Is the Worst Finally Behind Us?
Australian Property Market Update
7 May, 2019
As the pace of house price declines slow and economists point to an impending RBA rate cut, is the worst of our property market woes finally behind us?
The Auction Market – Still Plodding Along
Last week’s auction results appear to show a healthy boost in demand, with the highest preliminary auction clearance rates posted in months. However, we also have a significant lack of reporting on the part of agents this week, which means we can expect to see the final numbers adjusted down more than normal.
That means the true auction clearance rates in Sydney and Melbourne are likely around the mid-50s, as was the case in late March and the first half of April.
Capital City Average
Keep in mind that auction volume was much lower last week than in the weeks leading up to Easter, which could account for a boost in the clearance rate this week. If we still have the same number of buyers, but with fewer properties available at auction, clearance rates would be expected to rise.
Here are the latest preliminary auction results for all the capital cities:
Home Prices – Better than Last Month, Sort Of
Dwelling prices are still falling, but the pace of decline is slowing. April marks the third month in a row that CoreLogic’s monthly figures have shown an improvement.
Could we see the Sydney and Melbourne markets flatten out and a buying opportunity emerge? It’s a little too early to tell, but watch this space.
Here’s a look back at Corelogic’s recent monthly price movement data:
Looking beyond our two largest capital cities, Brisbane remains weaker than at the start of the year, but managed a slight improvement from last month. The pace of house price decline is also slowing in Perth, and Adelaide remains mostly flat.
The best performing capital city in April was Canberra, rising nearly half a percent, and the worst performer was Hobart, declining nearly 1 percent.
Here’s CoreLogic’s latest monthly median house price data:
Looking back over the past twelve months, Sydney is down about 11 percent and Melbourne has fallen around 10 percent. But house prices in our largest capitals have been falling for longer than the past year. The Sydney market peaked in July 2017 and Melbourne started falling in November 2017.
I keep monthly tabs on CoreLogic’s back series of data, and according to my assessment of their data, Sydney has fallen 14.56 percent and Melbourne is down 10.79 percent from the peak.
Keep in mind that’s just a metropolitan area average. Some suburbs have fallen more and some less. As Martin North recently reported, Gladesville and North Ryde have both fallen 21.6 percent since mid-2017. That means some homeowners who purchased around that time will now be in negative equity and have lost ALL of their cash deposit.
Mortgage Delinquencies on the Rise
As long as they can continue to make their mortgage payments and don’t become forced sellers, homeowners in negative equity may be able to ride out the storm. But according to a recent report by ANZ, an increasing number of mortgagees are getting behind on their payments.
The following chart tracks the number of households more than 90 days behind on their home loan payments.
Source: ANZ via SBS
In all states, mortgage delinquencies have been rising year-on-year. Things aren’t too bad in NSW at the moment because the job market is strong and unemployment is low. But WA is a different story, with an unemployment rate of over 6 percent.
While the RBA focuses primarily on the rate of inflation, to keep it between 2 to 3 percent, the unemployment rate is also on its radar. And for good reason. With house prices falling, a weak jobs market in NSW or Victoria would be devastating.
It’s About Time for Philip Lowe to Get Busy
The RBA just racked up a 33rd consecutive month without a change to its target cash rate. For now, we remain at a record low 1.50 percent.
But that streak is likely now coming to an end. May was the first month since before the last interest rate change 33 months ago that a rate cut was a 50/50 bet according to futures market traders. Looking forward to July, a full 25 basis point cut is already priced in, and futures traders have priced in cuts to a 1 percent cash rate by early 2020.
Why so much dovishness all of a sudden?
The consumer price index figures, the primary measure of inflation, was dismal in the March quarter. Economists weren’t expecting much, but they got even worse. Over the march quarter, the CPI was 0.0 percent. That brought the year-on year figure through March to 1.3 percent.
Yikes! That’s well below the minimum acceptable target for the RBA of 2 percent annual inflation. Were we not a few weeks out from an election, I reckon we would have seen a rate cut this week.
Will Lower Interest Rates Bring More Home Buyers?
