Housing Fever

The price-to-rent ratios in most Australian capital cities appear to have stabilized over the second quarter with the exception of Sydney and Melbourne. Melbourne’s housing market continues its downward trend and the Sydney market reversed its downward course and is now heading upwards.

Analysis of housing market fundamentals and sentiment reveals that the non-fundamental component of the Melbourne market is moving steadily towards a bubble-neutral state, transitioning from the positive regime and nearly reaching its pre-pandemic level.  Meanwhile, the Sydney market shows early evidence of recovery and another expansion. On the other hand, the non-fundamental component of the Brisbane housing market continues its sustained downward momentum in negative territory (i.e., over-correction).

The Hobart and Canberra markets are in a relatively stable phase, fluctuating at a level higher than their pre-bubble period and showing some early signs of an upward trend. The Darwin market has substantially recovered from overcorrection and reached the bubble-neutral state of zero. Perth is recovering from market over-correction but at a much slower pace than Darwin. The non-fundamental component of the Adelaide market is nearly flat, leveling out at a small negative value that indicates some continuing housing market weakness.

The price-to-rent ratios of the New Zealand housing markets continue to trend downwards and in aggregate are approaching pre-bubble territory.

The non-fundamental components of Auckland and Canterbury are moving swiftly towards a bubble neutral state from the positive regime, while the Wellington, Waikato, and Otago markets are in negative (over-correction) territory and continue to trend downwards, most markedly in Otago. The non-fundamental component of the Bay of Plenty has reached a bubble neutral state after rising from negative territory.

In the first quarter of 2023, the price-to-rent ratios in most Australian capital cities continued their downward momentum, with the exception of Canberra, Perth, and Darwin: notably, Sydney and Melbourne have reached a similar level although one that is still well above their 2020 levels; Canberra, Adelaide, and Brisbane form another group, with ratios well below those of Sydney and Melbourne but again higher than their 2020 levels; Hobart, Perth, and Darwin each have levels lower than the other cities and of these only Hobart exceeds its 2020 level.

In terms of their non-fundamental components, property market bubble corrections are evidently ongoing in Brisbane, Melbourne, and Sydney. Of these cities, Brisbane is experiencing the fastest rate of correction with a substantial decline in the bubble component over the last quarter that is due mainly to a significant increase in real rent. In contrast, the inflation-adjusted rental prices in Sydney and Melbourne have declined over the past quarter. In Canberra, Hobart, and Adelaide, the bubble components have stabilized, while in Darwin and Perth, they have reversed direction. As expected from these findings, all bubble indicators are currently switched off.

Similar to the previous quarter, the housing markets in New Zealand remain stable, with price-to-rent ratios showing minor fluctuations at levels slightly higher than those observed before the pandemic.

In terms of their non-fundamental components, both Auckland and Canterbury continue to move towards market normalcy following a period of speculative bubble activity, whereas Otago, Waikato, Wellington, and Bay of Plenty have experienced overcorrection.

Downward momentum of the price-to-rent ratios continued during the current quarter in the Sydney, Brisbane, Adelaide and Perth housing markets. For other cities, like Melbourne, Darwin and Canberra, the price-to-rent ratio either increased slightly or stayed at a similar level.

The 2020-2022 housing bubble involved six capital cities (Sydney, Melbourne, Brisbane, Perth, Hobart and Canberra). These housing markets now appear to be in a recovering state. Sydney, Brisbane and Canberra markets have almost arrived back to normality according to the computed non-fundamental/speculative components; but Melbourne and Hobart are still manifest some deviation from fundamentals. Notably, the non-fundamental market components in Perth and Darwin fell substantially below their average levels between 2021 and 2022, implying a potential over-correction during these years and are still to recover.

After rapid changes sustained over much of the period 2020-2022, New Zealand housing markets appear to have reached a more stable phase, with their price-to-rent ratios roughly unchanged over the last quarter.

Housing bubbles were detected in the Auckland and Canterbury regions for a substantial period between 2020 and 2022 and briefly in Waikato and Otago in 2021. Like Perth and Darwin in Australia, there is some evidence of an over-correction in the Waikato, Wellington and Bay of Plenty housing markets. On the other hand, Auckland, Canterbury, and Otago are still on trajectories returning to normalcy from speculative bubble episodes.

Periods when the housing fever indicator was switched on in each of the cities since 2020 are listed below:

Australia

• Sydney: 21 May to 21 Jul, 21 Oct to 21 Nov
• Melbourne: 21 Feb to 22 Jul
• Brisbane: 20 Apr to 22 May
• Adelaide: NA
• Perth: 20Dec to 21Jan
• Hobart:  21 May to 22 Jun
• Darwin: NA
• Canberra: 21Mar to 22 Apr

New Zealand

• Auckland: 20 Oct to 22 Jun
• Canterbury: 20 Nov to 20 Dec and 21 Feb to 22 Jun
• Bay of Plenty: NA
• Wellington: NA
• Waikato: 21 Nov
• Otago: 21 Oct – Nov