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Beware the ‘false dawn’ in the property market: Oxford Economics

By Charbel Kadib
4 minute read

The recent “stabilisation” in residential property markets is unlikely to endure, with the protracted battle against inflation threatening to trigger further price falls, according to Oxford Economics.

Across the world’s developed economies, residential property values have shown signs of recovery following the initial shock of aggressive monetary policy tightening from the world’s central banks.

In Australia, CoreLogic has reported three consecutive months of national home values growth, totalling 2.3 per cent.

This followed a cumulative decline of 8 per cent over the 12 months to February 2023.


The latest data from the Australian Bureau of Statistics (ABS) has also reported a $140 billion increase in the value of residential dwellings over the March quarter to $9.8 trillion.

But according to Oxford Economics lead economist Adam Slater, this rebound is “likely to prove short-lived”, with tailwinds “wearing off”, and headwinds mounting.

These headwinds include the outlook for valuations, the resetting of fixed-rate mortgages to higher variable rates, and the expected deterioration in labour market conditions.

“Housing transactions picked up in several major economies lately thanks to lower mortgage rates, an easing in the pace of bank credit restrictions, and a reduced squeeze on real incomes,” Mr Slater said.

“But mortgage rates are rising again and credit standards tightening further. Some economies are seeing house prices edge lower once more.”

The lead economist said it is “not unusual” for housing price corrections to be “interrupted” by “false dawns”, referencing the prolonged downturn in the US between 2006–11, which included three brief periods of recovery.

Prices are yet to return to “fair value”, he added, with recent declines yet to offset the surge in property prices during the COVID-era.

“If we compare world GDP-weighted real house price levels to their long-term filtered trend, prices still look around 8 per cent above ‘fair value’ even taking into the declines over the past year or so,” Mr Slater observed.

“Similarly, if we compare our measure of the global price-rent ratio with its filtered long-term average, this measure remains around 10 per cent above fair value.

“Nor is it obvious that once prices hit fair value that they will settle there: in previous house price cycles, prices have often undershot fair value by 5 per cent–10 per cent.”

Moreover, the full effect of monetary policy tightening is yet to filter through, Mr Slater warned.

“Markets where mortgages are largely floating rate or based on short-term fixed rates have seen the biggest price falls so far,” he observed.

“But for some of these markets, such as the UK, New Zealand, and Australia, the full effect is still yet to be seen — with large shares of fixed-rate mortgages, often contracted at lower mortgage rates than prevailing today, scheduled to reset in 2023–24.

“This is likely to lead to affordability issues for borrowers who may be obliged to sell up, depressing prices (although the extent to which this channel operates is uncertain). Additionally, weaker household disposable income from rate resets could feed into lower house prices.”

Adding to these headwinds is an expectation of further hikes to interest rates in the coming months amid signs of inflation “stickiness”, wages growth, and broader resilience in the global economy.

In Australia, the Reserve Bank recently lifted the cash rate by an additional 25 bps to 4.1 per cent and added “some further tightening of monetary policy may be required”.

Some economists are now projecting a terminal cash rate as high as 4.85 per cent, but the broad consensus is for one final 25 bps hike in the next three months.

But despite these headwinds, Australian economists largely expect the property market rebound to endure.

According to CoreLogic’s research director, Tim Lawless, the latest monthly improvement in national home values suggests markets have “moved past a short but sharp downturn”.

He acknowledged headwinds threatening to buck the trend but said the recent rebound in prices is “looking increasingly entrenched”.

AMP Capital chief economist Shane Oliver warned “lag down” risks “remain high”, but said his base case is that home prices have bottomed with “stronger increases likely next year”.

The Commonwealth Bank’s base case is for property price growth of 3 per cent in 2023 and 5 per cent in 2024, supported by expected monetary policy easing early next year, aimed at reviving a floundering economy.

Beware the ‘false dawn’ in the property market: Oxford Economics

The recent “stabilisation” in residential property markets is unlikely to endure, with the protracted battle against inflation threatening to trigger further price falls, according to Oxford Economics.

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