Property prices are likely to keep roaring higher into further record territory next year, as the Australian economy’s stronger-than-expected recovery continues.

And there is a good chance that they could continue to climb after that, market experts say, albeit prices could start to moderate and even return to their long-term percentage annual growth rates of low, single digits.

Louis Christopher, founder of SQM Research, says there are more property buyers than sellers and with the Reserve Bank of Australia re-affirming interest rates are likely to stay low for a long time, the evidence “suggests the market is going to continue to go up from here; particularly for free-standing houses”.

He estimates the price of free-standing properties in Sydney are up close to 20 per cent in the past year, with similar properties in Melbourne up between 12 per cent and 14 per cent.

“It’s a strong [cities] market and it is also strong in the regions, particularly along the east coast [of Australia],” he says.

After price rises slowed during April of this year, many property market watchers thought that growth would continue to moderate. However, capital city dwelling prices defied expectations and jumped again in May.

Prices in regional areas also climbed, likely driven by those working from home in the wake of the coronavirus pandemic who are seeking a lifestyle change and cheaper housing.

Figures from researcher CoreLogic show dwelling prices in Sydney climbed 3 per cent in May and 11.2 per cent over the 12 months. In Melbourne, prices jumped 1.8 per cent in May and are up 5 per cent for the full year.

Angie Zigomanis, director of Charter Keck Cramer’s research and strategy team, says prices in Sydney and Melbourne could rise by another 10 per cent over the next 12 months.

However, he would not be surprised if it was more like 5 per cent to 7 per cent, given there are so many factors at play; the most obvious being the impact of COVID-19.

Zigomanis forecasts that prices would remain robust for at least 12 months before moderating. He says with Melbourne’s economy traditionally highly dependent on migration growth – not only overseas immigration but also people relocating from other states – the closure of international borders would likely continue to see smaller price rises than in Sydney.

Melbourne’s central-city apartment market is likely to continue to be particularly challenged.

Figures from SQM Research show that although inner-city apartment rental vacancy rates have dipped from their record highs of last year, they remain elevated by historic levels.

SQM Research’s Christopher says the return of property investors to the market could signal that we are now nearer the end of the price-rise cycle than the start.

Usually, price-growth cycles start with first-home buyers, then upgraders join in and, finally, investors come into the market, attracted by the prospects of capital gains, Christopher says.

There is another factor that could help dampen price rises, Christopher says. The Australian Prudential Regulation Authority could “tap the brakes” on home lending, by putting restrictions on lenders. It did that in 2015, continuing the policy until prices peaked in 2017.

Shane Oliver, chief economist at AMP Capital, expects property prices to keep rising until 2023, when we could see the start of another cyclical downturn as interest rates move up more decisively.

Lenders are already starting to increase their 2 and 3 year fixed mortgage interest rates, after earlier increasing their 4 and 5 year fixed rates.

Steve Mickenbecker, Canstar’s group executive financial services, says variable mortgage interest rates are holding firm, but rising fixed rates are a sign that the interest-rate cycle is turning.

Australia’s property boom has picked up pace again, with national housing values rising 2.2 per cent in May, new data shows.

The latest Core Logic Home Value Index, released on Tuesday, revealed the “extreme” results – including rises of more than 3 per cent in Sydney and Hobart in the space of just one month – and a bounce back from April when the market showed early signs of a slow-down.

Corelogic research director Tim Lawless said while the results were not as record-breaking as the peak in March, they were still impressive and spoke to the strength of the boom conditions.

“We’re still seeing it’s not quite as rapid as it was in March, but 2.2 per cent is still extreme especially when you consider wages are rising by 1.5 per cent per annum,” Mr Lawless said.

Median house values were up across all the capital cities, led by Hobart, up 3.2 per cent to $574,543, and Sydney, up 3 per cent to $970,355.

Brisbane was up 2 per cent to a value of $574,572, while Melbourne was up by 1.8 per cent to $740,562. Perth saw the smallest rise of 1.1 per cent, with house values across the city sitting at $521,688.

It was the breadth of the rises that was so significant, Mr Lawless said, noting that they were rising no matter the property type or price segment.

