Along with my call for a likely lowering in official interest rates by 1 percentage point over the coming year, it stands to reason that this might well be positive for house prices. Indeed, my research suggests that given the prospective improvement in home affordability in the coming year, nationwide house prices could be ready to pop 10 to 15 per cent higher by late 2013.
There are several industry measures of affordability, all based on somewhat different methodologies. The Housing Industry Association measure of affordability, for example, is based on the median price of established dwellings financed by home loans from the Commonwealth Bank of Australia during the quarter. The HIA then compares house price trends to average weekly earnings and mortgage rates.
While the HIA research can provide detailed regional comparisons, however, its measure of income fails to allows for the increase in income earners per household over time – and its measure of house prices is narrowly focused on one (albeit important) bank.
My own index of housing affordability is based on the eight-capital city established house price index produced by the Australian Bureau of Statistics. I then compare house price trends to that of quarterly household disposable income per capita as also produced by the ABS, and the discounted bank variable mortgage rate compiled by the Reserve Bank of Australia. With some splicing of data and a few assumptions, my data goes back to the June quarter 1986.
Based on an assumed starting level of house prices, my index measures the mortgage payment required as a percentage of household disposable income per capita – assuming house prices track changes in the ABS house price index.
The results suggest that as at the June quarter, the mortgage repayment as a percentage of disposable income was around 6 per cent below the average since mid-1986. While house prices to disposable income were 16 per cent above their long-run average, this was more than offset by below-average mortgage rates.
Note, moreover, that while house prices to income are now above average, they’ve broadly held at this higher level since mid-2003 – suggesting the move (as I’ve long argued) was a sustainable one-off adjustment due to the structural drop in mortgage rates. As Reserve Bank governor Glenn Stevens once remarked, if house prices are in a bubble then they been that way for an extraordinarily long time.
The results also help explain the property boom from the mid-1990s – due to earlier declines in mortgage rates and house prices relative to income, affordability was particularly high in late 1997.
Personally I can't see this happening over the next 12 - 15 months especially if the boom is over, although nothing is impossible. Prices in some cities are quite low, and wages are high by international standards. Our high dollar gives us a lot of buying power.
Any expressed market opinion is my own and is not to be taken as financial advice
Personally I can't see this happening over the next 12 - 15 months especially if the boom is over, although nothing is impossible. Prices in some cities are quite low, and wages are high by international standards. Our high dollar gives us a lot of buying power.
"especially if the boom is over"
The boom is not over, and house prices are already moving up.
And the bears ought to be happy about this.
If prices didn't start moving up and new builds dont increase soon, their rents would skyrocket by even move.
Along with my call for a likely lowering in official interest rates by 1 percentage point over the coming year, it stands to reason that this might well be positive for house prices. Indeed, my research suggests that given the prospective improvement in home affordability in the coming year, nationwide house prices could be ready to pop 10 to 15 per cent higher by late 2013.
The problem with that theory is the banks have better fish to fry than residential housing right now.
Business lending which is far more lucrative for the banks will take up the slack. Housing will be left on the back burner for years to come.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
Why do some people think that lower interest rates must always lead to higher house prices when there are numerous examples from around the world that clearly show this to be false?
More realistic in the current environment is: Weaker economy ---> lower house prices & lower interest rates.
Why is that more realistic in the current environment when the opposite happened in 2009?
In 2009... weaker economy --> lower interest rates --> higher house prices.
And the same thing seems to be happening now, with lower interest rates leading to rising house prices over the past 3-4 months.
As everyone knows the increase in house prices in 2009 was government generated via the first home speculators grant. It had nothing to do with interest rates.
Currently there no clear upward trend in prices in Australia and I expect the long term trend is still down. I know you get really excited when prices tick up for a quarter but don't expect it to last.
If the global economy continues to deteriorate I expect lower interest rates will be the response along with lower house prices.
Why is that more realistic in the current environment when the opposite happened in 2009?
In 2009... weaker economy --> lower interest rates --> higher house prices.
Don't forget that came off the back of huge monetary stimulus - approximately 400bp fall in mortgage interest - and huge fiscal stimulus, a chunk of which was directly aimed at the housing market.
Both stimuli were implemented swiftly and without the oppostion making any serious attempt to block. The negative effects of the GFC on the economy were quickly overwhelmed.
Auction clearence rates have been looking a bit better recently, as has price growth - however, there doesn't appear to be any significant change in the rate of housing credit growth which continues to crawl forward at near-record lows.
But if the rate of mortgage interest continues to fall, then I can see the possibility of a renewed housing surge....for a while at least.
The housing market stalled around two years ago because it was simply becoming too expensive for average earning couples to resonabley afford. Price growth may return on falling mortgage rates but I think that the ceiling will never be too far away from now on.
As everyone knows the increase in house prices in 2009 was government generated via the first home speculators grant. It had nothing to do with interest rates.
I disagree on all three counts.
1. Not everyone 'knows' this, because it's not true. 2. The first home buyer boost was a factor, but a minor one. Most buyers were not even eligible for this grant. 3. Interest rate cuts were the primary driver, and they affected everyone, not just the minority first home buyer sector.
Anyway, we've been through all this before, so I suppose we'll have to agree to disagree.
Lefty
24 Sep 2012, 03:09 PM
there doesn't appear to be any significant change in the rate of housing credit growth which continues to crawl forward at near-record lows
Housing credit is still growing, however the rate of housing credit growth has been on a downward trend since 2003, but this hasn't stopped house prices from rising over the past decade. The evidence over the past decade suggests that a declining rate of housing credit growth doesn't necessarily prevent house prices from rising.
Lefty
24 Sep 2012, 03:09 PM
The housing market stalled around two years ago because it was simply becoming too expensive for average earning couples to resonabley afford.
I think it stalled on sentiment, driven by the RBA rapidly lifting interest rates seven times in a row, with the futures market and media predicting another 6 more rises over the following year (those rises never came of course).
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