House prices - what's in store for 2022 and beyond - Investment Perspectives 75 - quaygi.com
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quaygi.com Investment Perspectives 75 House prices – what’s in store for 2022 and beyond February 2022
House prices – what’s in store for 2022 2
According to CoreLogic, Australian house prices increased +22.1% 1 in 2021, led by Australia’s largest city of
Sydney (+25.3%). It is likely that there have been a few culprits for this stellar performance, including
record low interest rates, healthy household balance sheets, and perhaps a new desire to re-invest in the
home as some workers contemplate an extended ‘work from home’ environment.
To be fair, the uplift in residential prices is not a local event. The value of homes has soared across the
world, including New Zealand (+27.6%), the United States (+19.1% to October), the UK (+10.0%) and even
places like Turkey (+40.0% to October). And for those who believe interest rates drive property prices, the
average key interest rate in Turkey during 2021 was 18% (up from 11% in 2020). 2
As we head into 2022, there is an expectation that interest rates are likely to rise around the world in
response to recent inflation data. That may be true. However, we do not believe this will be enough to stop
the gains – in fact, rising rates may indeed add to further gains (as per Turkey). The biggest risk for investing
in residential property is, as always, excess supply.
The housing cycle
While there are many theories as to what drives house prices (ranging from interest rates and lenient tax
rules to immigration), residential property prices ultimately mean-revert around replacement cost. As
prices increase above the ‘cost to build’ there is almost always a supply response, as developers try to cash
in on the margin. Ultimately, increasing supply dampens prices back to a level where supply is restricted –
and the cycle starts all over again.
So, is the surge in residential property prices causing a supply response? In Australia, the answer is an
emphatic yes.
Quarterly Australian housing starts and completions
70000
65000
60000
55000
50000
45000
40000
35000
30000
25000
20000
Jul-2009
Jun-1999
Jul-2020
Nov-2005
Jun-2010
Nov-2016
Jun-2021
May-2000
Apr-2001
Mar-2002
Feb-2003
Dec-2004
Aug-2008
May-2011
Apr-2012
Jan-2004
Sep-2007
Mar-2013
Feb-2014
Dec-2015
Aug-2019
Jan-2015
Sep-2018
Oct-2006
Oct-2017
Starts Completions
Source: ABS, Quay Global Investors
The surge in new housing starts since COVID is similar, albeit sharper, to the 2015-2018 cycle which
ultimately saw prices correct in 2019. We have yet to see any heat come out of the Australian market –
completions have yet to increase as they lag starts by around a year. Inevitably, completions will surge this
year to match the starts, which may be somewhat ominous for the Aussie housing market.
1
www.abc.net.au/news/2022-01-04/australia-house-prices-corelogic-data-december-2021/100737080
2
countryeconomy.com/key-rates/turkeyHouse prices – what’s in store for 2022 3
Quantifying the oversupply (if any)
A surge in supply is not always a bad sign. The critical question is whether there is more total housing stock
relative to overall housing occupier demand. To answer this, we will need to quantify the magnitude of the
potential oversupply, if there is any. This is always a difficult task, as it not only relies on supply data but
also household formation data, which can be notoriously fickle.
We can get a general sense of any imbalances using historical trend data. For example, Australian
household starts ran at a consistent 40,000 per quarter between 2000-12, which appears to reflect a
balanced housing market (no acceleration or deceleration in supply). Post 2012, supply accelerated as
immigration increased. Adjusting for the increase in annual immigration from 1.4% per annum (2000-2011)
to 1.7% per annum (2011-2019), steady-state supply can be estimated at ~50,000 per quarter, being
household starts of 40,000 increased pro-rata with a higher immigration rate.
Using this assumption and based on housing starts data, we can estimate the cumulative supply shortfall
since 2010.
