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How can housing values fall when demand is so high?

Australia’s housing market has a distinct paradox, with an oversupply of homes in some markets contrasting with a narrative of extreme demand for somewhere to live and falling values, according to an expert.

CoreLogic Head of Research, Eliza Owen, said demand for housing in a location like Melbourne was seemingly sluggish and listings were accumulating, while at the same time the political discourse about the critical undersupply of housing was louder than ever. 

“The answer is in recognising that there is a difference between the market for purchasing housing and the need for somewhere to live,” Ms Owen said.

“In Melbourne for example, home values declined 0.9 per cent in the three months to January.

“This has occurred alongside a rise in total listing numbers, giving prospective buyers more choice, and therefore more leverage to negotiate prices down.”

Ms Owen said the difference between transaction volumes and listings was a good proxy for supply and demand of people who were able and wanted to purchase homes.

“The desire to buy housing is shaped by things like credit conditions, consumer confidence, income, savings, capital growth prospects, rent return and tax settings,” she said.

“But whether or not housing looks attractive to buy as an asset is different to needing somewhere to live.”

She said the Melbourne market was actually oversupplied, with 81,203 dwelling sales in the 2023 calendar year, but 90,000 new listings added to the market.

Ms Owen said demand, from the perspective of people needing somewhere to live, was best characterised by looking at rental markets.

“Population growth in Melbourne is likely to have increased markedly in 2023, with the city historically attracting around 30 per cent of the country’s net overseas migration, according to ABS regional population data,” she said.

“In November last year, rental vacancy rates across Melbourne were less than 1 per cent, compared to a historic five-year average of 2.2 per cent. 

“Rent values in Melbourne increased 10.7 per cent in 2023.”

Ms Owen said according to Homes Victoria, there was a 4.7 per cent increase in new housing applicants resulting from homelessness in the year to June. 

“Each of these factors points to increased housing demand, even if the people who need these homes are not in a position to buy,” she said.

According to Ms Owen, private rental market values can be a good proxy for the more fundamental need for housing, because the private rental market was the most common fall back for people who cannot, or are not willing, to buy property. 

“This helps to explain why changes in rent values and home purchasing values have differed over the past few years,” she said.

“The change in purchase values fluctuated amid changes in policy settings, while rents moved consistently higher.”

Ms Owen said she expected buyer demand to be particularly sensitive to changes in interest rates, or other demand-side aspects that make it easier to go from renting to owning.

“A reduction in mortgage rates, or the serviceability assessment buffer, would increase borrowing capacity for lower income households, boosting the number of buyers in the market,” she said.

“Value falls in the Melbourne market will also start to flatten out once prices are low enough to entice buyers. 

“Remembering that supply and demand of dwellings can mean different things from a market perspective and a social perspective is also important.”

She said it helped to avoid conflating a decline in dwelling values as a step toward solving the housing crisis, and acknowledging that some households will never be in the market to buy. 

“In these cases, it is important to have a consistent supply of social housing outside of market fluctuations, to ensure adequate housing for those that just need somewhere to live,” she said.

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.