Are rising rates and inflation cooling hot real estate in the region?

Jul 21, 2022

WITH rising interest rates, inflationary pressures and much hand-wringing over the health of economies, some heat is coming off red-hot property markets, many of which have seen double digit price growths since the last quarter of 2019.

The Business Times checks in with international real estate services company, JLL, for highlights on where residential capital values are headed in some of the frothiest - as well as perhaps more resilient - markets from the 17 cities its local research heads cover.

AUSTRALIA

JLL believes a crash (a price drop of over 30 per cent) in Australian house prices is very unlikely. That’s due to an expected under-supply of homes over the next few years, with supply further stifled by rapid construction and finance cost increases. At the same time, overseas migration estimates keep getting revised up.

And while credit is tightening, the tap has not been completely turned off. Finally, unemployment is at a record low of 3.9 per cent and appears likely to only rise slightly and gradually.

Sydney: JLL’s figures show dwelling prices in the city grew 29.1 per cent in Q1 2022 compared to Q4 2019. Prices have already begun to fall slightly in recent months as interest rates rise and borrowing capacity falls. However, prices will most likely remain above pre-pandemic levels - largely “a matter of giving back a little of the ‘froth’ at the end of the last cycle”, said the firm.

That’s because property owners have accumulated a lot of equity after recent rapid price rises, with the Reserve Bank of Australia in February estimating that only around 5 per cent of mortgage holders nationally had less than 25 per cent equity, and consequently the vast majority of homeowners should maintain positive equity in their property. “We expect a decline of about 15 to 20 per cent, peak to trough”, says JLL.

Brisbane: Interestingly Brisbane tops the Australian table with a 40.3 per cent price growth in Q1 2022 versus Q4 2019. But JLL’s view is that it presents a slightly lower pricing risk because the absolute level of prices is still substantially lower than in Sydney, and affordability is “not quite as stretched to the absolute limit”.

Brisbane, and most of South East Queensland, also has comparatively strong demand fundamentals, with much higher inter-state migration through the pandemic and now, increasing overseas migration. JLL thinks this still robust demand, combined with limited new supply levels, will support prices; and that price falls in Brisbane will be “much lower” than in Sydney and Melbourne at about 5 to 10 per cent peak to trough.

Melbourne and Canberra: Both cities are slightly more vulnerable because of a higher level of prices stretching affordability and a particularly strong run-up in prices through the pandemic. JLL expects similar levels of price decline as in Sydney.

Perth and Adelaide: These smaller capital cities are likely to hold up better than Sydney and Melbourne, as they are much more affordable, have good demand/supply balances supporting prices, very moderate levels of new supply and stronger net migration than before the pandemic. They should therefore see more limited price declines.

CHINA

From a macro perspective, China is facing comparatively modest pressure from rising rates, says JLL. Even if the key policy rate (medium-term lending facility rate, at which the central bank lends to banks) remains unchanged, borrowing costs for banks are coming down and the weighted average deposit rate among banks is also declining. Without hurting profits, banks may have scope to further ease lending rates and boost the housing market from a persistent slump.

Shanghai: The more recent wave of Covid-19 cases and containment measures were disruptive, with primary and secondary prices staying flat as sales activities were frozen in April and May.

As the epidemic prevention measures were lifted in June, Shanghai's housing market entered what JLL believes will be a gradual recovery amid continued restrictions, while many buyers and homeowners adopted wait-and-see attitudes.

It expects the housing market to regain confidence and gradually recover in H2 2022. Meanwhile, Shanghai further loosened its residency policy for fresh graduates. JLL says this effort to attract talent with solid housing demand will support sales in the coming quarters.

VIETNAM

Ho Chi Minh City: After a period of strong growth, JLL believes prices will continue to rise in the face of limited supply, but at a slower pace compared to pre-Covid levels. Support for further price growth is expected to come from state banks driving lending towards the manufacturing sector. While controls limiting lending to the real estate sector have affected market sentiment, borrowers with good credit still have access to loans. It notes many economists also predict that Vietnam's economy would grow at an annual rate of 6.5 to 7 per cent until 2025.

While the current inflationary environment exerts some pressure on market demand, JLL says the extent of this pressure is unclear. Concerns about housing affordability have recently grown as new supply in the affordable and mid-end segments has been extremely limited – and most buyers target these segments.

To entice more buyers, developers are offering additional incentives such as special discounts, free fitting-out packages and longer payment terms.

INDONESIA

Jakarta: In general, due to limited demand over the past few years, the high-rise residential market has been slowing down, says JLL. Hence, developers have also been highly cautious about launching new projects and continue to keep prices flat. They may provide additional incentives, such as seasonal discounts, free furniture and so on, to entice buyers.

SINGAPORE

JLL sees no major risks or bubbles in the Singapore residential market because of the cooling measures that the government introduced since 2010 to moderate demand and price hikes, so they move in line with fundamentals.

Based on Urban Redevelopment Authority statistics, private home prices rose an average of 1.8 per cent per annum in the last 10 years, while median income and gross domestic product grew 3.4 and 3.1 per cent per annum on average, respectively.

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