mid-sized capitals, generally 70%-plus growth in five years. That's not quite unprecedented – we have seen a few era time periods before this where values have arisen that much in five years – but it's incredibly rare. You might look back at the mining boom, or after recession, to the early 1990s, mid-2000s, where there's still periods of growth. But generally not as diverse as this, or broad-based.
“But you can see now that there's this convergence. We're no longer seeing that diversity, or at least the sheer level of diversity we used to be seeing. The mid-sized capitals are really clearly losing momentum, particularly Perth. Clearly slowing down mid-sized capitals. And the larger capitals of Sydney and Melbourne, you can see that quarter change; it's actually improving a little bit. So we're starting to see reverse trends, meeting in the middle somewhere. I wouldn't be surprised if this is something to look forward to in 2025, simply that we do see less diversity in the marketplace. But also probably, at least at the macro level, less growth than what we saw last year. Interest rates are coming down, but there's still a lot of barriers to values."
"There's always going to be cycles,” Lawless said. “And we know cycles have been really disruptive the last five or so years for reasons such as the pandemic, emergency low interest rates, and more recently, we've seen quite a spectacular rise in interest rates. The fastest and most significant rate-hiking cycle, I think, in at least a couple of generations.
“So whether or not this, I suppose current trend, is sustainable, to be honest, I'm not sure,” he said. “There's a whole bunch of other stuff that could be wildcards, like [US President Donald] Trump, for example, and there's loads of uncertainty. But my view is, affordability is going to be a key barrier in further growth – especially in markets like Sydney, but also markets like Adelaide. Adelaide's growth rate has been extreme. But it's also come on the back of household incomes nowhere near keeping pace with that level of growth. So Adelaide, even though it has a medium value [home price] that is way lower than Sydney, moving forward, that market is looking extraordinarily unaffordable. And we're now seeing interstate migration going backwards. I think that's probably a market to be pretty cautious about.
“But Melbourne, on the other hand, is looking like it's pretty primed for growth. It's much more affordable than Sydney; its underlying foundation for population growth, or at least interstate migration growth, is leveling out now. It's got a pretty decent yield, relative to Sydney, as well. Melbourne housing is down about 7% from its peak, a little bit less than 7%. That's actually a silver lining for people looking to get into the market. We are seeing high levels of first-time homebuyers in Melbourne. But I think just the sheer affordability [of Melbourne], pretty reasonable economy, the massive state debt as well, which is probably a bit of uncertainty around it."
"The biggest impact from interest rates coming down is probably just the sentiment factor," Lawless said. "And we can see sentiment has actually been rising the last six months; any measure of consumer sentiment simply has been trending higher. And when we look at the relationship between confidence and mortgage activity, or housing market activity, there is a really clear relationship. As people start to feel more confident about their household finances, about their ability to hold a job, just about the direction of inflation and interest rates, generally, we start to see a pickup in transaction activity as well – which, of course, aligns with mortgage activity and vice versa.
“So [the recent rate cuts] will be the big test. We've already seen last month, the Consumer Price Indicator, the monthly one, showed a pretty big jump in March. It was significant and still in pessimistic territory. But it's well off there it used to be. Whether or not that translates into more activity coming from the market just yet, we don't know. Because at this point in time, it's running up against some of those barriers I talked about earlier on, around affordability challenges. And even though sentiment has improved quite severely, it's still below that magical point where optimists and pessimists have historically waited in the marketplace. So with interest rates coming down, that's definitely a good thing. But we all acknowledge it to be a gradual and cautious cycle.
"We're seeing first home buyers proportionately quite active," he said. "I think this really highlights that the Great Australian Dream is still alive and well. That people still want to own their own home. But also, I think a lot of renters are going to be bending over backwards to get out of the rental market where you have such low vacancy rates and rental affordability pressures. First-time buyers, even though they're very sensitive to the cost of debt, they're also pretty sensitive to the cost of living pressures and the cost of rents as well, are probably desperate to get out of that cycle."
"We're seeing a big shift," Lawless said. "We're seeing vacancy rates in rental markets still extraordinary, like sub 2% in most regions. A typical healthy vacancy rate is probably somewhere around 3%. So, we're still seeing vacancy rates really low. Yet we're seeing this trend of consistent reduction in momentum in the growth rates for renters. Broad-based, across the capital cities and regional markets, rental growth has slowed – remarkably, it's still slowing. But it's still above average.
“I think what we should expect is, over the coming year, we'll probably see growth rates for rental markets getting back to a 2% to 3% rate,” he said. “Not necessarily because we've finally seen rental supply demand rebalancing. It's probably more due to factors like household sizes getting a bit bigger. We're seeing a real reverse in group households forming, multigenerational households are becoming more common. Renters, understandably, are probably trying to maximize their tendencies to cover the rental costs, which is driving that obvious pressure on household sizes, and that just helps to de-amplify rental demand. Another real driver of rental demand is overseas migration, which is pretty much normalized now. Less overseas migration simply means less demand in rental markets as well, particularly those inner city high-density rental markets, like Sydney and Melbourne. We're not seeing rents really going backwards just yet, but definitely, we're well beyond rental revenue, probably driven by these affordability pressures and less migration."
