Record low interest rates, a swift economic recovery and low listing volumes have launched national housing values to new record highs. The tailwinds for the Australian property sector has helped the REA Group Ltd (ASX: REA) share price push ~10% higher in April to a close of $158.35, within an arms reach of its previous all-time record high of $162.00 on 8 April.
Housing prices surge past 2017 peak
At the end of April, the CoreLogic national home value index increased a further 1.82%, driving housing values some 10% higher since September last year. During this time, the REA share price managed to break above its pre-COVID high of $115 in August 2020 before staging a 40% rally to today's prices.
Looking over at auction volumes, 2,885 capital city homes went under the hammer last week, an increase of 38% on the prior week. One year ago, a significantly lower 612 homes were auctioned as COVID-19 related restrictions put activity on halt. Interestingly, the final clearance rate for houses came in at 79.1% last week. This is the first time clearance rates have dropped below 80% this year.
As the property market continues to heat up, it might be worth dividing attention towards the downside risk factors that could eventually 'pop' the so-called bubble. Overall, CoreLogic believes that the RBA's commitment to hold interest rates and the current rebounding economic cycle means solid housing prices are here to say. However, it does point out tighter credit conditions as a potential near term risk.
Through previous housing cycles, the factors that generally slowed the housing market were either rising interest rates, worsening economic conditions or tighter credit conditions. Looking at each of these factors, we aren't expecting a lift in short term mortgage rates any time soon, and the economy has some positive momentum, so the most likely factor that will slow housing conditions is a new round of credit tightening along with housing affordability becoming more of a challenge, especially for first home buyers.
Morgan Stanley sees a higher REA share price in 2021–22
Morgan Stanley was the latest broker to provide an update for the REA share price. On 14 April, the broker rated REA shares as overweight with a $175 target price.
The broker believes that a sharp increase in Australians searching for new homes carries important implications for the business. Its commentary centres around a potential earnings super cycle in 2021–22 driven by factors such as positive listings growth and additional houses for sale.