One thing is certain – lower interest rates will not cause house prices to fall faster. But will a lower RBA cash rate stop falling prices or even cause prices to start rising again by bringing new buyers to the housing market?
While it’s true that we can see a direct correlation between falling interest rates and rising house prices in Australia from 2012 to 2017, low interest rates alone do not make house prices rise. There are two other factors we must consider: the availability of credit and the supply of housing.
Just because interest rates are lower does not mean banks will be writing more loans. Most banks are not permitted to assess the creditworthiness of borrowers at the variable mortgage rate. Regulators force banks to determine borrower serviceability assuming a mortgage rate of 7.25 percent, to provide a buffer against future rate rises. That won’t change with a rate cut unless APRA changes this assessment rate.
The other factor is the supply of housing. With many apartment developments still being built in Brisbane, Melbourne, and Sydney, and settlement risk still hovering over developers, plenty of supply remains in the pipeline. In fact, there are more houses on the market now than anytime since 2012.
Of course, the other wild card is how possible changes to investor tax concessions from Labor could impact the property market. According to the latest Newspoll, if the election was held today, Labor would come out on top.
Source: The Australian
It’s hard to imagine a scenario where negative gearing and CGT discount policies change and house prices don’t face further downward pressure.
March’s Credit Growth Numbers Really Sucked
Because housing demand depends primarily on the availability of cheap credit, the rate of credit growth is the most important leading indicator of home price movements. Changes in housing credit growth tend to lead changes in home prices by about six months.
In March, housing credit only grew by 0.25 percent. That brought the annual growth rate to 3.99 percent. That’s the lowest level on record.
As credit growth numbers are a leading indicator, home prices will likely still be falling six months from now, unless current lending restrictions loosen significantly.
Building Approvals Tanked Again
Although February was a solid month, building approvals tanked again in March. Approvals for the construction of new homes fell 15.5 percent, wiping out most of the previous month’s gains. This brought the annual figure through March to a decline of 27.3 percent.
Developers of apartments and units were the major culprit, plunging 30.6 percent in March. Approvals for houses only fell 3.2 percent.
Building approvals are important because they are a good indicator of what lies ahead in the construction industry. The latest figures mean there will be less work available for tradies and builders.
Longer-term, lower supply should be good for house prices, but it could take us a while to get there.
What does it all mean for property investors?
On the bright side, house prices are falling at a slower pace than in previous months, especially in Sydney and Melbourne. We’re also likely to see at least one or two interest rate cuts in the coming months by the RBA.
But many headwinds remain. Our economy isn’t really growing, construction and property industry jobs are coming under pressure, and credit growth is slow.
That doesn’t mean it’s time to batten down the hatches and go into hiding. Astute investors will continue to make money in the coming months.
That said, if you’re a passive buy and hold investor, keep in mind the importance of market timing. It may be best to look for signs of the bottom before you jump into a deal.
If you’re a manufactured growth investor, make sure you have a solid due diligence system and, depending where you’re investing, factor falling prices or a longer sales period into your projected profit.
Regardless of your strategy or your market bias, commit time and money to your property education. You can never go wrong investing in yourself.
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Great article Jason
So what has fundamentally changed in the economy to prompt a change in sentiment?
A change in sentiment from who?
(Apologies Jason, re-reading my question, it sounds like I was questioning you directly. That wasn’t my intent). Great article, as always.
I was once told that if you want to know what the market is going to do is watch the banks. This seems to follow what you have said here. So what sort of credit growth numbers would indicate a rising market to follow? I’m new here so excuse my ignorance plus I was once told no question is stupid if you want to learn☺️
Hi Eggy. Thanks for your question, and I agree there’s no such thing as a stupid question :)
Housing credit growth to investors peaked in mid-2015 at about 10.8% growth per year. Currently, the growth rate is around 0.1%. When prices started rising in 2012/2013, the growth rate for property investor loans was around 5-6%. So I’d say we would need to see credit growth to investors growing at least in the 6 to 7% range unless there was a big surge in owner-occupier lending growth toward 10% per annum.
Even with a renewed optimism from a Liberal victory, we’ll need to see lending restrictions loosened before house prices can continue rising, which begs the question, “How much more debt can we service?”
Hope that helps.