The Australian housing market continues to bounce back despite further interest rate rises, with CoreLogic's national Home Value Index rising by 1.2% in May.

The capitals and the regions both performed strongly, with all capital cities recording a month-on-month increase, and only regional Victoria decreasing.

Once again, the capital cities performed well with Sydney leading the way with a 1.8% increase, followed by Brisbane (1.4%), Perth (1.3%), Melbourne (0.9%), Adelaide (0.9%), Tasmania (0.5%), Darwin (0.4%) and Canberra (0.4%).

Performance across regional areas was also largely positive, with only Victoria experiencing a reduction in values (-0.5%). The Northern Territory and ACT, maintained values, whilst New South Wales (0.5%), Western Australia (0.5%), Tasmania (0.7%), Queensland (0.8%) and South Australia (0.9%) all experienced growth.

The property market continues to experience a lack of supply, with the last weekend of May holding just 1912 auctions, well below the 3226 that occurred on the same weekend in 2022. This lack of supply is likely the factor propping up property prices.

Melbourne (858) and Sydney (708) led the way with significantly more auctions taking place than the rest of the country with Brisbane (140), Adelaide (117), Canberra (72) and Perth (17) all well below previous year figures.

Whilst the total auctions were down considerably, clearance rates were exceptionally high, with a weighted average of 75.9% across the capital cities, well above the 59.3% last year. Adelaide had the highest clearance rate across the country, with 81.8% (up from 73.6% last year). Sydney and Melbourne also performed strongly with 78.5% and 77.1% respectively, well above the 56.4% and 60.4% last year. Canberra recorded 67.8% (64.4% last year) with Brisbane also outperforming last year, with 60.3% (51.2% last year). Perth was the weakest performance of the cities, with only a 27.3% clearance rate, down from 42.1% last year.

Clearance Rates & Auctions 22^nd - 25^th of May 2023

Property Values as at 1^st of June 2023

Median Dwelling Values as at 1^st of June 2023

Quick Insights

Clover Moore, Closing the Door

The National Housing Finance and Investment Corporation estimates that there is a shortfall of 400,000 houses nationwide. The Sydney basin represents nearly half of this amount, and over the next decade that shortfall will worsen by another 160,000 houses.

Rising house prices have been routinely blamed on negative gearing policies, when in reality it is the inaction and onerous requirements laid on developers in the inner cities that has exacerbated the issue.

Developers have been unable to provide supply due to the conditions city bureaucrats have placed upon them.

Source: Australian Financial Review

Paperwork & Supply

National Australia Bank boss Ross McEwan has spoken out about the housing supply saying, "Housing supply is a major issue at present and without clear moves to significantly increase supply, demand will inevitably push up prices further and faster."

Mr McEwan was backed up by Lendlease's Dale Connor, Mirvac's Campbell Hanan and Charter Hall's David Harrison - who agreed that improving planning processes was the first area to target.

Mr Harrison said that, "State governments have to take more control over the planning process to create more densification."

"It's got nothing to do with negative gearing or the demand side of things - it's all about a chronic undersupply of housing stock."

Source: Australian Financial Review

Hot Terraces

In defiance of the RBA's then coming increase in rates, 8 out of 10 Sydney terrace homes put up for auction last weekend sold, the strongest result in 19 months.

As mentioned in our Market Update this was followed by a 77.2% clearance rate across the combined capital cities, the third consecutive week of robust increases.

Independent Sydney-based auctioneer Clarence White said, "Even one-bedders are selling quite well nowadays, such as the one I sold on the northern beaches last week, where we had five registered bidders. I wouldn't have seen that six months ago."

Source: Australian Financial Review

Author: Filippo Sciacca, Director - Investor Relations, Asset Management and Compliance

Equity markets were mixed in May. In the US, the S&P 500 rose +0.3%, the Nasdaq rebounded sharply +5.8%, whilst in the UK, the FTSE 100 declined by -5.4%. In Australia, the All Ordinaries Accumulation index fell -2.6%, driven by ongoing investor caution around the impact of interest rate hikes by the Reserve Bank of Australia. The technology sector was the top performing sector, as investor sentiment continues to recover after materially underperforming in 2022. Consumer discretionary was the worst performer, with multiple ASX listed stocks flagging consumer spending is weakening due to rising interest rates and cost of living pressures. Gold stocks also underperformed in the month. 

Small cap stocks significantly underperformed as investor funds moved to the perceived safety of larger cap stocks. As an example, on the ASX, the Emerging Companies index fell -6.4%, whilst the Small Ordinaries Accumulation index declined -3.3%. 

In bond markets, the US 10 year bond yield rose +20bp to close at 3.66%, whilst the Australian 10 year bond rate increased +26bp to 3.60%. Both movements were due to increased inflation expectations. In currency markets, the A$/US$ declined -2% to close at US$0.65. Commodities were broadly weaker in May. Brent crude oil declined -8.6%, copper -6.5%, iron ore -5.0%, whilst gold -1.2%. Thermal coal fell sharply, down -27.3%. 

The numerous interest rate hikes implemented by the Reserve Bank over the past 12 months are clearly having an impact on consumer spending, as evidenced by multiple ASX listed retailers announcing profit downgrades in recent weeks. Whilst some components of the CPI basket are declining (eg. Commodities), other parts such as power prices and wages are still rising (eg. Recent 5.75% award wage increase which commences on 1 July). Services inflation in particular, continues to be too high, as businesses across the board increase prices. With regards to interest rates, given inflation is proving more difficult to reduce to the Reserve Bank's targeted band of 2%-3%, it now appears likely that the RBA will need to lift rates 2-3 more times in this cycle. 

One theme that continues to impact the fund's relative performance versus benchmark is the underperformance of small/mid cap stocks on the ASX, noting the fund has a strong skew to this part of the market. Whilst this has been negative for the performance of the fund in recent months, we strongly believe this focus will produce some outstanding buying opportunities for longer term focussed investors over the next 6-12 months. The Fund continues to see numerous attractively valued stocks across a wide range of sectors and is well capitalised to take advantage of this current short term investor bearishness.