Cumulative Australian excess housing supply
0
Mar-2010
Sep-2010
Mar-2011
Sep-2011
Mar-2012
Sep-2012
Mar-2013
Sep-2013
Mar-2014
Sep-2014
Mar-2015
Sep-2015
Mar-2016
Sep-2016
Mar-2017
Sep-2017
Mar-2018
Sep-2018
Mar-2019
Sep-2019
Mar-2020
Sep-2020
Mar-2021
Sep-2021
-20000
-40000
-60000
-80000
-100000
-120000
-140000
-160000
Source: ABS, Quay Global Investors
Generally, the Australian housing market has defied most gloomy predictions. Indeed, there was almost a
small cottage industry dedicated to predicting the imminent collapse of Australian house prices in the post-
financial crisis world. However, the chart above demonstrates that there has never been a situation where
there has been excess supply of housing in Australia. Accelerating housing starts (as prices rise above
replacement cost) were quickly absorbed by new households.
For Australia, population growth has generally provided Aussie housing the ultimate ‘get out of jail free
card’ just as the market begins to cool. We made a similar observation in our June 2019 article What now
for residential property?, where we reversed our earlier bearish 2017 call.
However, with COVID, population growth effectively halted right at the time supply was accelerating. For
example, if we were to reduce our household growth assumption to 20,000 per quarter (60% reduction),
the residential market would quickly become oversupplied (once current projects complete later in 2022).House prices – what’s in store for 2022 4
Cumulative Australian excess housing supply
adjusted for lower COVID population growth
150000
100000
50000
0
Mar-2010
Sep-2010
Mar-2011
Sep-2011
Mar-2012
Sep-2012
Mar-2013
Sep-2013
Mar-2014
Sep-2014
Mar-2015
Sep-2015
Mar-2016
Sep-2016
Mar-2017
Sep-2017
Mar-2018
Sep-2018
Mar-2019
Sep-2019
Mar-2020
Sep-2020
Mar-2021
Sep-2021
-50000
-100000
-150000
-200000
Source: ABS, Quay Global Investors
We don’t believe it is time to call for a market correction just yet, but based on the above chart it seems
unlikely recent national residential price growth will be repeated in 2022.
What about the US?
Recent strong increases in US residential property prices have also come with a surge in new supply, in both
houses and apartments.
Single family house starts Apartment starts
(US - 000's) (US - 000's)
2000 700
1800
600
1600
1400 500
1200
400
1000
800 300
600 200
400
100
200
0 0
Jul-03
Jul-10
Jul-17
Apr-05
Apr-12
Apr-19
Jan-00
Jan-07
Jan-14
Jan-21
Oct-01
Oct-08
Oct-15
Jul-03
Jul-10
Jul-17
Apr-05
Apr-12
Apr-19
Jan-00
Jan-07
Jan-14
Jan-21
Oct-01
Oct-08
Oct-15
Source: St Louis Fred, Quay Global InvestorsHouse prices – what’s in store for 2022 5
Does the US face the same supply headwinds as Australia? To answer, we have applied the same
methodology as the Australian analysis above. Specifically:
• We have assumed a normal supply run rate of:
o 1.2m single family homes per annum (consistent with pre-GFC bubble average)
o 0.3m apartments per annum (consistent with pre-GFC bubble average), and
• We have also assumed this required supply falls by 60% from mid-2020 to account for the collapse
in immigration 3.
The following charts reflect the result for each sector.
Cumulative single family excess supply Cumulative apartment excess supply
(US - 000's) (US - 000's)
3000.0 200.0
2000.0 100.0
1000.0 0.0
Jul-09
Nov-15
Jun-17
May-06
Apr-14
Jan-00
Aug-01
Mar-03
Dec-07
Feb-11
Sep-12
Jan-19
Aug-20
Oct-04
0.0 -100.0
Jul-03
Jul-10
Jul-17
Apr-05
Apr-12
Apr-19
Jan-00
Jan-07
Jan-14
Jan-21
Oct-01
Oct-08
Oct-15
-1000.0 -200.0
-2000.0 -300.0
-3000.0 -400.0
-4000.0 -500.0
-5000.0 -600.0
-6000.0 -700.0
Source: St Louis Fred, Quay Global Investors
For single family, there was a significant increase in excess supply leading to the financial crisis, which offers
no surprise since prices boomed and were well above replacement cost. However, the single-family sector
was crushed post crisis in terms of price (and ultimately resources), resulting in a significant deficiency in
supply – even after allowing for the pandemic-induced collapse in immigration.