“Values were up by more than 1 per cent across every capital city over the month, with both house and unit values lifting across the board. Of the 334 SA3 sub-regions analysed by CoreLogic, 97 per cent have recorded a lift in housing values over the past three months,” he said.

“Such a synchronised upswing is an absolute rarity across Australia’s diverse array of housing markets.”

While Sydney’s growth continued to stun the property sector, other regions throughout the country were seeing unprecedented rises.

“Although housing values are now rising the fastest once again in Sydney, at least in trend terms, the annual growth rate is generally higher across the smaller capitals, as well as regional New South Wales and regional Tasmania,” Mr Lawless said.

Darwin cracked the 20 per cent annual growth barrier in May, Mr Lawless said, with house values now 20.3 per cent higher over the past 12 months.

“For Darwin dwellings, this is the strongest annual gain on record,” he said.

Housing values across all of regional New South Wales were up 18.6 per cent while regional Tasmania values were 18.1 per cent across the year.

The rise in values in regional NSW had been led by the Richmond Valley Coastal area – including Byron Bay – which has seen a 31.5 per cent rise in house values over the past 12 months, Mr Lawless said.  Likewise, the west coast of Tasmania, including Queenstown and Strahan, saw values rise by 25.1 per cent over the past year,

A better lifestyle and working from home had both played big parts in seeing people move to regional areas after the worst of COVID-19 – as had housing affordability, though it was becoming far more expensive to buy a home in some regional areas.

“There’s little difference between house prices in Byron Bay and Sydney,” Mr Lawless said.

Though some regional areas flew, others did not do as well. The weaker part of the market over the past year included regional Western Australia, where values remained the same.

Melbourne, which had a value rise of just 5 per cent over the past year, had suffered the effects of the extended lockdown, Mr Lawless said. He added that it was too early to tell whether the latest lockdown would have any significant effect on housing values.

While the housing boom continued in May, there would be some challenges to its continued growth at pace.

“We expect to see a gradual tapering in the pace of growth, and affordability will be behind that, adding to the slow-down,” Mr Lawless said.

The building of more dwellings would ease the current supply and demand issues, and a slow rise in fixed-term interest rates could also have an impact.

“There won’t be a sharp downturn until there’s a significant catalyst like interest rate rises, and the speculation is that won’t happen until at least 2024,” Mr Lawless said.

When the pandemic first arrived on our shores back in March last year, the mood within the property market rapidly deteriorated.

In just weeks, a bullish market had been flipped on its head, with widespread reports of properties being sold for significantly below asking prices.

Then came the predictions of big losses for property owners, as housing analysts and the banks fired off forecasts of up to 32 per cent price falls in quick succession.

Now as we look back at those market conditions through the lens of prices rising at the fastest rate since the late 1980s, March 2020 seems like a completely different world.

Since the start of the year, property prices in the nation’s five largest capital cities have risen by a whopping 9.5 per cent, with Sydney leading the way with prices rising by 11.9 per cent.

For the 66 per cent of households who own their home outright or have a mortgage, this has resulted in arguably the largest boost to household net wealth in such a short period of time in Australian history.

But as some of these lucky Australians enjoy their large capital gains, for those who don’t own their own home, things are quite a bit different.

According to a report from Domain, potential homebuyers have seen the required size of home deposits skyrocket since the start of the year.

“Anyone in Sydney who had saved a 20 per cent deposit on the median house price in December but did not manage to buy a home needs to have saved an extra $20,614 since then (to March 31st) to keep their deposit at 20 per cent of the current median house price.”

While Sydney is certainly an outlier, between January 1 and March 31, the required deposit (20 per cent) to buy a median house rose by $9706.

It’s important to keep in mind that these required savings actually get prospective home buyers no closer to their dream of property ownership than they were before. Instead, they merely maintain the purchasing power their deposits had previously before prices took off.

As prices continued to get away from prospective first homebuyers, many looked to their parents for help getting into the market.

According to figures from research firm Digital Finance Analytics (DFA), the number of first home buyers seeking help from their parents rose from 8 per cent in the first quarter of last year, to more than 60 per cent by March 2021.

The average assistance being provided isn’t exactly just parents providing a bit of a top up to their adult children’s deposit either.

