Signs the property market is cooling but no big slowdown

A new Housing Market Indicators Report suggests that despite interest rates dropping to a record low, buyers are backing away because of rising house prices. The market is still predominantly a strong one, but it has lost a little of its previous heat.

Low borrowing costs will always be a powerful lure for buyers, but an increasing number of buyers have now made that purchase. Incentives have been taken away from the market, and house price increases have led to properties becoming less affordable.

Changes in the statistics

According to the report, there has been a modest drop in the volume of property searches throughout the country. It had previously reached a historic high, and searches remain considerably higher than they were a year ago.

Sales volumes remain far higher than they were 12 months ago, but they too have eased somewhat from the highs before Easter. Similarly, the number of views per listing has gone down, but they remain substantially higher than they were this time in 2020.

Many of the metrics covered in the report remain significantly higher than they were in 2020, but Q1 of 2021 saw historic highs. With that frenzy dropping off somewhat, the market may be a little calmer in the coming months.

The report observes an increase in the number of listed properties, alongside a drop in search and sales volumes. The result is slow in demand regarding views per listing, so the next wave of potential buyers may not be as sizeable as seen in Q1 of 2021.

Loss of incentives

People waiting for prices to drop could be in for a long wait. The market is not expected to grind to a halt, so prices will continue rising for now. The second half of 2021 may not see quite such a strong market, but a significant drop in house prices is unlikely.

The recent federal budget announced several homebuyer incentives, but their effectiveness in driving buyers to act is likely to be far smaller than the COVID-induced HomeBuiler scheme. That ended in April, coinciding with the decrease in market activity.

Undoubtedly, the budget incentives will drive a certain amount of demand, but the level brought on by the HomeBuilder scheme was unprecedented. The level of demand for that scheme exceeded expectations, and more was spent on it than was originally budgeted.

The impact of the federal budget 2021

While the email enquiries to residential real estate agents are still comparatively higher than it was a year ago, it has consistently fallen month-on-month in 2021. Nevertheless, enquiries for houses are the dominant force - significantly higher than enquiries about units and land.

Enquiries for land and apartment projects are still substantially higher than they were 12 months ago. Plus, enquiries for all property types have fallen since April, so the evidence is that HomeBuilder was a huge driver of demand for new homes. In a historical context, enquiries remain high, but the end of HomeBuilder has had a clear impact.

Since COVID-19, there has been a shift in the flow of enquiry. Apartment projects have historically accounted for the majority of enquiries, but HomeBuilder made land estates more attractive. Now that HomeBuilder is over; it will be interesting to see how the trends shift. Closed international borders have put something of a handbrake on enquiries from apartments.

Enquiries are expected to continue dropping across the board over the next few months. Strong sales volumes, the end of HomeBuilder and a decrease in search volumes indicate a likelihood that email enquiries will continue to fall over the coming months. Many prospective buyers have now purchased, with seemingly fewer buyers in the next wave, and rising housing costs will also play a part.

First-home buyers vs investors

The email enquiry from buyers in April reached a historic high. Enquiry form first-home buyers continued its gentle downward trend, while investor enquiry reached its highest share since March 2020.

Buyer enquiry remains substantially higher than it was a year ago, and investor enquiry has increased dramatically. The end of HomeBuyer has put a dampener on first-home buyer enquiry, but investor demand continues to rise.

Tight rental market conditions and potential for high yields and capital growth are likely to prolong the surge in investor enquiry. However, the FOMO (fear of missing out) among first-home buyers is still there, though the frenzy we witnessed at the end of 2020 has somewhat decreased.

The increase in new stock on the market has probably helped drive investor activity. Last year, stock levels were very low, but this has improved over the last few months.

Will the bubble burst?

Though the market has cooled slightly, low borrowing costs and restrictions to recreation and travel mean it will be some time before prices begin to fall. It won't be until mid-2022 that bubble countries like New Zealand will be unrestricted for travelling again, so plenty of money is expected to continue going into the property.

The likely triggers for drops in prices will be if they continue to grow at a high rate (unlikely) or a reintroduction of macroprudential policies from APRA, whereby interest rates are eventually increased.

There have been calls for the real estate bubble to burst for decades. This is only like to happen under a particular set of circumstances. Many times, we have seen prices fall and, when they fall becomes too much, there are broader economic repercussions. The result is that RBA moves to cut interest rates, thus lifting the demand for residential property.

With this in mind, it seems very unlikely that the bubble will burst anytime soon. The only thing that could cause it would be if the government decides to change tack, and there is very little reason for this to happen.

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