Conversely, US apartments never felt the effects of excess supply in the lead-up to the financial crisis. Also,
unlike single family homes, apartment supply recovered more quickly in response to the demographic
demands of millennials leaving home in the first half of the 2010s. However, with the decline in
immigration there appears to be a growing risk that apartments are moving into excess supply for the first
time in decades.
Concluding thoughts
The boom in global residential prices is another side-effect of the pandemic that seems to have caught
many by surprise (us included). With any residential boom come concerns of a ‘new bubble’ and imminent
crash. This type of reaction is understandable, given the deep scars left from the financial crisis a decade
ago.
3
There is no specific rationale for supply to decline by 60%, except to reflect that we think some adjustment needs to be made to
account for the fact that new household formation would be significantly lower in a near-zero immigration economy.House prices – what’s in store for 2022 6 But by digging into the data, it is clear not all markets face the same risk. The cumulative undersupply in US single family housing is still significant and may take many years to rectify – especially now the sector has a demographic tailwind with the millennials, the largest US demographic cohort, seeking a more stable accommodation to marry and raise a family in a home. The outlook for US apartments and Australian residential is less sanguine. For the first time in decades, there is a real risk these markets are facing a headwind of persistent oversupply, exacerbated by pandemic- induced immigration declines. A word of warning: this analysis is not meant to be all encompassing and each market has its own subtleties and nuances. To be clear, we are not necessarily predicting a ‘crash’, or even a correction in these markets. The investment market is littered with the dead bodies of housing perma-bears. But it seems clear from the data that right now that one of the best risk return profiles is in US single family housing – which is where the fund maintains a significant investment position. We are more than happy to remain long. For more insights from Quay Global Investors, visit quaygi.com The content contained in this article represents the opinions of the authors. The authors may hold either long or short positions in securities of various companies discussed in the article. The commentary in this article in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader. This information is issued by Bennelong Funds Management Ltd (ABN 39 111 214 085, AFSL 296806) (BFML) in relation to the Quay Global Real Estate Fund (Unhedged) and the Quay Global Real Estate Fund (AUD Hedged). The Funds are managed by Quay Global Investors, a Bennelong boutique. This is general information only, and does not constitute financial, tax or legal advice or an offer or solicitation to subscribe for units in any fund of which BFML is the Trustee or Responsible Entity (Bennelong Fund). This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on the information or deciding whether to acquire or hold a product, you should consider the appropriateness of the information based on your own objectives, financial situation or needs or consult a professional adviser. You should also consider the relevant Information Memorandum (IM) and or Product Disclosure Statement (PDS) which is available on the BFML website, bennelongfunds.com, or by phoning 1800 895 388 (AU) or 0800 442 304 (NZ). Information about the Target Market Determinations (TMDs) for the Bennelong Funds is available on the BFML website. BFML may receive management and or performance fees from the Bennelong Funds, details of which are also set out in the current IM and or PDS. BFML and the Bennelong Funds, their affiliates and associates accept no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. All investments carry risks. There can be no assurance that any Bennelong Fund will achieve its targeted rate of return and no guarantee against loss resulting from an investment in any Bennelong Fund. Past fund performance is not indicative of future performance. Information is current as at the date of this document. Quay Global Investors Pty Ltd (ABN 98 163 911 859) is a Corporate Authorised Representative of BFML.
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