As of March, the average amount of assistance parents were providing their first homebuyer children for their deposits was almost $90,000.

Despite a relatively strong increase in prices up until the end of the last year, first home buyers were generally undeterred by this additional hurdle to get into the market.

Figures from DFA show that a record high 34 per cent of prospective first home buyers were looking to get into the market in the next 12 months at the start of this year.

This has since fallen to 23 per cent in the largest one month non-Covid related move in the index since records began in 2013.

With deposit requirements setting off for the stratosphere and prices rocketing out of the reach of many prospective first home buyers, it’s perhaps unsurprising that so many have chosen to give up on trying to buy a home, at least for now.

In decades long past, this may have started to put the brakes on a housing boom, as prospective buyers leave the market and price growth begins to slow down as a result.

In the United States, rising prices have already resulted in the single largest monthly drop in home buying intentions in the 54 years records have been kept.

But like the theme of so many finance industry presentations and backyard BBQ conversations, Australia really is different.

Through the forces of negative gearing and a growing perception that the government will not allow prices to fall significantly, we may be seeing only the first stage of the rocket that is the nation’s current property price boom.

In the words of property research company SQM Research’s managing director Louis Christopher:

“They [the federal government] will never let a housing crash happen in this country.”

As the number of first home buyers priced out of the market continues to rise, the capital gains potentially on offer has seen the number of investors looking to get into the market or buy more properties has set off like a rocket.

When surveyed in January, few property investors were looking to transact, with just 1 per cent of those DFA defines as “portfolio investors” stating they intended to buy in the next 12 months.

By the time April came around, the situation had been completely transformed by the hottest property market since the late 1980s.

In April, 16 per cent of solo investors and 21 per cent of portfolio were now suddenly looking to get into the market.

To put these figures into perspective without the distortions from the pandemic, in February 2020 just 7 per cent of solo investors and 14 per cent of portfolio investors were intending to buy a property in the next 12 months.

While rocketing prices are disastrous for first home buyers who increasingly find themselves priced out of the market in greater and greater numbers, for property investors, rising prices are having completely the opposite effect.

Rising prices are an incentive to get into the market, to take advantage of what they hope will be yet another long-term period of very strong housing price growth.

Where the housing market will find itself in the long term is anyone’s guess, as concerning signs of weakness begin to emerge in the global economic recovery.

But in the short term, there are two things we know with relative certainty.

Investors will likely once again get into the market to chase capital growth, in what is perceived as the nation’s safest asset, and first home buyers will continue to be priced out of the market.

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The Australian dwelling market has reached a new record high, with the total value of residential real estate breaking the $8 trillion mark for the first time.

Following recent broad-based capital gains across the country, with many markets said to be at their peak, residential real estate now makes up the bulk of Australia’s wealth, CoreLogic data has revealed

According to the data, Australia now boasts 10.6 million dwellings worth $8.1 trillion.

“This puts Australian residential property at around four times the size of Australian GDP, and around $1 trillion more than the combined value of the ASX, superannuation and commercial real estate stock,” said CoreLogic’s head of research, Eliza Owen.

As such, an average 53 per cent of household wealth is held in housing.

The growth in housing value is underpinned by the 6.8 per cent property price increase recorded in the three months to April – the highest quarterly growth in more than 30 years. Individually, every capital city recorded a rapid rate of appreciation in home values, ranging from a quarterly rise of 8.8 per cent in Sydney to 4.2 per cent in Perth.

Overall, dwelling values in Australia are 7.8 per cent higher over the year, and currently sit around 7.6 per cent above the previous October 2017 record high.

This strong increase in the value of residential real estate has put Australian home owners in a strong equity position, with the Reserve Bank of Australia (RBA) estimating just 1.3 per cent of housing loans were in a negative equity position at the start of the year.

First home buyers, however, are said to be facing greater affordability constraints, with finance acquired by first-timers, as a portion of lending to owner-occupiers, down nationally to 30.4 per cent.

“For many Australians looking to get a foot on the property ladder, the continued strength in the market is putting home ownership further out of reach despite record-low mortgage rates,” Ms Owen said.

“Wages growth simply isn’t keeping pace,” she highlighted.

