House price rises have underpinned the continuation of positive headline economic results over the past year or so, flowing onto other areas of the NSW economy, in particular residential construction.

Summary

The continued surge in house prices was the major story to come out of the State economy in the Winter quarter. During the Spring quarter, however, house price growth has slowed in Sydney, with prices up by 3.2% to a median of $1,032,433. While still a record median house price for Sydney, the market is growing at less than half the rate of three months ago.

A number of factors have contributed to this slowdown. Fundamentals – including the sustained rebound in housing supply – have continued to rebalance the market in terms of supply and demand. However, such an acute price response has arguably resulted more from unsettled buyer sentiment due to “macro-prudential tightening [and] out-of-cycle rate hikes on investor mortgages.” Credit Suisse commented on the susceptibility of the NSW market to changing consumer sentiment:

It is interesting to note that the correlation between sentiment and home sales is particularly strong in NSW but much looser in other states. The strength of the correlation, and the extreme negativity of NSW home-buying sentiment, is a worrisome development.

Looking forward, price expectations for the housing market, both in Sydney and more broadly, remain subdued which is in stark contrast to those in previous quarters. This is because there are prospects in the months ahead of continued supply growth and constrained investor demand resulting from macro-prudential tightening.

Nevertheless, in the interim and at an aggregate level, recent price rises have underpinned the continuation of positive headline economic results over the past year or so, flowing onto other areas of the NSW economy, in particular residential construction. The positive wealth effect for incumbent home owners from rising house prices has also provided support to consumer spending.