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13 Jul 2021 - Why property prices should continue to climb
By: Roger Montgomery, Montgomery Investment Management

Why property prices should continue to climb

Roger Montgomery, Montgomery Investment Management

08 June 2021

CoreLogic has just reported that national dwelling prices rose by 2.3 per cent in May. That's an annualised rate of more than 28 per cent. And with lenders continuing to provide cheap and easy access to credit, and investors showing lots of interest, I don't see the property market cooling off any time soon.

Here at Montgomery, we've always kept a close eye on the property market. By now you should know we believe access to credit ultimately determines short and medium-term property prices. On that front lending data has been strong for some time and housing credit has accelerated. Unsurprisingly, as we have previously predicted, house prices have risen.

Other factors can have a 'micro-economic' effect on prices through the behaviour of buyers and sellers each weekend, but ultimately the meaningful changes in property prices are driven by credit, and immigration in the longer-term.

The Commonwealth Bank of Australia (ASX:CBA) has just published property lending data, which helps paint a picture of the state of the current property market.

According to the CBA economics team, new housing-related lending rose by 3.7 per cent in April to a new record high (excluding re-financing), while lending to owner-occupiers surged by 4.3 per cent and lending to investors was up by 2.1 per cent. Thank ultra-low rates for that.

Interestingly, lending to first home buyers has fallen for three consecutive months and the CBA believes this reflects declining affordability.

Clearly, the Australian property market is booming and the latest lending data suggests there are ample people looking for property with cheque books approved. That will continue to keep property prices supported.

The CBA notes the lending mix, is shifting. First home buyers are declining while investor buying is strong and lending to owner-occupiers excluding first homebuyers rose by 7.0 per cent.

According to the CBA, housing finance data is a strong leading indicator for dwelling prices.  Mind you, the relationship weakened during COVID when the CBA forecast significant house price declines that never eventuated.

Now prices are rising to record levels, houses are selling faster than ever and the proportion of homes exceeding asking prices is also at a record. It's all thanks to cheap, abundant and easy access to credit. The rate of price increases is quite spectacular. CoreLogic has just reported national dwelling prices rose by 2.3 per cent in May. That's an annualised rate of more than 28 per cent.

Despite the surging property prices, or perhaps because prices are rising so fast, owners are reluctant to sell, resulting in listings remaining stubbornly low. According to CoreLogic again, in the three months to May there were approximately 164,000 dwelling transactions Australia-wide. During the same period however only 136,000 new properties were put up for sale. It seems potential sellers fear missing out on further price rises or being locked out altogether. Consequently, the lack of stock, itself a function of rising prices, is fuelling further price rises.

For what it's worth, the termination of the RBA's Term Funding Facility at the end of June should mean bank borrowing costs for three and four year fixed rate mortgages will rise, and so will rates on those loans. That could dampen demand for loans and if it does could slow the rate of price increases for properties, particularly for owner occupiers.

If investor loans and properties continue to accelerate at the expense of first home buyers, it might be possible some macro-prudential measures by APRA could be implemented. This would serve only to slow the pace of property price rises because interest rates remain ultra-low relative to history and employment, wages and economic data continues to improve. While aggregate wages might not be rising, you only need a bunch of IT or digital recruits to switch jobs for a reported 10-15 per cent wage increase to impact what happens at this weekend's auctions and ultimately impact property prices for everyone else.

Funds operated by this manager:

Montgomery (Private) FundMontgomery Small Companies FundThe Montgomery Fund

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