While alternative purchasing methods are on the rise, including ‘rent-vesting’, ‘the bank of mum and dad’ and ‘fractional investing’, Ms Owen believes first home buyer numbers are set to keep declining in 2021.

Overall, CoreLogic’s data shows a growth in sales volumes of 22.6 per cent nationally over the 12 months to April. Regional growth is said to be at 34.0 per cent, while capital cities saw a cumulative increase of 16.1 per cent.

As for rents, national values have risen 4.9 per cent in the year to April, following a long period of subdued rental conditions, and a fall in rents at the onset of COVID-19. Darwin led the rental charge with growth of 18.0 per cent, followed by Perth on 15.7 per cent.

According to CoreLogic, with housing values generally outperforming rents, yields are trending lower, with the exception of Perth and Darwin.

Currently, the biggest problem for the real estate market is a lack of volume, but CoreLogic has reported a substantial increase in fresh listings to the market through April, with the figure said to be 18.3 per cent above the five-year average level for this time of year.

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Using the Reserve Bank of Australia’s model of the housing market, Coolabah Capital Investments (CCI) is predicting substantial property price growth through to the end of 2023, as well as similar gains in real residential investment.

The forecast, based on the model developed by RBA’s economists, Peter Tulip and Trend Saunders, foresees house prices growth of 8 per cent over 2021, including an additional 9 per cent in 2022, before a final spike of 8 per cent in 2023.

This takes the cumulative growth through to end-2023 up to 25 per cent.

But while a similar growth trajectory is expected across residential investment, with CCI predicting a 26 per cent lift over three years, rents are tipped to drop by 2 per cent through to end-2023, as vacancy rates peak.

“The ranges are large, but not surprising considering that house prices and rents are volatile. For example, the standard deviation of annual growth in house prices over recent decades is nearly 7.5pp, while the standard deviation of growth in rents is almost 3.5pp,” Kieran Davies, chief macro strategist at CCI, explained.

According to CCI’s modelling, in real terms, national house prices are currently up about 6 per cent from prior to the pandemic, which contrasts with past recessions where the median peak-to-trough decline has been 15 per cent.

Even during the global financial crisis – which the RBA classes as a brief slowdown rather than a recession – real house prices fell by 9 per cent.

“The resilience of prices during the pandemic stands as testament to an aggressive and generally unprecedented fiscal and monetary policy response across the advanced economies, with a critical role played by job retention schemes,” Mr Davies said.

Fears over affordability and inequality 

The fear, however, is that a large rise in house prices could intensify concerns over affordability and inequality.

And while homes are “very affordable” insofar as debt-servicing costs are very low, Mr Davies noted that raising a deposit still remains a real barrier to entering the market.

“Easy monetary policy reduces income inequality by lowering unemployment, but can add to wealth inequality, which reflects very low home ownership among low-income/resource households.

“CCI’s view is that concerns over affordability and inequality are better addressed by government via the tax/transfer system. The other step that government can take is to address the longstanding inflexibility of the supply side of the housing market, which has seen lower interest rates manifested in higher house prices more than the construction of new homes,” Mr Davies explained.

And while he believes that the recovery in house prices to date is a reassuring development for the RBA, in that higher prices signal that policy is working, Mr Davies does see some risk of monetary policy tightening sooner than expected.

CCI’s base case, however, is that policy will need to remain accommodative for an extended period, given that history shows it has been very difficult to achieve full employment in recent decades.

But there are other risks, namely the real possibility that banks may lower their lending standards.

“We expect the RBA will keep policy loose until it achieves its economic objectives, there is always the risk that banks lower lending standards as house prices strengthen, which would trigger a regulatory response that would challenge the model’s forecasts,” Mr Davies said.

As for industry murmur following New Zealand’s regulatory intervention, Mr Davies opined that New Zealand’s market is very different, with strong investor-led growth in debt rapidly propelling prices to an all-time high during the pandemic.

“In contrast, the starting point for Australia is markedly different. Even with the gain during the pandemic, real house prices are yet to surpass the peak reached in 2017, while credit growth is slowly lifting from depressed levels on strength in lending to owner-occupiers,” Mr Davies concluded.